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The FX Trader: USD still a safe haven once risk-off gets bad enough
Summary: The US dollar flexed its old-fashioned safe haven status versus the broader market late Thursday and early Friday after initially showing indifference as risky assets threw a fit. The JPY can't decide if it wasnt to rival the USD here for that same status. AUDUSD suddenly finds itself at a 7-month low. The BoE guided more hawkish than expected, but the reaction was overwhelmed by the volatile backdrop.
US mid-terms: A huge risk-off double take
Yesterday served up a neck-snapping risk-off move across markets as the markets seem to have decided that the US mid-terms were a big deal after all. One angle is that the Democrats are generally more against data center buildouts than Republican opponents, particularly in key states like Texas. Much of the strong performance in global stocks over the last couple of years has been linked to the AI buildout, now seen as a lynchpin for overall market direction and even the global economy.
Initially yesterday, most of the equity selling pressure was again on the complex of stocks linked to the buildout of AI data centers in the US after Wednesday’s likewise poor performance for these stocks, even as almost all other sectors rallied strongly Wednesday. But quite early in yesterday’s US equity market session, the rout spread across the entire market, with nearly all sectors caught up in a general deleveraging move. This shift began to power a wider safe-haven seeking that saw a strong bid into short-dated US treasuries and the US dollar, especially against the smaller currencies. AUDUSD tumbled from above 0.7000 early Thursday to below 0.6880, a breathtaking downdraft to a 7-month low. The action in EURUSD was more sedate but the pair was pushed back below the magnetic 1.1200 level.
Bottom line: The agenda has suddenly shifted now with this risk off move, with the US dollar likely to continue to serve its role as safe haven as long as we are in this white-knuckle environment for stocks. The sub-plot here will be whether the JPY continues to track the US dollar higher, or if the sense that the risk off move is becoming so profound that it will slow global growth and crush bond yields further could finally feed more interest in bidding up the JPY, perhaps in part on Japanese repatriation flows. Spotlight on AUDJPY, GBPJPY and EURJPY on that front for traders wanting to take the USD out of the equation.
Chart: AUDUSD
AUDUSD suddenly finds itself at a 7-month low well south of 0.6900 after attempting just yesterday to re-establish itself above the pivotal 0.7000 round level area. The support area it has just taken out is an important one, needing a spike reversal on a general shift in global risk sentiment if the pair is to avoid a further sell-off into the next important level, the low for the year in the 0.6835 area.
Central bank developments overwhelmed by the backdrop.
The Riksbank meeting on Wednesday saw Thedeen and company delivering the expected 25 basis point hike and serving up reasonably hawkish guidance for further policy tightening to come and even throwing in a mention of the currency. SEK rallied to new local highs versus the euro, but then a soft inflation print Thursday and the huge risk off move changed the plot, sending EURSEK back above 11.00. SEK bulls will now be looking for good levels to get involved on the short side in EURSEK, but should they stand aside as long as this widespread risk-off move is afoot? Arguably, EURSEK can back up to the 11.10-11.15 area without disturbing the bearish setup, but volatility elsewhere needs to calm.
Elsewhere, Norges Bank was more hawkish in its guidance than expected yesterday as it passed on tightening as expected, but the modest rally this sparked was quickly overwhelmed by the risk-off backdrop and EURNOK finds itself at 10.47 this morning after trading below 10.42 yesterday and could be in for a squeeze higher to 10.60 plus given the likely large positioning shift that likely occurred with the tremendous NOK rally.
The Bank of England was also more hawkish than expected on top of its 25 basis point hike, as the lone dissenter was in favour of a 50 basis point hike yesterday. Bailey sounded a bit more hawkish than expected in guiding for an additional hike as he positioned yesterday’s hike as unlikely to be the last one unless the Iran war is resolved. Still, he wanted some dovish optionality as he stated that it isn’t inevitable that yesterday’s first hike since 2023 will be the first in a long sequence of hikes. Could the EURGBP move be exhausted for now and leave a pair like GBPUSD a bit more vulnerable if this general risk-off move extends?
US jobs report ahead – will it even matter? FX Board of G10 and CNH trend evolution and strength. One thing to note on all of the EUR crosses above is that Germany-France yield spreads widened a fair amount yesterday on the general risk-off move – that is worth watching. French nominal yields still fell, so it was more a question of German Bunds being seen as the preferred safe haven – but should a general risk deleveraging send the yields in opposite directions, that would be far more concerning for the euro. On that note, the euro is a bit sideways here in momentum terms, even as the trend is still in the negative category. Elsewhere, it is the Aussie that has been administered a sudden pounding, while JPY and USD are turning sharply higher, even if still at neutral levels in broader trending terms.
With the markets fixated on this sudden global deleveraging event, not sure how the US jobs data will play today, especially as there is little pent-up focus or drama around the number. I suppose the bigger surprise side would be a positive one after last month’s weak number and any possible index on treasuries. Employment-related data usually lags the economic cycle and other data this week from the US, the JOLTS, ADP payrolls change, ISM Services Employment index and jobless claims were all benign to slightly strong.
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Table: NEW FX Board Trend Scoreboard for individual pairs.
AUDJPY suddenly bidding to put on a negative trend as it has cumped to a new low since early this year. EURSUD is also on the cusp of a flip to a new uptrend today. Elsewhere, watching the potential for the AUDNZD move to flip to negative as the recent bull trend extension looks set to reverse. Watch out for a USDCAD reverse to a positive trend in the coming days as the attack below 1.4000 has now been smartly reversed.