FX Update: USD & JPY surge as sterling traders face two-way risk
Summary: The US dollar and Japanese yen surged yesterday, on possible sudden safe haven seeking within G10 on the recognition that the short-term two-way risks for sterling are significant ahead of the Brexit negotiation deadline tomorrow. GBPUSD plunged back below 1.3000 but depending on how headlines shape up tomorrow on the status of negotiations could find itself at new multi-month highs or lows by Friday.
Trading focus:
Pronounced risk for GBP volatility through tomorrow
Yesterday failed to produce any positive headlines as negotiations between the EU and the UK continued ahead of the October 15 deadline tomorrow that Boris Johnson has declared for making a deal. An EU Summit also starts tomorrow and ends on Friday. Sterling was weak yesterday and weaker still this morning, led by GBPUSD on the added factor of a USD bounce-back, as the reversal well back below 1.3000 there likely triggering stops on recent long positions.
There are notable two-way risks for GBP here if the two sides are unable to come to basic terms tomorrow – and the market doesn’t look ready for bad news for sterling. On the other hand, headlines touting a sudden breakthrough in talks that point toward “entering the tunnel” (when the two sides have agreed in principle and begin the process of hammering out the details) would likely provide a very meaningful GBP boost. UK Prime Minister Boris Johnson and EU Commission President Ursula Von Der Leyen are to speak today.
Keep in mind that it is still possible to cobble together something before December 31 even if the UK side pulls out of talks after tomorrow in a bid to up the pressure for last ditch talks in November or even December. On that front, any negative sterling reaction tomorrow on a stand-off could be sizable but then stop suddenly and even reverse partially on hopes of a new round.
Also keep in mind that there are a spectrum of outcomes on December 31 from a comprehensive deal that is surprisingly generous to the UK’s financial services industry (unlikely) to a more or less “no Deal” outcome that only sees modest mitigating measures to avoid the worst types of disruptions (not at all priced – perhaps a 25% probability however?). The most likely outcome is some sort of hybrid deal that is more or less a free-trade deal on goods with reduced access/passporting into the EU for UK financial services. That leaves the key questions of the knotty fisheries issue and more importantly, whether the two sides can agree on the framework for adjudicating whether UK “state aid” aimed at favouring domestic industries and companies exceeds what the EU is willing to tolerate. The UK clearly wants significant state aid leeway while the EU has sounded more flexible recently on fisheries.
Chart: GBPUSD
Breaking: In the seconds before pixel time we get the headline that “the UK signals that it won’t walk away from EU talks immediately”, thus enhancing the risk that we are none the wiser in either direction on tomorrow’s deadline if the two sides have yet to reach agreement. GBPUSD reversed badly yesterday and into this morning on the combination of sterling weakness and USD strength as we reach crunch time for this phase of Brexit negotiations ahead of tomorrow’s deadline established by Boris Johnson, a day that also marks the start of a two-day EU ummit. The move back well below 1.3000 likely triggered stops on fresh longs, but given the binary implications of the different headlines that might hit the market tomorrow, the technical implications are irrelevant. Safe to say that we could be at a very different level on Friday’s close – as low as sub-1.2500 on a complete collapse of talks to as high as perhaps 1.3500 on the most promising version of possible outcomes.
The US dollar resurgent – but so is the JPY ahead of US election uncertainty.
The US dollar and the Japanese yen both surged yesterday, with the immediate trigger for trading clearly the release of the US September CPI data yesterday, which was fully in-line with expectations and failed to immediately buttress the weaker USD argument linked to the risk of increasingly negative real rates. The development boosted the yen as well from the angle of long US rates, which backed down sharpy yesterday as well, as the yen is often supremely sensitive to long US yields. The tactical technical developments look short term bullish for both the USD and the JPY in many crosses, but very choppy charts and the looming US election (and potentially considerable volatility from the Brexit situation noted above in the coming sessions in particular) make it tough to hang our trading hats on strong directional moves over the next two-three weeks.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Trading focus:
Pronounced risk for GBP volatility through tomorrow
Yesterday failed to produce any positive headlines as negotiations between the EU and the UK continued ahead of the October 15 deadline tomorrow that Boris Johnson has declared for making a deal. An EU Summit also starts tomorrow and ends on Friday. Sterling was weak yesterday and weaker still this morning, led by GBPUSD on the added factor of a USD bounce-back, as the reversal well back below 1.3000 there likely triggering stops on recent long positions.
There are notable two-way risks for GBP here if the two sides are unable to come to basic terms tomorrow – and the market doesn’t look ready for bad news for sterling. On the other hand, headlines touting a sudden breakthrough in talks that point toward “entering the tunnel” (when the two sides have agreed in principle and begin the process of hammering out the details) would likely provide a very meaningful GBP boost. UK Prime Minister Boris Johnson and EU Commission President Ursula Von Der Leyen are to speak today.
Keep in mind that it is still possible to cobble together something before December 31 even if the UK side pulls out of talks after tomorrow in a bid to up the pressure for last ditch talks in November or even December. On that front, any negative sterling reaction tomorrow on a stand-off could be sizable but then stop suddenly and even reverse partially on hopes of a new round.
Also keep in mind that there are a spectrum of outcomes on December 31 from a comprehensive deal that is surprisingly generous to the UK’s financial services industry (unlikely) to a more or less “no Deal” outcome that only sees modest mitigating measures to avoid the worst types of disruptions (not at all priced – perhaps a 25% probability however?). The most likely outcome is some sort of hybrid deal that is more or less a free-trade deal on goods with reduced access/passporting into the EU for UK financial services. That leaves the key questions of the knotty fisheries issue and more importantly, whether the two sides can agree on the framework for adjudicating whether UK “state aid” aimed at favouring domestic industries and companies exceeds what the EU is willing to tolerate. The UK clearly wants significant state aid leeway while the EU has sounded more flexible recently on fisheries.
Chart: GBPUSD
Breaking: In the seconds before pixel time we get the headline that “the UK signals that it won’t walk away from EU talks immediately”, thus enhancing the risk that we are none the wiser in either direction on tomorrow’s deadline if the two sides have yet to reach agreement. GBPUSD reversed badly yesterday and into this morning on the combination of sterling weakness and USD strength as we reach crunch time for this phase of Brexit negotiations ahead of tomorrow’s deadline established by Boris Johnson, a day that also marks the start of a two-day EU ummit. The move back well below 1.3000 likely triggered stops on fresh longs, but given the binary implications of the different headlines that might hit the market tomorrow, the technical implications are irrelevant. Safe to say that we could be at a very different level on Friday’s close – as low as sub-1.2500 on a complete collapse of talks to as high as perhaps 1.3500 on the most promising version of possible outcomes.
The US dollar resurgent – but so is the JPY ahead of US election uncertainty.
The US dollar and the Japanese yen both surged yesterday, with the immediate trigger for trading clearly the release of the US September CPI data yesterday, which was fully in-line with expectations and failed to immediately buttress the weaker USD argument linked to the risk of increasingly negative real rates. The development boosted the yen as well from the angle of long US rates, which backed down sharpy yesterday as well, as the yen is often supremely sensitive to long US yields. The tactical technical developments look short term bullish for both the USD and the JPY in many crosses, but very choppy charts and the looming US election (and potentially considerable volatility from the Brexit situation noted above in the coming sessions in particular) make it tough to hang our trading hats on strong directional moves over the next two-three weeks.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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