BNY Mellon: AUD/JPY & CAD/JPY

17 jan 2019

By Simon Derrick, Chief Currency Strategist, BNY Mellon

By Simon Derrick, Chief Currency Strategist, BNY Mellon

While it’s certainly true that the composition of the S&P 500 as changed substantially over the past decade and a half (Amazon joined in 2005, Google in 2006, Netflix in 2010 and Facebook in 2013), the index continues to provide a surprisingly reasonable reprise of its performance in both late 2007/early 2008 and at the end of 2000.

This first started to become apparent in mid-December. Since then it’s notable that the recovery seen in the index since early January has come at almost the same point in the cycle as it did back in both 2001 and 2008.

This certainly doesn’t imply a set path for US equities from here. Indeed, it’s worth recalling that the 2001 and 2008 moves followed very different paths from this point in the cycle (with the second leg of the 2008 move really taking until summer to get underway).

However, it does suggest that the current environment is very similar to that seen at both these key junctures for markets.

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 the first week in January.

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, in the five days after the recovery began at the start of this month, the AUD rose about 6% from the lows against the JPY while 10-day realized volatility spiked up to above 16%.

Similarly, the CAD gained around 4.5% over the same period while 10-day realized volatility rose above 17%.

Given this, it’s interesting to note that since then the upward momentum for both the AUD and CAD against the JPY has all but evaporated.

The AUD stands less than 1% higher than it did on January 9 while the CAD is essentially unchanged. Equally, realized volatility has trended steadily lower.

While history rarely repeats itself, it’s still worth recalling that the early 2008 rallies in both the AUD and the CAD only lasted for around a month and that realized volatility declined steadily over the course of the move. It's also interesting to note this morning that the risk off tone developing since the headlines connected with Huawei Technologies emerged late in the US trading day (see Newswatch) has seen AUD/JPY coming under increased pressure.