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JPY Reverses Hard against AUD, NZD as Chinese Liquidity Concerns Arise

JPY Reverses Hard against AUD, NZD as Chinese Liquidity Concerns Arise

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Post-NFP rally over as attention shifts immediately to Asia.

- Yen boosted by weak NFP and by Chinese liquidity concerns.

- Big picture: Fed QE3 taper expectations continue to dissolve.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.02% (-0.82% prior 5-days)


The past several days we’ve been focusing on the shifting US yield curve as a way to prognosticate market sentiment regarding incoming economic data and events. Having established that investors were buying US Treasuries especially in the “belly” of the curve – 3- to 7-year notes – yesterday’s significantly disappointing September US NFP report all but confirms that the Federal Reserve won’t taper QE3 next week.

While the prolonged period of excessive Fed monetary easing might prove positive for higher yielding currencies and risk-correlated assets over the coming months, there has been absolutely zero follow through today. While the USDJPY’s weakness following the US labor report isn’t surprising, the US Dollar’s resiliency elsewhere is purely a function of widespread risk aversion in FX markets.

The input fact that changed overnight leading to the severe sharp decline in the Australian and (especially) New Zealand Dollars was a spike in short-term Chinese money rates. The 7-day repo contract, already seeing higher rates over the past two weeks, spiked higher by more than 100-bps today.

It is worth mentioning that the Chinese credit crunch isn’t necessarily organic; that is, the PBOC has intentionally kept its lending standards tight despite slowed growth prospects. Part of the reason is to keep inflation in check, which has proven difficult amid a wave of foreign capital coming into the country to take advantage of the strengthening Chinese Yuan. Regardless; the Yen has stepped in to fill the role of safe haven du jour.

NZDJPY 5-minute Chart: October 23, 2013 Intraday

JPY_Reverses_Hard_against_AUD_NZD_as_Chinese_Liquidty_Concerns_Arise_body_x0000_i1027.png, JPY Reverses Hard against AUD, NZD as Chinese Liquidity Concerns Arise

Will the JPY crosses keep selling off on these Chinese headlines? History might suggest otherwise. The last bout of tight Chinese credit was met with intervention after several tense days in June 2013. Quantitatively, this type of risk aversion in FX is too intense for continuation; in 2013, the four occurrences that saw the NZDJPY depreciate by more than 2% in a 24-hour period had an average 5-day return of +1.85%.

Read more: US Dollar Drops as September NFPs Miss – EUR/USD Hits Fresh 2013 High


JPY_Reverses_Hard_against_AUD_NZD_as_Chinese_Liquidty_Concerns_Arise_body_Picture_1.png, JPY Reverses Hard against AUD, NZD as Chinese Liquidity Concerns Arise

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--- Written by Christopher Vecchio, Currency Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.