What's moving the markets


Since the stock markets started to tumble, the theme to trading has been risk-on/risk-off.

Last night we had an extreme risk off, it seems led by 2 things :

  • Firstly, China released a slightly weaker than expected PMI number. The data was released early in the trading session and although it created a risk-off environment, stocks didn’t really react during the day. US stocks initially traded higher.

  • Secondly, at the end of the US session, Apple cut its Q1 revenue guidance and this seemed to be the catalyst for some severe risk-off selling.

A typical strategy in currency markets during a risk-off environment is to sell AUD/JPY. With a Tokyo holiday, NY finished for the day, Europe finished for the day and Asia not quite up and running, the markets were thin. This led to algorithmic programmes falling over themselves, selling and snowballing as they tried to fill their orders. This culminated in USD/JPY falling rapidly from 109 down to 105 and for AUD/USD to fall from 0.6990 down to 0.6750.

The bounce back was equally as quick, though USD/JPY has struggled to regain all of its move from last night, bouncing back to 108 and struggling to make any further headway. Overall, it is not a surprise that it failed to regain all of its lost ground as the risk-off environment remains in place. We had softer Chinese PMI data and revenue warnings from Apple, combined with softer stock markets over the last month, plus concerns that the Fed are becoming more cautious on further rate increases. All of this adds to the risk-off sentiment and selling of USD/JPY rallies.

It’s a similar story over the last month with AUD, though it did make back all its lost ground on last night’s flash crash. Since the start of December, AUD has moved lower from 0.74 down to 0.69 which is almost a 10-year low, so it’s understandable that AUD is a little sticky down at these levels. Sentiment remains the same, but at 10-year lows you need to pick your selling levels carefully, as the bounce can be painful whilst remaining in a downward channel.

Overall, last night’s move was the right idea, it just went a little too far a little too quickly because of the holiday in Japan and the time of day /night.

Don’t forget, it's only the second trading day of the new year and non-farm payrolls will be released tomorrow (Friday) at 13:30 GMT.

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