BNY Mellon: Some Familiar Patterns

10 jan 2019

By Simon Derrick, Chief Currency Strategist, BNY Mellon

By Simon Derrick, Chief Currency Strategist, BNY Mellon

Quite when the phrase "Greenspan put" first emerged remains open to question. However, it is clear that by 2001 many believed the “put” existed.

Subsequent events over the next 17 years have done little to counter this idea. It was therefore not that surprising when what looked an awful lot like the put reemerged in late November.

Much as in January 2016, this recent change in tone from the Fed proved sufficient to begin to relieve the downward pressure on the CNY.

Indeed, such was the market's confidence in the put that by mid-December the NDF market was largely prepared to ignore a brief period of fresh pressure on the CNY against the USD in the spot market.

This suggested a market that collectively believed the PBOC would (with the help of the Fed put) be able to carry out a very effective smoothing operation in the months ahead, and that any move by the USD above CNY 7 would likely prove muted.

Since then, the recovery in sentiment towards the CNY has been so robust that one-year NDF points are now rapidly moving towards zero.

This then is a market that is now feeling sufficiently optimistic that it is now beginning to consider the possibility of the CNY strengthening against the USD in 2019.

This Fed-fueled (and trade talk-fueled) recovery in sentiment has been felt elsewhere in the currency markets in recent days.

Most obviously it has been apparent in the performance of classic risk-sensitive currency pairs, such as AUD/JPY and CAD/JPY.

However, history suggests that a degree of caution might be warranted.

As noted earlier this week, the S&P 500 is continuing to provide an uncanny reprise of its performance in in late 2007/early 2008.

It’s therefore interesting to note that something similar can be said about the recoveries seen in both the AUD and CAD against the JPY since last week.

Coincident with the stabilization seen in the S&P 500 in late January 2008, the AUD (which had lost significant ground against the JPY over the previous three months) began to stage a recovery against the JPY.

This rally ran in tandem with the move seen in the S&P 500 and saw the AUD gain around 10% over the next month. Over the same period the CAD staged a 6% recovery.

Much of the excitement came early on with 10-day realized volatility in both currency pairs peaking out about five trading days after the trend reversal before tracking steadily lower over the next month.

By way of comparison the AUD is currently up 6.6% from the low of five days ago against the JPY, while the CAD is up 5.1% over the same period.

Given this it’s also interesting to note that despite the losses seen in the JPY over the course of the past week, few signs of actual outflows from the currency have emerged in our iFlow data over this period of time (see chart below).

Curious.