Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Technical Analysis

This note takes a thorough look, through a technical lens, of major JPY crosses as nearly all show bullish breakouts across the board.When seen in conjunction with rising yields, higher commodity prices, and stable stocks, we get a fuller picture of the reflationary trends that have re-emerged across markets except in Japan where deflationary concerns (even in the face of rising wholesale prices) are never far away. This keeps the JPY the favoured funding currency, as usual.Keep in mind that US yields are likely to continue higher still – the target for US 5-year yield is 1.80% which will probably take a few months to achieve. Such a development would most likely put US 10-year yield well above 2.00%.The only trend, at this juncture, that is beginning to look mature is the rally in Brent Crude, which has effectively met the $85 target area that has been in place for over a month. That does not mean we will reverse but instead could slow down or consolidate ahead of big levels just below $90.

This note takes a thorough look, through a technical lens, of major JPY crosses as nearly all show bullish breakouts across the board.When seen in conjunction with rising yields, higher commodity prices, and stable stocks, we get a fuller picture of the reflationary trends that have re-emerged across markets except in Japan where deflationary concerns (even in the face of rising wholesale prices) are never far away. This keeps the JPY the favoured funding currency, as usual.Keep in mind that US yields are likely to continue higher still – the target for US 5-year yield is 1.80% which will probably take a few months to achieve. Such a development would most likely put US 10-year yield well above 2.00%.The only trend, at this juncture, that is beginning to look mature is the rally in Brent Crude, which has effectively met the $85 target area that has been in place for over a month. That does not mean we will reverse but instead could slow down or consolidate ahead of big levels just below $90.

FX & Rates

Two trends that are becoming clearer in these markets is the rise in yields and the rise in energy prices.Together they spell out a ‘reflationary’ stance which is inter-related to the market preparing for Fed tapering asset purchases. This is further supported by the recent move higher in US breakevens which are now set to trend up. While these may appear to be positive developments and signs of markets moving in the right direction, they do not come without risks.

Two trends that are becoming clearer in these markets is the rise in yields and the rise in energy prices.Together they spell out a ‘reflationary’ stance which is inter-related to the market preparing for Fed tapering asset purchases. This is further supported by the recent move higher in US breakevens which are now set to trend up. While these may appear to be positive developments and signs of markets moving in the right direction, they do not come without risks.

Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

Global FX volatility – as measured by the 5-day Standard Deviation (SD) in the daily percentage change in the spot (closing) price of a turnover-weighted basket of 32 major currency pairs against the US Dollar – remains depressed by historical standards.While global FX volatility rose slightly on 11th August to about 0.32 SD following the release of US CPI-inflation data, it is still well below its level one month ago (0.43 SD) and 10-year average (0.47 SD). Notably global FX volatility is at a similar level (0.30 SD) as it was in the run-up to the 16th June Fed meeting and release of a more hawkish FOMC “<a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210616.pdf" target="_blank" rel="noopener">dot-chart</a>”.Volatility versus the US Dollar in most of these 32 developed and EM currencies has either fallen in the past month from already modest levels or been broadly stable. Volatility in the high-yielding Brazilian Real and low-yielding Canadian Dollar, Czech Crown, Norwegian Krone and Hungarian Forint has fallen the most in absolute terms. However, there have been a few notable exceptions, including the Turkish Lira, Thai Baht and Chilean, Colombian and Philippines Pesos.USD/THB volatility has risen further in past month and is now near top end of its admittedly narrow 12-month range. The Baht has been choppy against a strong US Dollar, resulting in the Baht NEER appreciating 1.4% since the multi-year low recorded on 6th August.GBP/EUR volatility is currently at its lowest level since early June. Sterling’s appreciation against the Euro has been slow and steady, in line with our expectations. Volatility in global FX (and the S&amp;P 500) also remains very modest compared to volatility in other asset classes, notably US Treasuries and Brent crude oil (see Figure 5). Most of the price action has been in the US rates market in recent months, perhaps unsurprisingly given protracted debate about the timeline for Fed tapering and rate hikes.There are a number of factors behind this low transmission from US rates to Dollar crosses and equities but, as was the case in late-2019, FX markets are ultimately pricing in very little risk of policy, macro data or geopolitical surprises, in our view.

