Baku, Azerbaijan, April 3
By Anvar Mammadov - Trend:
The global foreign exchange market reacts quite mildly to fluctuations and is struggling to find a catalyst, head of Foreign Exchange Strategy at Saxo Bank John Hardy told Trend.
He said that April 2 was a prominent example of the lack of contagion across markets from the headline-grabbing gyrations in equity markets.
“The US S&P500 traded down as much as 4 percent yesterday and through the closely watched 200-day moving average and currencies can barely muster a response,” he noted. “Yes, JPY crosses dipped in response, but is generally within recent ranges and hardly mimicking the degree of volatility in equity markets. As well, risk spreads have generally widened in sympathy with the pick-up in equity market volatility, but we are still within the medium-term range, whether the focus is on credit or emerging market spreads. In short, equities are throwing a tantrum, but other asset classes are merely looking on with mild concern, with no signs of a general deleveraging yet taking place.”
One factor that may be preventing a stronger reaction in currency markets is that countervailing forces are acting on the US dollar, making it tough to create a narrative on what to do with the currency, he said.
“On the one hand, risk-off is perhaps USD-supportive at the margin as traders square extended USD speculative shorts and generally lean on the greenback for its deep liquidity,” he added. “But on the other hand, falling interest rate expectations from the Fed ease the focus on USD liquidity worries and erode the carry advantage of the greenback.”
“From here, bond traders may get the worst whiplash if equity markets calm quickly and we continue to see rather inflationary data out of the US,” he said.
“Yesterday’s ISM Manufacturing Prices Paid component, which has a strong history of leading the most-followed inflation measures, was at its highest in nearly seven years,” he noted. “But the chief focus will be on the Friday Average Hourly Earnings data for March after the February data cooled slightly. On balance, a return of risk appetite and higher yields would most likely put the USD and especially the JPY under short-term pressure again.”