USD: Viewpoint On USD Being A Safe Haven
Brad Setser wrote a thread on X providing a few excerpts from his recent blog on why the USD might not see the demand it usually encounters during the next bout of stress in markets. https://t.co/Fqc00L3sOc
- Brad Setser on X: "The dollar, famously, rallied during the global financial crisis (which originated in the US). It didn't though rally because foreign investors rushed into US assets"
- “There is a very common belief that foreign investors ran into the safety of US assets (and specifically Treasuries) during the global financial crisis (folks tend to reason from the dollar's rise). But that isn't what the balance of payments data shows.”
- “Debt related flows reversed (foreign investors pulled funds from the United States and specifically from US banks). So why did the dollar rise? Because US money also came home.”
- “Remember that both the dollar and yen rallied in 2008. I think that is because both were funding currencies in the global carry trade in the runup to the crisis, and the crisis triggered a carry unwind …”
- “Why does this matter? Well, the dollar is now the destination currency for a lot of carry trades (and equity outperformance hopes), and destination currencies don't tend to rally in times of stress.”
- “And a lot of financial models assume that the dollar will rally in bad states of the world, and thus the dollar itself provides a hedge against a US equity or US credit overweight. (I am not convinced).”
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FOREX: JPY Crosses - Bounce Off Support Overnight, Headwinds Still Around
The US Equity move higher stalled overnight and a poor ISM services report saw it trade heavy for the whole N/Y session. The market is trying to ignore the worries about growth that would make the cuts possible but the ISM services data shows these headwinds are increasing. This morning has seen US futures open a little lower, ESU5 -0.05%, NQU5 -0.25%. The Yen was sold overnight and managed to bounce off various support levels, there are still lots of headwinds for risk though and for this reason I feel you could still expect sellers on a bounce.
- EUR/JPY - Overnight range 169.82 - 170.95, Asia is trading around 170.80. This pair bounced off its support just below 170.00. Watch for any signs of topping out should risk actually start correcting lower, a move sub 169.50/170.00 could signal a deeper pullback is on the cards.
- GBP/JPY - Overnight 195.27 - 196.46, Asia trades around 196.35. The pair sliced through its support around 197.00 and has moved very quickly towards the 195.00 support. The move higher looks to have stalled for now and a sustained break below 195.00 would turn momentum lower again. A bounce back towards 197.00/197.50 should now see sellers remerge first up.
- NZD/JPY - Overnight range 86.67 - 87.11, Asia is currently dealing 87.20. The pair failed with multiple attempts to break above 89.00. A top looks to potentially be in place now and a break sub 96.50 could signal a deeper correction, expect sellers on any back towards 88.00 initially.
- CNH/JPY - Overnight range 20.4641 - 20.5608, Asia is currently trading around 20.5200. This pair broke through its 20.7000/20.8000 resistance area last week but the price action was pretty ugly as the move higher was rejected in what looks like a key day reversal. Initial support is around the 20.40 area but a sustained break back below 2.3000 would begin to turn momentum lower again.
Fig 1 : GBP/JPY Daily Chart
Source: MNI - Market News/Bloomberg Finance L.P
MNI EXCLUSIVE: Ex-RBA Member Warns Not To Ease Too Much
An ex-RBA board member warns against over easing.
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CHINA: Central Bank Withdraws CNY170.5bn via OMO
- The PBOC issued CNY138.5bn of 7-day reverse repo at 1.4% during this morning's operations.
- Today's maturities CNY309bn.
- Net liquidity withdrawal CNY170.5bn.
- The PBOC monitors and maintains liquidity in the interbank system through the issuance of reverse repo.
- The CFETS Pledged Repo Deposit Institutions 7 Day Weighted is at 1.42%, from prior close of 1.44%.
- The China overnight interbank repo rate is at 1.30%, from the prior close of 1.35%.
- The China 7-day interbank repo rate is at 1.43%, from the prior close of 1.44%.
