Asia Braces after Market Selloff. USD/JPY Prices Eye Trend Support

10 Oct 2018 23:00, GMT

Daniel Dubrovsky, Contributing Senior Strategist

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Asia Pacific Market Open – Wall Street Selloff, Brexit Optimism, GPB/USD, US Dollar, USD/JPY
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Asia Pacific Market Open – Wall Street Selloff, Brexit Optimism, GPB/USD, US Dollar, USD/JPY

Market selloff engulfs stocks, FX and bonds. S&P 500 down 3.29% as AUD, NZD, CAD fall
US Dollar trades mixed amidst Brexit optimism and Euro and British Pound remain strong
Asia Pacific markets, Nikkei 225 and ASX 200 bracing as USD/JPY eyes rising trend line

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A storm has rattled financial markets akin to the intense selloff witnessed back in February and it may have been for similar reasons. The S&P 500 tumbled 3.29%, the NASDAQ Composite plummeted 4.08% and the Dow Jones Industrial Average shed 3.15% off its price. In general, stock markets have not been faring well in the aftermath of a third Fed rate hike this year and with potentially one more to come in December.

Granted, that probability has now declined from about 80% to 71.7% when looking at overnight index swaps following today’s developments. US government bond yields tumbled as investors bought into what is effectively known as the world’s benchmark risk-free asset. Interestingly, despite the demand, the US Dollar was fairly little changed if not cautiously lower by the end of Wednesday’s session.

The greenback was higher against the commodity bloc of FX such as the Canadian, Australian and New Zealand Dollars. It underperformed against typical anti-risk currencies such as the Japanese Yen and Swiss Franc. Other FX majors that stood tall versus USD were the Euro and the British Pound which may have been as a result of Brexit optimism bets ahead of a speech from Chief EU negotiator Michael Barnier as expected.

In his speech to EU commissioners, Mr. Barnier noted that about 80 – 85% of a withdrawal agreement has been met and is within reach. UK and German front-end government bond yields briefly surged ahead of the speech which helped propel EUR/USD and GBP/USD higher. Then, bond yields tumbled as the intense stock market selloff accelerated. Yet, both the Euro and Sterling remained elevated.

Taking this into consideration might help to explain why the US Dollar failed to secure broad gains against its major counterparts. After all, in times of aggressive risk aversion in the markets, investors’ concerns tends to be safety rather than yields. But in this case, gains in key European currencies probably undermined some of the appeal of the greenback.

Looking to Thursday’s Asia Pacific trading session, the plummet on Wall Street could yet permeate into this region next. Risk trends and market mood may overwhelm the influence of arguably lackluster local economic data. Declines in the Nikkei 225 and ASX 200 could further bolster the Japanese Yen as USD/JPY prices continue approaching the March 2016 support line as expected. The New Zealand Dollar is also quite vulnerable to risk trends and emerging markets as was anticipated for this week.