Forex Market Analysis And Studies
In the currency markets when there is turmoil there are three currencies which stand out as a beacon for safe haven investment; that is the USD, CHF, and JPY.
In terms of products the USDX, USD/CHF and JPY/USD become the three most actively traded products due to a variety of safe haven features to convince investors of certainty in uncertain times.
The Brexit even brought about a whole range of price movement across the currency majors and bonds markets as investors sought stability and indeed the safe haven bet is nor likely to become a consolidated position if the UK invokes article 50 and the European project begins to unravel with further political turmoil across the Euro zone.
What is curious is the behavior of the USD/CHF and JPY/USD after the Brexit event; which tend to move together with a usual correlation of plus 0.5. The Brexit event two weeks ago led to two strikingly different price movements where the CHF lost some 0.60% to the USD while the JPY increased 2.3% against the USD. This puzzling disparity became a result of the closeness of the SNB to the Euro zone with traders weighing in heavily against the CHF unlike the JPY. The chart below illustrates how the positive correlation between the two currencies changed after Brexit from a positive correlation of 0.5 to a negative correlation 0.5 in the space of a week.
The correlation gap made for some fast arbitrage selling by astute currency traders selling the CHF and buying the JPY. The SNB now has a lot of issues on it's plate with the Euro zone politics, economic ties and a faltering Swiss economy spiraling into negative interest rate territory at a faster rate than that of Japan. Hence, the loss of attraction in the weaker CHF viz a viz the JPY and a massive vote in favor of the new government of Japan and it's current handling of the economy and its currency reserves.
The underlying reason why the JPY became a more attractive safe haven than the CHF could be summed up by 10 year bond yields which you can track here on Bloomberg:
http://www.bloomberg.com/markets/rates-bonds
Swiss government 10 year is trading at minus 0.62% compared to Japan counterpart at minus 0.27% furthermore the SNB is taking more steps than the Central Bank Japan for FX intervention.
Currently USD/CHF is trading lower at 0.9817 and the JPY/USD 0.00957 or USD/JPY 104.22.
As I write now I can see gold the safe haven shiny metal is retreating and is down now to 1320 as to be expected as a precious metal that should snap back to supply and demand fundamentals.
A new UK conservative leadership has stemmed the tide on losses on GBP for the moment; but reality is that this story hasn't even begun to unfold itself with the implications for thousands of individual trade agreements needing to be renegotiated over the next 10 years not to mention the mass exodus of corporate units to Europe.
GBP/USD bounced to the 1.33 but looks out of steam and the 1.35 stands a bridge to far as the hedge funds prepare to short trade into the obvious uncertainty. Where the last two years saw hedge funds attack weakness in the crude oil markets, EUR/ USD and gold bullion now the flavor of the moment for a new long term trade is fast becoming the GBP/USD short band wagon.
In terms of products the USDX, USD/CHF and JPY/USD become the three most actively traded products due to a variety of safe haven features to convince investors of certainty in uncertain times.
The Brexit even brought about a whole range of price movement across the currency majors and bonds markets as investors sought stability and indeed the safe haven bet is nor likely to become a consolidated position if the UK invokes article 50 and the European project begins to unravel with further political turmoil across the Euro zone.
What is curious is the behavior of the USD/CHF and JPY/USD after the Brexit event; which tend to move together with a usual correlation of plus 0.5. The Brexit event two weeks ago led to two strikingly different price movements where the CHF lost some 0.60% to the USD while the JPY increased 2.3% against the USD. This puzzling disparity became a result of the closeness of the SNB to the Euro zone with traders weighing in heavily against the CHF unlike the JPY. The chart below illustrates how the positive correlation between the two currencies changed after Brexit from a positive correlation of 0.5 to a negative correlation 0.5 in the space of a week.
The correlation gap made for some fast arbitrage selling by astute currency traders selling the CHF and buying the JPY. The SNB now has a lot of issues on it's plate with the Euro zone politics, economic ties and a faltering Swiss economy spiraling into negative interest rate territory at a faster rate than that of Japan. Hence, the loss of attraction in the weaker CHF viz a viz the JPY and a massive vote in favor of the new government of Japan and it's current handling of the economy and its currency reserves.
The underlying reason why the JPY became a more attractive safe haven than the CHF could be summed up by 10 year bond yields which you can track here on Bloomberg:
http://www.bloomberg.com/markets/rates-bonds
Swiss government 10 year is trading at minus 0.62% compared to Japan counterpart at minus 0.27% furthermore the SNB is taking more steps than the Central Bank Japan for FX intervention.
Currently USD/CHF is trading lower at 0.9817 and the JPY/USD 0.00957 or USD/JPY 104.22.
As I write now I can see gold the safe haven shiny metal is retreating and is down now to 1320 as to be expected as a precious metal that should snap back to supply and demand fundamentals.
A new UK conservative leadership has stemmed the tide on losses on GBP for the moment; but reality is that this story hasn't even begun to unfold itself with the implications for thousands of individual trade agreements needing to be renegotiated over the next 10 years not to mention the mass exodus of corporate units to Europe.
GBP/USD bounced to the 1.33 but looks out of steam and the 1.35 stands a bridge to far as the hedge funds prepare to short trade into the obvious uncertainty. Where the last two years saw hedge funds attack weakness in the crude oil markets, EUR/ USD and gold bullion now the flavor of the moment for a new long term trade is fast becoming the GBP/USD short band wagon.
Today's commentary
Pieter Bergli - Trader X16
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