Morning Commentary: Cross Currents

Foreign Exchange - Morning Commentary
Cross Currents
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Markets are fairly quiet this morning after yesterday’s risk off move. Despite all of the concerns over trade, global growth and geopolitical concerns, FX volatility remains near historic lows. 

One of the best illustrations of this is USDJPY.  Over the past four months, USDJPY has traded within a 3.4% range.  This is the narrowest four month range since the summer of 2014.  If we take a step back and look at USDJPY over the past 26 months, it has traded in a 9.1% range, making it the narrowest range since 1990. 

USDJPY’s relative stability has been a function of both the USD and JPY being strong.  The US dollar and the Japanese yen, as well as the Swiss Franc, are seen as safe haven currencies.  As a result, both currencies have seen inflows with the deterioration in global economic confidence, inclusive of concerns over US trade policies, political uncertainty in Europe and a pullback in global equities. 

Specifically with the JPY, the fall in global equities/yields has increased importance as it has put a dent in record Japanese overseas investments, one of the key drivers of JPY weakness over the past year.  Even if US-China trade tensions don’t escalate further, they are likely to linger for a prolonged period of time.  This means that the forces that have led to offsetting strength in both the USD and the JPY are likely to continue and keep USDJPY range bound.      
  • The Turkish lira is one of the biggest movers overnight, strengthening at one point by over 2.5%.  Markets were supported by reports that Presidents Trump and Erdogan spoke in an effort to solve the Russian missile issue as well as Turkey releasing a NASA scientist that is allegedly connected with the 2016 coup attempt.  Both these moves are seen as moves in the right direction for US-Turkey relations.  
  • In Italy, Matteo Salvini is reportedly ready to call time on the coalition government his party has with the Five Star Movement if Five Star doesn’t back his tax plan.  A strong showing for Salvini’s party raised the possibility of early elections in Italy.  
  • US Q1 GDP came in stronger than expected at 3.1% versus expectations for 3.0%. 
  • Israel will hold fresh elections on September 17.  PM Netanyahu was unable to form a workable coalition by the midnight deadline and chose to call new elections rather than allow another party to try and form a government.  This is the first time a party has failed to form a government.  Polls suggest Netanyahu should win again, however he has been politically weakened by the corruption charges he is facing. 
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