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The sharpest two-day rally in a year brought the Japanese yen to the highest level in two weeks against an average of its major counterparts as geopolitical security concerns and trade war fears resurfaced.

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Source: Bloomberg

Yen soars most in a year as Trump sours market mood: President Trump expressed displeasure with progress in US/China trade talks after apparent de-escalation earlier in the week. He also called for a probe into auto imports that sounded eerily similar to the one that led to a tariff hike on steel and aluminium. Canada is a major importer of motor vehicles and parts into the US, so the move also casts a cloud over NAFTA renegotiation efforts. Finally, he cancelled a June summit with North Korea’s Kim Jong-un, ominously hinting that the US military is prepared to take whatever action necessary from here. This understandably soured investors’ mood and stoked unwinding of carrying trades – bets on higher-yielding assets funded by cheap yen-denominated loans – and sent the frequently anti-risk unit upward. The benchmark USD/JPY exchange rate broke the uptrend carved out from late-March lows and looks to be resuming the longer-term downtrend started in January 2017. Near-term support is at the 109.00 figure.

Wall Street resilient to global equities slide, Trump pulling out of North Korea summit: Once again, US markets proved remarkably resilient this past session, despite an environment that clearly stepped up the pressure on the speculative outlook. While the S&P 500 and Dow didn’t forge actual bullish progress on the day – they wouldn’t need to in order to outperform global peers. In a second attempt to jump start a global risk aversion move, Asian shares opened Thursday to further selling. For the ASX 200, a day’s slide adds on to the turn started nearly two weeks ago; but the two-day retreat from the Nikkei 225 looks far more technically profound. That same pressure carried over into European trade with the DAX and FTSE 100 breaking through two-month channel floors. Despite the weight of a global shares retreat, the Dow again held up to a test of 24,625 and the S&P 500 at 2,710 – two-week support on both accounts. What makes this durability all the more impressive was the headline news during the session that US President Donald Trump had cancelled the planned June summit with North Korea with a statement that was a mixture of regret and aggression. With backsliding on trade, political stability and peace; the market’s conviction is truly being put to the test.

A run of central banker speak ahead: We will round out this relatively quiet week for scheduled event risk with a few noteworthy economic events (Tokyo inflation, UK business sentiment, day two of the Eurozone and EU Finance Ministers’ summit), but a theme will form around central bank speak.  The 350 anniversary of the Riksbank – the oldest central bank in the world – will bring key monetary policy figures from key banks in the global financial system. Fed Chairman Jerome Powell and Bank of England Governor Mark Carney are due to speak on a panel discussion. Any indication of their personal views on bearing for their respective central banks will be closely monitored. Yet, just as important would be any take they have on the efficacy of monetary policy in these extreme conditions where their efforts are stretched and financial markets are showing increased tension amid external threats and the uncertainty of normalization. The ECB’s Liikanen will also be speaking with the market evaluating his view and his candidacy as the next President of the European Central Bank when Draghi’s term ends next year. A run of additional comments from the Fed’s Kaplan, Evans and Bostic should give us enough to chew on for fine adjustment to the curve for the FOMC rate forecast.

Gold gains as yields fall in risk-off trade, crude oil drops on OPEC+ supply boost prospects: Gold prices posted the largest one-day gain in six weeks as global risk aversion sent capital flows rushing to the safety of Treasury bonds, weighing on yields and boosting the relative appeal of non-interest-bearing alternatives epitomized by the yellow metal. It may continue to find support as a sour mood lingers across financial markets but a hawkish-leaning speech from Fed Chair Powell might boost the US dollar and cap upside follow-through. Meanwhile, crude oil fell alongside the bellwether S&P 500 index. Whereas US equities managed to recover into the close on Wall Street, the WTI benchmark continued to sink after Russian energy minister Novak said the OPEC+ grouping of top producers engaged in a coordinated output cut scheme will discuss rebuilding supply levels in June. Separately, Deputy Finance Minister Vladimir Kolychev said there is “no sense” in further oil price gains.

Turkish lira’s rally post 300 bp rate hike reverses the following day:  The Turkish central bank shocked the markets on purpose Wednesday when it announced a 300 basis point hike to one of its key rates following an emergency meeting to address the tumbling local currency, the lira. The initial response played out exactly as anticipated: the lira surged. A higher interest rate is a strong draw for global capital, but aggressive moves in monetary policy can only earn so much influence. In the case of Turkey, that impact may have been less than a day as the gains the lira made (the USD/TRY decline) was largely reversed Thursday. While the exchange rate hasn’t returned to the record intraday high set Wednesday, it was nevertheless a record on a close basis after an approximate 4 percent gain. This effort is fighting capital outflow prompted in part in concern over political spill over to the capital market. This is not an uncommon theme across the world – though with varying details and aspects. The effort to pursue an extremely accommodative policy in the developed world to leverage faster growth and inflation has proven its limitations as well.

Australian dollar mixed against uneven counterparts, thin backdrop, falling yield: The Australian dollar was a mixed bag amongst its major pairings this past session, and the immediate outlook doesn’t look any clearer. On an equally-weighted basis, the currency was little changed from the previous day and its total session range was notably narrower than the preceding day. Fundamentally, there was little to prompt the Aussie into action with a widespread bid or sell. Where the sizable moves arose – like the AUD/JPY and AUD/CAD – there was far more action registered from the counterparts. AUD/JPY in particular highlights the faded appeal of carrying between the record low yield of the Aussie and the wavering of risk trends that are more explicitly valued through their ‘income’ versus capital return. And, with the Australian 10-year government bond yield sliding for five consecutive sessions, their restraint should not surprise. With no key event risk on tap on Friday, keep a close eye on risk trends.

S&P/ASX 200 selloff may resume after brief respite: Australian share prices stalled Thursday, with losses in the overweight materials and financials sectors offset by a surge in consumer discretionary, real estate and consumer staples names. Perhaps most remarkably, the index managed to escape broader risk aversion that sent the regional MSCI Asia Pacific benchmark index down 0.6 percent, pushing it to a two-week low. This resilience may not carry through into Friday’s session, however, with SPI futures indicating selling pressure at the open as investors consider swelling political risk and renewed trade war jitters.

Market Data:

SPI futures moved 4.58 or 0.08% to 6037.08.

AUD/USD moved 0.0023 or 0.3% to 0.7583.

On Wall Street: Dow Jones -0.21%, S&P 500 -0.14%, Nasdaq 0.11%.

In New York: BHP -0.27%, Rio -0.29%.

In Europe: Stoxx 50 -0.57%, FTSE 100 -0.92%, CAC 40 -0.31%, DAX 30 -0.94%.

Spot Gold moved 0.97% to US$1305.96 an ounce.

Brent Crude moved -1.2% to US$78.84 a barrel.

US Crude Oil moved -1.55% to US$70.73 a barrel.

Iron Ore moved 0.98% to CNY462 a tonne.

LME Aluminum moved 0% to US$2270 a tonne.

LME Copper moved -1.6% to US$6867 a tonne.

10-Year Bond Yield: US 2.98%, Germany 0.47%, Australia 2.81%.

 

Written by: Ilya Spivak, Currency Strategist and John Kicklighter, Chief Strategist with DailyFX

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