In “Hell Or High Water“, I mused that despite record highs on various equity benchmarks, there are plenty of signs that things are somewhat off-kilter.
If “off-kilter” isn’t the right adjective, it would be fair to describe the current environment as “delicate” or “tenuous”.
One particularly vexing issue is the dollar, which continues to climb, despite expectations for Fed easing. The greenback is sitting at the highest levels since 2017. DXY is near 100, a psychologically important level that could trigger more buying.
For the line-lovers among you, there’s a golden cross in the works, too.
Clearly, the dollar is in “haven” mode right now, but it’s being turbocharged by economic outperformance and the assumption that the outlook for the global economy is about to take a turn for the worse thanks to the fallout from the coronavirus. Epidemic worries resurfaced on Thursday as South Korea became the new “hot zone”, if you will.
The yen, meanwhile, is all to hell (for lack of a better way to describe it) after its worst day since mid-August. I talked a ton about this on Wednesday, noting that the surge in USDJPY appeared to be down to a combination of short-covering, stop-outs, real money demand, hopes for Chinese fiscal stimulus, and recession worries on the heels of Japan’s worst quarterly GDP print since the 2014 tax hike.
Fast forward to Thursday, and there’s so much commentary out there that it’s nearly impossible to keep track of it all. “[The] dollar’s higher against everything [and] particularly the yen, which is likely tied to Japanese investor / pension fund purchases of foreign bonds”, Nomura wrote.
“In terms of flows, the overnight release of MoF data showed strong Japanese investor buying in overseas notes and bonds totaling $12.9 billion during the week ended February 14 compared to net purchases of $14.9 billion in the prior week”, BMO’s Ian Lyngen, Jon Hill, and Ben Jeffery said, early Thursday morning, adding that “this activity shows ongoing sponsorship for one of the largest regional owners for Treasuries [and] with anecdotes suggesting much of the buying interest has occurred on a non-currency hedged basis, it also speaks to an ongoing endorsement of dollar strength”.
“The last key driver of the recent JPY weakness is likely related to the mounting speculation around Japanese investment funds re-allocating their positions towards foreign securities as we approach the end of the Japanese financial year”, ING said, in an e-mailed note. “The FX markets are inevitably sensing these dynamics, thus contributing to the yen decline”.
And there’s more. And more. And more.
“We would link the turnaround in the behaviour of the yen with three overlapping factors”, Rabobank’s Jane Foley said, before enumerating those factors as follows:
- The impact of the coronavirus is very close to home,
- The step up in fears that Japan could fall into recession in the current quarter and
- The USD can offer both liquidity and yield.
“For these reasons the USD can offer many investors a more practical safe haven”, she concludes.
“The currency’s biggest one-day decline in six months versus the dollar on Wednesday has caught options traders off guard as they rushed to cover short-volatility positions resulting in strong demand for structures that benefit from a weaker yen”, Bloomberg’s Vassilis Karamanis said, on the way to noting that “yen sentiment is being weighed down by a number of factors [including] heavy demand from Japanese funds for overseas securities before the end of the fiscal year, growing concerns that a Japan recession is coming, and signs the coronavirus outbreak is spreading in the country”.
When you throw in momentum traders piling on, you’ve got a recipe for yen-sanity (sorry).
As you might imagine, this means traditional relationships are in the process of breaking down completely. For example, dollar-yen typically moves with the copper/gold ratio for obvious reasons (the former is a risk appetite barometer and the latter is a real-time indicator of global growth expectations). That relationship is gone.
SocGen’s Kit Juckes said Thursday we’re simply witnessing “huge capitulation by almost anyone who isn’t a dollar bull”.
“The yen is shedding its safe-haven skin, at least temporarily”, he wrote, in a separate note, adding that the currency has “completely decoupled from any measure of relative rates”.
When it comes to dollar strength, it’s worth noting that the perception of Democrat disarray (made worse by Wednesday evening’s contentious debate) may be contributing to the greenback’s rise.
“Regardless of how Trump feels about the dollar, he’s been good for the buck”, TD’s Mark McCormick remarked, in a note. “It’s likely the case that US risk assets, and by extension the USD, prefer the status quo to a progressive shift in the White House”.
It probably won’t be long before Trump puts on his FX strategist hat, takes to Twitter and proceeds to assail the Fed for the dollar’s relentless rise.
That, despite knowing who to “blame”. In April of 2017, Trump famously told The Wall Street Journal the following: “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me”.
The greenback subsequently plunged. So, who knows, maybe this is the top.