Morning Commentary: Walks like a Duck, Quacks like a Duck but isn’t a Duck

Foreign Exchange - Morning Commentary
Walks like a Duck, Quacks like a Duck but isn’t a Duck
Share this story:
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
For many years, low Japanese rates have made the yen into a funding currency as borrowing costs are low.  During times of positive market sentiment, investors would sell yen to raise funds in order to buy risky assets.  Conversely during periods of negative market sentiment, investors would sell risky assets and buy the yen to pay off their loans.  This flow dynamic has helped the yen behave as a safe haven asset—i.e. a currency that has an inverse relationship with risk markets. 

With European rates lower than Japanese rates, the euro has also become a funding currency, but is it also a safe haven currency?  Euro price action definitely shows some safe haven behavior.  So far this year, the euro has outperformed a decent amount of high beta currencies but still lags behind the traditional safe havens.  So what is preventing the euro from functioning as a genuine safe haven during risk off episodes?

For starters, the Eurozone economy remains weak which puts into question the economy’s ability to handle a downturn.  Moreover, should the downturn be severe, there would likely be concerns about the viability of the single currency.  Additionally, the Euro area is unique in that it has both a current account surplus and sizeable long term capital inflows.  During risk off periods, the pull back in these capital inflows would offset some of the inflows due to the unwinding of euro funded carry trades.  

What this all nets out to is a currency that has some safe haven credentials but fails to match those of traditional safe havens such as the Swiss franc and Japanese yen. 
  • China announced that it would reduce, by 50%, the tariffs imposed on $75 billion of US goods.  While this move wasn’t entirely unexpected, as it was part of the Phase 1 deal, it is still encouraging that China is following through on its pledges.  The cut will be effective from 1:01 p.m. (Beijing time) on Feb. 14, the same time as when the US will implement its reductions of tariffs on some Chinese products. Other retaliatory tariffs imposed by China beyond the ones being cut will remain in place.   
  • Overnight, the PBoC’s USDCNY fix suggests that the PBoC is comfortable with the CNY’s current level and will allow market forces to dictate movement. 
  • The second day of OPEC+’s special Joint Technical Committee (JTC) meeting ended with no agreement and will continue for a 3rd day as the group looks for a way to stabilize the oil market hit by the coronavirus.  Saudi Arabia is pushing for a cut while Russia and Nigeria have taken the other side. 
  • Germany reported very weak factory order data with orders dropping -2.1% against expectations for a 0.6% rise.  This report adds further questions around market consensus that European growth should pick up in 2020.
  • US initial jobless claims moved lower and beat estimates by coming in at 202k versus expectations for 215k claims.  This month’s print was the lowest amount of jobless claims since April 2019.  Beats on both ADP employment yesterday and initial jobless claims today illustrates the continued performance of the US labor market. 
  • Australia’s December retail sales disappointed by falling -0.5% against -0.2%.  A pull back in December was expected as November retail sales printed a blockbuster number.  However, the unfavorable base effects were exacerbated by the bushfire crisis that has disrupted domestic sales and tourism.
If we can help you with any Foreign Exchange needs, please email or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to Please do not reply to this email. To ensure the delivery of future emails, please add to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC


Popular posts from this blog

Acquisitions or Alliances: What's Your Growth Strategy?