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Forex today saw the JPY crosses post moderate gains, despite the sharp drop in the Asian equities.

Japan’s Nikkei index fell 4 percent in Asia and was on course for its biggest single-day decline since March. Further, China’s Shanghai Composite index dropped 3.9 percent to its lowest level since 2014 and was accompanied by a 3.8 percent decline in Hong Kong’s Hang Seng.

South Korea’s benchmark Kospi index also fell 3.4 percent and Australia’s S&P/ASX 200 index shed 2.4%.

Clearly, the 800 point drop in the Dow Jones Industrial Average (DJIA) prompted Asian investors to sell risk. However, despite the risk-off, the financial markets did not witness a classic flight to safety.

For instance, the AUD/JPY pair – which is widely considered as a barometer of risk – rose to 79.44, representing a 0.4 percent gain on the day. The NZD/JPY also gained 0.25 percent in Asia and so did the EUR/JPY and GBP/JPY pairs. Meanwhile, Gold, a classic safe haven asset, traded flat to negative around $1,193/Oz.  

The US dollar exchange rate, as represented by the dollar index (DXY), fell to a ten-day low of 95.18 in Asia and was accompanied by a drop in the US 10-year treasury yield to an eight-day low of 3.14 percent. The pullback in the treasury yields could calm market nerves.

While the USD dropped against most majors, the broad-based weakness did little to stall the decline in the Chinese yuan. The offshore yuan exchange rate or the USD/CNH pair rose to 6.9429 in Asia – the highest level since Aug. 16.

CNH’s failure to capitalize on the broad-based USD weakness has left the doors wide open for a sharp drop toward 7.00 on the back of a better-than-expected US inflation number.

The resilience shown by the JPY crosses in Asia does not necessarily mean that risk assets will stabilize in Europe. Moreover, the minor bounce in AUD/JPY could be associated with the oversold conditions, reported by the hourly chart relative strength index (RSI).

At press time, the S&P 500 futures are reporting 1 percent drop. Hence, the probability of European stocks reporting bigger losses is high. As a result, the uptick in the JPY crosses witnessed in Asia could end up being a dead cat bounce.

Investors need to keep an eye on EUR/JPY, which is looking south toward 129.02 (50% Fib R of 124.90/113.13), having closed below the 50-day moving average (MA) of 129.55. Elsewhere, GBP/JPY is stuck in a narrowing price range or pennant pattern.

Key headlines in Asia

Economic data in Europe (GMT)

06:45 France Sep CPI (EU Norm) final

07:00 GMT Spain HICP

Events in Europe

07:00 Riksbank’s Skingsley reports on the economic situation and current monetary policy at Profit & Loss Scandinavian conference in Brunkebergstorg, Sweden.

10:45 BoE’s Vlieghe speaks on ‘Global and domestic challenges for UK monetary policy’ at the National Bank of Belgium in Brussels.

What’s brewing in the majors?