Yen Thrives As Sterling Selling Unabated

Quick Take

The title of today’s report embodies the exceedingly random and trendless dynamics in currency markets amid a multi-year low FX volatility regime. As a consequence of the extremely short-term flow-driven movements, courtesy of a decade low QE experiment where Central Banks have become the ultimate liquidity providers with no monetary policy divergences to take note of, and where politics is at the epicenter of the European FX moves, it’s not surprising that we see a Sterling transitioning from the absolute dominant attracting the most buying flows into the most depressed in a matter of days.

It’s the reality of the markets, which is precisely why under the current lay of the land in FX, understanding the constant fluctuation of flows through intermarket analysis gives us an advantageous front row 'VIP' seat to not miss the market’s pulse. Don't forget that. Not accepting this reality would essentially negate the regular findings I report day in and day out on strongly correlated instruments that I always emphasize and serve at your doorstep to follow the ever-evolving market's narratives.

In today’s report, I break down the anatomy of the latest market movements as usual, which are mainly characterized by the continuous dominance of the JPY and USD as macro ‘true risk off’ prevails, while the EUR and the GBP suffer the consequences of the relinquishment of the ECB’s attempt to exit QE and the Brexit unknowns. We then have the commodity-linked currencies staring at the FX show from its relatively low vol confinements.

Currency Strength Meter

The Sterling is the worst performing currency as a new week gets underway and the Brexit plot thickens without any breakthrough this far in the game of chicken. One can clearly observe through the 2nd chart below how the tendency towards the British currency has deteriorated dramatically, resulting on both micro and macro bearish trend now firmly in place. Another clear macro bearish trend since last week’s ECB catalyst is the Euro, even if the elongated nature of last Thursday’s extension has now led to a micro bull trend based on the slope of the 25-HMA.

On the opposite side, we find the Japanese Yen, emboldened not only by the intensity of ‘true risk off’ flows but also as a result of absorbing a larger share of demand on the back of a very low US NFP number last Friday. We should not ditch the USD as a more unattractive proposition for the market to diversify into but rather, at this stage, amid the lack of clear alternatives, as a firm contender to keep catching bids for the current mild bearish micro trend to re-anchor with its bullish macro trend as the 2nd chart shows.

A familiar theme that hasn’t really changed ever since the ECB-led volatility is the relatively stable performance of commodity-linked currencies, still finding pockets of demand; as the thick lines (red, blue, silver) demonstrate. The only exception, one could argue, is the tentative bullish dynamics developing in the Kiwi. As the chart on monetary policy expectations below indicates, the positive flows towards the Kiwi fall in line with the pricing out of rate cuts by the RBNZ.

source: Westpac

Narratives in Financial Markets

  • Shocking miss in the US Feb NFP after a headline number of just +20k. On the bright side, the unemployment rate came down to 3.8% from 4% while earnings jumped to 3.4% vs 3.2%. Adding to the positive inputs, the January number was revised up to 311k.
  • Canada’s employment change, yet again, comes exceedingly strong at 55.9k vs 1.2k exp, while the unemployment rate was unchanged at 5.8%. A surprisingly high hourly wage rate of 2.2% was also observed vs 1.7% exp, with the participation rate also up to 65.8% vs 65.6%.
  • Fed Chair Powell gave a speech on Friday with the familiar mantra of ‘wait and see’ and ‘patience’ dominating the rhetoric. Importantly, he added that the bar has been set quite high for the Fed to resort to new policy strategies that make up for periods of low inflation.
  • Norway’s sovereign wealth fund announced its plans to disinvest from oil and other fossil fuel related companies, weighing in the energy sector across the board.
  • Fox Business reported that China’s President Xi is no longer planning to attend a trip to Trump’s Mar-a-Lago in March due to the lack of details about an eventual deal. One of the many sticking points appears to be finding an agreement in which an ‘enforcement’ of trade commitments is reciprocal and not only biased towards China respecting them. White House Economic Adviser Kudlow said the meeting may take place end of March or early April.
  • Further evidence of the sharp deterioration in China’s trade data both in yuan and usd terms. Imports but especially exports suffered major slumps during Jan and Feb. In yuan terms, exports were down 16.6% y/y while in usd terms was even worse at -20.7% y/y. Meanwhile, imports were down -0.3% y/y and -5.2% y/y in yuan and usd terms respectively.
  • As the endgame of the Brexit conundrum approaches, the Sterling is down considerably as the new week starts as no breakthroughs to amend the Brexit divorce agreement was found. The latest proposal by the UK was rejected by UK PM May, who faces the next vote this Tuesday, and all indications point towards another humiliating defeat north of 150 votes. Remember, there is a silver lining, as this may lead to a ‘delay’ of the Brexit process by a few months.
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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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