Danger, Danger”! FX Goes Berserk in Asia, Flash Crash in AUD/JPY?

Trading View AUD JPY Chart 03 January 2019

Summary: “My, my, hey, hey volatility is here to stay” (to the tune of Neil Young’s song). Once again, the last hour of trading in New York saw volatility rule. In early Asia, trading platforms shutdown as what appears as a flash crash in the AUD/JPY occurred.
Earlier in NY, the Yen, Dollar and Loonie rose while the Aussie, Sterling and Euro slumped. The Dollar Index (USD/DXY) rallied 0.75% to 96.80 as the Greenback reclaimed safe-haven status. Wall Street stocks ended mildly lower after another choppy intraday session. The US 10-year bond yield fell anew to 2.65% from 2.68%, fresh lows since January 2018.
Brent Crude Oil rallied 2.08% following reports that Saudi Arabia lowered crude exports.
Chinese Manufacturing output missed forecasts which hit sentiment earlier in the day. Euro-area PMI’s remained soft while fresh Brexit concerns outweighed upbeat UK factory output data.

  • AUD/USDThe Aussie extended it’s drop following the downbeat Chinese December Manufacturing PMI data (49.7 against expected 50.1). Concerns resurfaced on a slowdown in the Chinese economy which saw the Australian Dollar break the critical 0.70 mark. AUD/USD slumped to near 3-year lows at 0.6982 before recovering to close at 0.6997, down 0.75%. The Aussie also suffered hefty losses against its Rivals.
  • USD/JPY – This Yen continued to attract safe-haven flows, climbing 0.45% against the US Dollar to 109.15 from 109.70 yesterday. The 3-basis point drop in the US 10-year bond yield to 2.65% weighed on the Dollar. By contrast, Japan’s 10-year JGB yield was flat at -0.01%.
  • EUR/USD – While Euro-area PMI data mostly matched forecasts, they remained to the weak side which weighed on the Single currency. The yield on Germany’s 10-year Bund fell 8 basis points to 0.16%. The Euro fell to an overnight low of 1.1325, settling to close at 1.1340 after it failed to break above 1.1500.
  • USD/DXY – The Dollar Index, a measure of the Dollar’s value against a basket of foreign currencies (heavily weighted to the Euro and Sterling), rallied to 96.80 from 96.15 yesterday. Overnight high traded was 96.958, which was the high traded before Christmas. Investor fears of slow global growth and the partial US government shutdown saw flows back into the Greenback.

On the Lookout: Expect a choppy start in Asia today Japanese markets still closed for their New Year holiday. Poor risk sentiment, low liquidity and volatility will continue to be the main drivers in Asian time.
The Aussie gets another test with the release of the University of Melbourne’s December Inflation reading. Which is today’s first set of data. Europe sees Swiss December Retail Sales as well as UK PMI Construction for December. The US releases its Challenger Job Cuts and ADP Non-Farms Employment, ahead of tomorrow’s crucial US Payrolls.

Trading Perspective: Despite the drop in US yields, the yields of its global peers dropped further. Which has provided the US Dollar with the support to trade higher against most of it’s Rivals. The yield on Germany’s 10-year Bund slumped 8 basis points. The yield on the UK’s 10-year Gilt fell to 1.2% from 1.27%. Australia’s 10-year bond yield dropped 8 basis points to 2.28%. Yield differentials widened out in favour of the Greenback.

Trading View AUD USD Chart – 03 January 2019
  1. AUD/USD – The Aussie is always weakest near it’s lows and this is no exception. AUD/USD traded to a low of 0.6982 in New York and 0.6983 this morning. The next support level lies at 0.6960, then 0.6920. A break of 0.6960 could see 0.6920 and then 0.6850, 2016 lows. Immediate resistance can be found at 0.7010 and then 0.7040. The Aussie also tumbled against it’s Rivals. The Australian Dollar Trade Weighted Index is below the 60.00 mark, the lows since 2016. The RBA will not be in a hurry to lower interest rates with the Aussie TWI this low. Which would provide the Aussie with support. In this environment the Aussie will trade to the weak side with a likely range of 0.6920-0.7020.
Trading View USD JPY Chart – 03 January 2019

2.  USD/JPYWith Tokyo closed for its 4-day New Year holiday, expect trading volumes to stay low amidst choppy conditions. The Dollar hit a low of 108.70 which is strong support. Expect this level to hold during Asian time. The next support level comes in at 108.50. The fall in the US 10-year yield to 2.65% looks a bit overdone and we should expect a bounce back to 2.75%. Expect another roller coaster ride in this currency today with one major Asian centre out.

3.   EUR/USD – The Single currency suffered a set-back as haven flows came back into the US Dollar following poor risk sentiment and volatile markets. EUR/USD failed to break above the 1.1500 level and reversed, breaking the 1.1400 and 1.1380 levels to 1.1340. Euro area Manufacturing PMI’s mostly met forecasts but were anchored at yearly lows. This fuelled further fears of a European and global economic slowdown. Expect support in the EUR/USD to emerge at 1.1325 followed by 1.1300. Immediate resistance lies at 1.1380 and then 1.1420. Likely range today 1.1330-1.1380.

4. USD/DXY – The Dollar Index held the strong 96.00 support, trading to a low of 95.822 in choppy conditions. The 1.03% drop in the Euro and the 1.14% slump in Sterling lifted the USD/DXY to a high of 96.96 despite the lower USD/JPY. Immediate resistance lies at 97.00 followed by 97.25. Immediate support can be found at 96.70 and then 96.20.

The FX markets got out of hand this morning, the Central Banks will be on alert. Something triggered that flash crash. Be prepared for more. Get those tin helmets on. Happy trading all.