Article / 25 May 2016 at 8:16 GMT

FX Update: Yesterday changed market tone in FX

Head of FX Strategy / Saxo Bank
  • Tuesday's swing to risk-on looks like a key reversal
  • If risk-on lasts, look for USD strength versus lowest yielders and QE currencies
  • Beaten-down currencies may be able to rally a bit vs USD in nearest term
  • USDJPY up on hawkish Fed, surge in US home sales and renewed risk appetite
  • If USDJPY holds up, focus goes to cloud top and resistance line just below 112.00
  • If USDJPY can’t rally in current market conditions, uncertain if it can rally at all

Sportscar speeds through curve
 Surge in risk appetite has changed the tone in the markets. Photo: iStock

By John J Hardy

Yesterday looked like a key reversal for markets, as the blatant risk-on move felt like the market making some kind of declaration. The timing is important as we have just seen a cavalcade of Fed speakers talking up the Fed rate trajectory this year. That hawkishness had engineered a sharp rise in short US interest rates that took the USD higher, especially against risky currencies, and had put risk appetite on the defensive. But then yesterday’s action seemed to proclaim that the market may not be so afraid of the Fed’s hawkish stance after all.

But it was just one day of market action, so it may be hasty to draw conclusions here, but that’s the initial takeaway and we’ll be looking for confirmation in the follow-up action today and the next few sessions. 

What would that look like? Likely more risk-on sentiment with stable to higher Fed rate hike expectations could see USD strength versus the lowest yielders and quantitative easing countries/currencies such as JPY, EUR and CHF. It could even mean that the most beaten down currencies are able to rally a bit versus the greenback in the nearest term, or at least slow the momentum lower in the likes of AUD, CAD and EM currencies. Some of this was evident yesterday in a pair like USDTRY which managed to sell off steeply even as Turkish short rates eased a bit lower after the central bank meeting brought an expected no-move outcome.

USDJPY pulled back higher yesterday on the combination of a hawkish Fed, a massive surge in US new home sales in April and surging risk appetite. This has taken the price back into the Ichimoku cloud, a bullish development if the pair can close here or higher on the day, and taking the focus to the cloud top and then the resistance line just below 112.00. If USDJPY can’t rally in an extension of current market conditions, one wonders if it can rally at all.  
Source: Saxo Bank

The G-10 rundown

USD – USD strength sits a bit uncomfortably with the sudden return of risk-on sentiment, but one would think that if Fed expectations continue to march higher, we will see the greenback higher versus safe-haven and QE currencies, even if the outlook is suddenly more clouded in USD/EM and USD/commodity currencies.

EUR – Watching the German Ifo today for a sentiment check as the euro has traded passively amid a lack of catalysts – certainly nothing likely from the European Central Bank, but perhaps more downside to wring out of the Brexit now “Bremain” referendum.

JPY – USDJPY rallied yesterday, but somewhat surprised. As stated above on the chart comment, if current market conditions extend (higher Fed rate hike odds in an environment of improving risk appetite) something has gone very wrong with traditional correlations. 

GBP – sterling is having a moment in the sun on fading Brexit odds and the heady risk-on rally. More room for further strength near term if these conditions persist – looking at 0.7500 as the next area of interest in EURGBP and the 200-day moving average in GBPUSD is fast descending from 1.4775.

CHF – not sure where the market is focusing for a driver, but there's technical disappointment on the inability of EURCHF to hold above 1.1100 – the next key there is the previous 1.1000/25 zone.

AUD – the shift in risk sentiment is fast taking momentum out of the AUD shorts, and there could be more of this to come in the near term if AUDUSD closes back above 0.7250.

CAD – the shift in risk sentiment is spoiling the party for the bulls and a nonchalant or even optimistic Bank of Canada statement today could see the near-term price action taking us below 1.3000 again, while we may need the risk rally to fade, oil prices lower and/or a more dovish BoC to keep the support intact and look higher to the next big resistance levels in 1.3310-1.3360 area.

NZD – Seems to be a low beta trade to the reversal in risk appetite, and specifically AUD. Disappointing for NZDUSD bears as well that we remain bogged down in the range here, keeping near-term direction uncertain as the recent bearish reversal has yet to follow through lower.

SEK – the risk-on tone in markets yesterday has given SEK a strong boost, with the sudden acceleration in SEK strength pointing to more to come. Let’s see if the perma-range lows are threatened in the days ahead if risk appetite strength endures.

NOK – A milder reaction in EURNOK than in EURSEK, but a similar setup and it's giving the bears some hope as the 200-day moving average near 9.40 held.

Upcoming Economic Data Highlights (all times GMT)
  • Germany May IFO Survey (0800) 
  • ECB’s Knot to Speak (0900) 
  • ECB’s Constancio, Praet to Speak (1030) 
  • US Fed’s Harker to Speak (1300) 
  • US May Preliminary Markit Services PMI (1345) 
  • Canada Bank of Canada Rate Decision (1400) 
  • US Fed’s Kashkari to Speak (1540) 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank 


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