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
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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. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • 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.
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