Forex Friday: Risk OFF

Currency exchange rate board of multiple currencies
Fawad Razaqzada
By :  ,  Market Analyst

Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.

In this week’s edition, we discuss the yen, gold, dollar and yields, and look forward to the key events coming up in the week ahead.


  • Risk off sentiment hits major FX pairs
  • Yen soars as global bond yields tumble
  • Will gold get past $2K?
  • Central bank tightening over?
  • Looking forward to the week ahead

Risk off sentiment hits major FX pairs


The major European stock averages tumbled shortly after the open and everything else followed suit – the EUR/USD, GBP/USD, AUD/USD etc. Yen crosses were hit the hardest, with the EUR/JPY down over 240 pips at the time of writing. Concerns over the banking sector intensified as investors sold shares of Deutsche Bank. The German lender’s shares sunk over 10% and was falling more at the time of writing as credit default swaps spiked. ECB’s Nagel said he won’t comment when asked about the bank’s tumbling shares. Meanwhile shares in UBS fell 8% as Switzerland’s biggest bank fails to calm investor concerns over its acquisition of Credit Suisse. UBS’s bond prices have dropped in recent days, while credit ratings companies have lowered their outlook on the bank’s debt.



Yen soars as global bond yields tumble

As mentioned, FX markets have been in a risk-off mode, as equities continue to struggle on lingering concerns over the health of the global banking system. The yen being perceived by many as a haven currency strengthened across the board. The yen has also been supported by a drop in U.S. and global bond yields. This is because the gap between those yields, and Japan’s have been reduced.


The market’s feeling is that the major central banks are going to pause their rate hiking and soon think about cutting rates as the global economic activity slows down as the impact of one of the fastest central bank tightening cycles filters through the economy.



In fact, the drop in bond yields have been so spectacular that money markets have now fully priced a quarter-point Fed rate cut by June!





But the Bank of Japan never tightened its belt, and so there is not much loosening they can do when others eventually do. This is precisely why the yen has been supported so significantly. So, is the USD/JPY heading for a new low on the year? I wouldn’t bet against it.


Will gold get past $2K?


The rising banking fears have been so significant that even gold, which has been rising sharply in recent days on falling yields, has struggled to get past $2,000. But its appeal as a safe-haven asset and the rallying bond markets suggests it is just a matter of time.


Indeed, the US dollar has continued to weaken against the yen, as the short-end of the yield curve remains under pressure, with US 2-year yields dropping below 3.60% today.


The market is thus betting that we have reached a peak in terms of rate hikes and that from here looser monetary policy should follow.



Central bank tightening over?


The Fed, SNB and BoE all hiked interest rates this week, but the message from these banks was the same: more increases may be required, not will be, if inflationary pressures persist. However, the markets have started to price in rate cuts from the second half of this year, even though the Fed Chair said this was not discussed at their FOMC meeting this week.


With investors starting to price in interest rate cuts for later in the year or start of next year, this should help technology stocks outperform again (meaning fall less sharply than other sectors, or rise stronger than other sectors), and continue to underpin non-interest-bearing assets like gold and silver.


This week featured three central bank decisions. Here’s a summary of those decisions by my colleague Matt Simpson:

  • The Fed voted unanimously to hike rates by 25bp to 5%, Jerome Powell pushed back on rate buts this year – yet money markets
  • The SNB hiked interest rates by 50bp to 1.5%, with President Jordan saying further hikes cannot be ruled out with inflation having risen since December
  • The BOE voted 7-2 in favour of a 25bp hike to take their interest rate to 4.25% following another hot inflation report. Money markets are pricing in a final 25bp hike whilst economists expect a pause at their next meeting



Looking forward to the week ahead

Here’s a good summary of everything you need to know by my colleague Matt Simpson:


Three major central banks hiked rates totalling 125bp last week, and whilst it is not certain we have seen the last of the hikes form the Fed, BOE or SNB, they’re certainly a lot closer to their respective terminal rates than they were. Of course, recent market turbulence and fears of a banking sector meltdown have certainly added to the calls for terminal rates. But will inflation allow them? The Fed and traders alike will pay very close attention to Friday’s core PCE numbers, as will the SNB to their inflation data on Friday. BOE Governor will also deliver a speech to the London School of Economics where traders hope he’ll reveal if they are at the terminal rate. And as the week progresses, investors will keep a close eye on the spat between the notorious bears, Hindenburg Research and Jack Dorsey’s payment company Block. And if there is any popcorn left, we’ll all be keeping our ear to the ground for any banking failures or signs of financial stress. Good luck!





-- Written by Fawad Razaqzada, Market Analyst at

Follow Fawad on Twitter @Trader_F_R


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