Market Drivers February 6, 2018
Risk stabilizes USDJPY above 109.00
RBA remains on hold
Nikkei -4.73% Dax -1.82%
Europe and Asia:
AUD RBA stays on hold
CAD Ivey PMI 10:00
Risk recovered in early European trade today helping to lift USDJPY above the 109.00 figure as European equities remained in the red but were well off their lows.
The global selloff in risk which saw the Dow plunge by more than -1100 points – it biggest one day decline ever – continued in Asia and early Europe, but the panic receded providing scope for some short covering flows. USDJPY which plunged to 108.50 in Asia session trade popped back to 109.30 before giving some of the gains back while EURUSD vericalized through 1.2400 level before selling off slightly as well.
Equity flows with dominate all trade in the FX for the rest of the day as the spike in volatility will make all assets much more correlated to each other. There are many theories for why stocks plunged yesterday, but perhaps the best explanation is the simplest. Equities were grossly overbought and the pace of gain in January was utterly unsustainable. Yesterday’s steep selloff was a natural response to the one-way gains of the past few weeks.
However, the increase in volatility that the selloff has brought may have longer term complications and will now create a more unstable regime across all asset classes. The one difference between the current selloff and the corrections over the past few years is that G-3 central banks are now in a coordinated monetary tightening cycle and therefore will not act as natural volatility dampeners they were in the past.
Given this dynamic, volatility in FX is likely to expand as well, but for now the only focus in the market will be on whether equities could stage a rally. If the selling subsides USDJPY is likely to regain the 109.50 level and maintain its support structure on the charts. But if we see a second wave of selling as the day goes by the critical 108.50 support is likely to fall by the wayside indicating that the downtrend in the pair remains in tact.