Global FX volatility – as measured by the 5-day Standard Deviation (SD) in the daily percentage change in the spot (closing) price of a turnover-weighted basket of 32 major currency pairs against the US Dollar – remains depressed by historical standards.While global FX volatility rose slightly on 11th August to about 0.32 SD following the release of US CPI-inflation data, it is still well below its level one month ago (0.43 SD) and 10-year average (0.47 SD). Notably global FX volatility is at a similar level (0.30 SD) as it was in the run-up to the 16th June Fed meeting and release of a more hawkish FOMC “dot-chart”.Volatility versus the US Dollar in most of these 32 developed and EM currencies has either fallen in the past month from already modest levels or been broadly stable. Volatility in the high-yielding Brazilian Real and low-yielding Canadian Dollar, Czech Crown, Norwegian Krone and Hungarian Forint has fallen the most in absolute terms. However, there have been a few notable exceptions, including the Turkish Lira, Thai Baht and Chilean, Colombian and Philippines Pesos.USD/THB volatility has risen further in past month and is now near top end of its admittedly narrow 12-month range. The Baht has been choppy against a strong US Dollar, resulting in the Baht NEER appreciating 1.4% since the multi-year low recorded on 6th August.GBP/EUR volatility is currently at its lowest level since early June. Sterling’s appreciation against the Euro has been slow and steady, in line with our expectations. Volatility in global FX (and the S&amp;P 500) also remains very modest compared to volatility in other asset classes, notably US Treasuries and Brent crude oil (see Figure 5). Most of the price action has been in the US rates market in recent months, perhaps unsurprisingly given protracted debate about the timeline for Fed tapering and rate hikes.There are a number of factors behind this low transmission from US rates to Dollar crosses and equities but, as was the case in late-2019, FX markets are ultimately pricing in very little risk of policy, macro data or geopolitical surprises, in our view. 

Low Global FX Vol: Maturity or Complacency?

Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

We suggest taking profits on our long-standing recommendation to buy the Mexican peso against the Canadian dollar. The peso has been among the best-performing currencies in EM this year helped by the central bank’s surprise rate hike at the last meeting. The Canadian dollar, meanwhile, has underperformed following last month’s dovish taper by the central bank. We remain constructive on the peso but opt to close the trade as we see the risk that the central bank conveys a dovish message at the next meeting even as it raises the policy rate.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

We suggest taking profits on our long-standing recommendation to buy the Mexican peso against the Canadian dollar. The peso has been among the best-performing currencies in EM this year helped by the central bank’s surprise rate hike at the last meeting. The Canadian dollar, meanwhile, has underperformed following last month’s dovish taper by the central bank. We remain constructive on the peso but opt to close the trade as we see the risk that the central bank conveys a dovish message at the next meeting even as it raises the policy rate.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

FX Dashboard: Take Profits on Long Mexican Peso Vs Short Canadian Dollar

The Mexican peso has outperformed the broad EM currency complex and we expect it to continue to do so as more rate hikes are on the way due to persistently high inflation and the macroeconomic backdrop remains supportive. We reiterate our trade recommendation to go Long Mexican peso against Short Canadian dollar.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

The Mexican peso has outperformed the broad EM currency complex and we expect it to continue to do so as more rate hikes are on the way due to persistently high inflation and the macroeconomic backdrop remains supportive. We reiterate our trade recommendation to go Long Mexican peso against Short Canadian dollar.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

FX Dashboard: Mexican Peso Should Continue Outperforming

Canada

The Canadian dollar is the official currency of Canada. 

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CAD (USDCAD CURNCY)

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