FX Update: Shrugging off inflation data, flash risk off pattern.
Summary: The Swedish krona initially jumped yesterday on a very hot August inflation print from Sweden, but backtracked after the weaker than expected US CPI data. This morning, sterling has entirely ignored the highest UK inflation readings in nine years, a sign that the market is unwilling to react consistently to relative inflation data when risk sentiment swings suddenly dominate the landscape.
FX Trading focus: Risk sentiment correlations dominate as inflation data largely shrugged off
A weak August US CPI print yesterday, with the core month-on-month cooling all the way to +0.1% vs. +0.3% expected, should have triggered a weaker US dollar and driven at least a modest rise in risk sentiment on the implications for Fed policy if the market was heavily anticipating this release. Instead, while we got a brief knee-jerk reaction in that direction, risk sentiment weakened anew in and the USD and especially the JPY rose as US treasuries rallied. That suggests that the market wasn’t particularly invested in the implications of this release and the evidence elsewhere suggests that inflation is less on the brain than other factors. In Sweden yesterday, for example, a very hot August inflation print failed to sustain the SEK rally (importantly as EURSEK 200-day moving average was tested yesterday) despite that number and the highest anticipation of the Riksbank eventually moving to hike rates for the cycle, once risk sentiment weakened later in the day. SEK defaulting to quickly to reacting to a still fairly modest swing in risk sentiment is a fairly feeble performance.
Likewise this morning, where the hottest UK inflation level in over nine years (3.2% year-on-year and 3.1% for core year-on-year) failed to reverse any of yesterday’s reversal in sterling from strength to weakness noted in the GBPJPY chart below.
One day of risk off does not a new trend make, but yesterday’s action requires a nimble stance on the potential for a deepening rout in risk-correlated trades if US data, concern about the implications of Chinese policy moves (note Evergrande behemoth moving toward a more official restructuring) and/or options expiries into Friday in the US could mean volatility remains high here at least in the near term.
Chart: GBPJPY
One of the more interesting technical developments yesterday was in GBPJPY, which went from poking toward a break-out above the Ichimoku cloud that has clearly provided resistance of late and to new 1-month highs to a vicious reversal back lower as US treasury yields dropped in the wake of the US CPI release and the JPY rallied smartly amidst generalize weak risk sentiment. Will have to see how the situation develops further from here – particularly for the JPY around the upcoming Japanese election, but the structure of the chart is rather compelling if the price action bites lower, especially if the neckline-like area of the significant head and shoulders formation comes into view below the 200-day moving average (currently 149.50). The neckline is a bit poorly defined but is at around 148.50 at the lowest. JPY traders should always have one eye on USDJPY as well, where a break of the 109.00 area could generate considerable volatility across JPY crosses.
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FX Trading focus: Risk sentiment correlations dominate as inflation data largely shrugged off
A weak August US CPI print yesterday, with the core month-on-month cooling all the way to +0.1% vs. +0.3% expected, should have triggered a weaker US dollar and driven at least a modest rise in risk sentiment on the implications for Fed policy if the market was heavily anticipating this release. Instead, while we got a brief knee-jerk reaction in that direction, risk sentiment weakened anew in and the USD and especially the JPY rose as US treasuries rallied. That suggests that the market wasn’t particularly invested in the implications of this release and the evidence elsewhere suggests that inflation is less on the brain than other factors. In Sweden yesterday, for example, a very hot August inflation print failed to sustain the SEK rally (importantly as EURSEK 200-day moving average was tested yesterday) despite that number and the highest anticipation of the Riksbank eventually moving to hike rates for the cycle, once risk sentiment weakened later in the day. SEK defaulting to quickly to reacting to a still fairly modest swing in risk sentiment is a fairly feeble performance.
Likewise this morning, where the hottest UK inflation level in over nine years (3.2% year-on-year and 3.1% for core year-on-year) failed to reverse any of yesterday’s reversal in sterling from strength to weakness noted in the GBPJPY chart below.
One day of risk off does not a new trend make, but yesterday’s action requires a nimble stance on the potential for a deepening rout in risk-correlated trades if US data, concern about the implications of Chinese policy moves (note Evergrande behemoth moving toward a more official restructuring) and/or options expiries into Friday in the US could mean volatility remains high here at least in the near term.
Chart: GBPJPY
One of the more interesting technical developments yesterday was in GBPJPY, which went from poking toward a break-out above the Ichimoku cloud that has clearly provided resistance of late and to new 1-month highs to a vicious reversal back lower as US treasury yields dropped in the wake of the US CPI release and the JPY rallied smartly amidst generalize weak risk sentiment. Will have to see how the situation develops further from here – particularly for the JPY around the upcoming Japanese election, but the structure of the chart is rather compelling if the price action bites lower, especially if the neckline-like area of the significant head and shoulders formation comes into view below the 200-day moving average (currently 149.50). The neckline is a bit poorly defined but is at around 148.50 at the lowest. JPY traders should always have one eye on USDJPY as well, where a break of the 109.00 area could generate considerable volatility across JPY crosses.
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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