Article / 03 February 2014 at 8:16 GMT

JPY crosses, risk appetite will either stand or fall this week

Head of FX Strategy / Saxo Bank

• JPY carry trade still a benchmark for global risk appetite
• Euro's safe-haven status is ebbing
• The week's strongest theme is confidence

By John J Hardy

A weak set of official Chinese PMI’s over the weekend saw equity investors heading for the exits, especially perhaps after the North American session on Friday failed to close strongly enough (although there was a bounce) to convince the world that this bout of risk aversion is over and done with. The Chinese non-manufacturing PMI was the lowest in the recent history of the survey (since early 2011), though it continued to show slight expansion. EURJPY closed at its lowest level in over two months on Friday ahead of this week’s ECB meeting as the JPY was generally strong across the board as the JPY carry trade remains one of the benchmarks for global risk appetite.


EURJPY was one of the weakest performers on Friday as JPY crosses remain nervous on the global themes of emerging markets worry and the status of global risk appetite and the JPY carry trade. At the same time, late last week showed firm signs that the euro’s status as a risk haven is faltering (as indeed it should falter, EU contagion risks remain and the market has been very complacent for too long on this). As for the EURJPY cross itself, we are zeroing in on key support here and it will only hold if risk appetite holds and makes a stand as well.

Source: Saxo Bank


RBA preview

We’ve got the latest Reserve Bank of Australia (RBA) meeting on tap tonight. As the main concern expressed by the central bank chief, Glenn Stevens and company — the exchange rate — has moved forcibly in their favour, it is hard to imagine any strong change of course from here in the RBA's rhetoric. Still, the latest employment report was a very weak one, so watch out for signs of raised concern on the jobs front, as well as how the bank explains away the higher than expected Q4 inflation numbers, as Australia was one of the very places with upside surprises in inflation data. All in all, AUD crosses are in an interesting spot here, as AUDUSD is poised just above the lows for the cycle while the currency has been eroding some of the latest losses against the euro, as the single currency looks weak in the knees ahead of the European Central Bank (ECB) meeting this week. EURAUD may move to a deeper correction mode as long as it remains below the 1.5500/5600 area. With AUDNZD also rallying, the Aussie appears to be stabilising a bit relative to the rest of G10.


The US ISM Manufacturing survey for January due later today is an important one as always, and I don’t see any reason to expect weakness after nearly all of the regional surveys were strong, though the Markit non-official survey showed a weakening. Regardless, the market should focus more on the Wednesday non-manufacturing ISM, which is far more important as a measure of overall US economic growth, both because of the weight of the services sector in the US economy and especially as it is has decelerated perilously in recent months, suggesting a slowing expansion.

As I indicated last week, the 1770 level in the cash S&P500 index is a cross-market trigger that could bring correlation in all assets aligned along the risk appetite axis closer to one (JPY crosses lower, emerging markets currencies lower, bonds higher, etc…) if this level fails to support.

While this is a very important week for event risks, including the usual important first of the month US data (remember Friday payrolls, etc.) and the ECB and Bank of England meetings on Thursday, I suspect the most important theme this week is simply one of confidence — how confident is the market in where it sits as we kick off a new month after recent nervousness and in the face of the slow withdrawal of liquidity by the US Fed?

More on the ECB meeting in the days to come.

Economic Data Highlights

  • China Jan. Manufacturing PMI out at 50.5 as expected and vs. 51.0 in Dec.
  • Australia Jan. AiG Performance of Manufacturing Index out at 46.7 vs. 47.6 in Dec.
  • Australia Jan. RPData/Rismark House Price Index out at +1.2% MoM
  • Australia Dec. Building Approvals out at -2.9% MoM and +21.8% YoY vs. -0.5%/+23.4% expected, respectively and vs. +23.6% YoY in Nov.
  • China Jan. Non-manufacturing PMI out at 53.4 vs. 54.6 in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

  • Italy Jan. Manufacturing PMI (0845)
  • France Jan. Final Manufacturing PMI (0850)
  • Germany Jan. Final Manufacturing PMI (0855)
  • Eurozone Jan. Final Manufacturing PMI (0900)
  • UK Jan. Manufacturing PMI (0930)
  • Eurozone ECB’s Constancio and Nouy in Press Conference (1200)
  • Canada Dec. Industrial Product Price/Raw Materials Price Index (1330)
  • US Jan. Final Markit US PMI (1358)
  • US Jan. ISM Manufacturing (1500)
  • Australia RBA Cash Target announcement (0330)



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