The Japanese Yen Kept Falling Against The US Dollar Closing The Week Above 128, By Far The Worst Performing Major Currency YTD

With Euro area PMIs and growth data surprising positively, the possibility of an early liftoff by the ECB is becoming likelier: the front end of the curve looks like the weak point if the ECB hikes 3 times this year (July, September, December)

EUR, USD, JPY 1 Month Into 2Y ATM Swaptions Implied Volatilities | Source: Refinitiv


The Euro Continued To Fall This Week, With The War In Ukraine And The Risk Of A Russian Nat Gas Ban Now Putting The EU On The Edge Of A Recession

Euro options positioning is skewed to the downside with the first round of the French presidential elections now upon us; a win by Le Pen would push the spot further down towards 1.0500 with a widening of the OATs-Bunds spreads (and a likely spillover into BTPs)

Euro & EUR-USD 12X18 Forward Rates Differential | Source: Refinitiv


Lack Of Additional Sanctions Against Russia Leads To A Return Of Risk Appetite, With EM Currencies The Main Beneficiaries

Rates differentials continue to push the yen lower, as the BoJ keeps buying JGBs to maintain control of the curve, with no sign yet that the central bank is worried about importing inflation with a weak currency

Japanese yen spot rate vs US-JP 18X21 forward rates differential | Source: Refinitiv


The US Dollar Fell This Week, Along With FX Implied Volatilities; Ukrainian War Fading In The Background, As Monetary Policy Decisions Take The Limelight

Although ATM implied volatilities fell this week, the skew is still very much to the downside, with the Euro 3-Month 10-delta put / ATM ratio around 1.40, close to the highest levels in the past 5 years

Euro 1-Month Implied Volatily Smile | Sources: ϕpost, Refinitiv data


US Dollar Index Ends Volatile Week Modestly Higher, With Both JPY And CHF Falling Close To 2%

The euro area is obviously more directly affected to the Ukrainian invasion than the US, and the volatility of the single currency has jumped in the past couple of weeks, although the brutal hedging moves into low-delta / high-gamma puts have started to recede


Extreme Moves In Implied Volatilities, Particularly In Downside Euro Protection As Spot Price Falls Below 1.10

The Rouble ended the week down another 10% against the US Dollar, with the possibility of additional sanctions against Russia weighing enormously on its government debt and the cost of default protection

US Treasury 2-Year vs Russian Government 2Y Yield (local currency) | Sources: ϕpost, Refinitiv data


US Dollar Rises Against The Euro And Yen, In Line With Short Rates Differentials

In EM currencies, the shekel weakened 1% today as the bank of Israel sold the currency in the open market, and the Polish zloty was essentially unchanged after a 50bp rate hike widely anticipated by the market

Japanese Yen Spot Rate vs. US-JPY 18x24 Forward Rates Differential | Sources: ϕpost, Refinitiv data


Risk Aversion, Rates Differentials Push The US Dollar Up Against Most Currencies This Week

Antipodean currencies are faring the worst among majors, as they're the most sensitive to global risk sentiment, with the Kiwi dollar now down over 4% year-to-date, and the Aussie pretty close to that as well

FX Majors Performance Year To Date | Sources: ϕpost, Refinitiv data


Risk-Off Trade Takes Down Australian And Canadian Dollar, While Funding Currencies Rise (JPY, EUR, CHF)

The (still modest) rise in volatility and risk aversion across asset classes we've seen this week, from US technology stocks to bitcoin and other cryptocurrencies, is causing some unwind of levered carry positions in FX

CitiFX Long Term Macro Risk Index | Sources: ϕpost, Refinitiv data


Risk-On Moves In FX, With The Aussie Dollar Leading the Way Among Major Currencies

Sovereign credit spreads were down for Russia, Turkey, Brazil, South Africa, allowing EM currencies to make significant gains today: BRL up 2%, RUB up 1%, ZAR up 1%

Russia & Brazil 5Y USD CDS Spreads | Source: Refinitiv


Rates Differentials Take US Dollar Higher Against Euro, Swissie, Sterling

Euro implied volatilities have become more skewed to the downside over the past month, while risk reversals are showing less bias to a strengthening yen (lower risk aversion)

Euro 1-Month Implied Volatility Smile | Sources: ϕpost, Refinitiv data


Widening Rates Differentials With The US Curve Take Down Euro, Swissie To End Week

Good week for major currencies against the dollar, with gains across the board, led by the Japanese Yen, Canadian Dollar and Pound Sterling

FX Majors Performance Against The US$ This Week | Sources: ϕpost, Refinitiv data


Risk-Off Move, Rates Differentials Combine To Push Yen, Swissie Higher Against The USD

One of the purest risk-off trades has been to go long Japanese Yen, short Aussie Dollar, and we expect to see this continue to play out over the course of the year

AUDJPY Spot Rate vs Nasdaq Composite Index | Source: Refinitiv


Broad Fall In The US Dollar, With More Dovish Sentiment Around Powell's Confirmation Hearing

However, after a brutal repricing at the front end of the US yield curve last week, this move in the dollar may not last, and could simply be a temporary reprieve ahead of the latest CPI data tomorrow

Euro spot rate vs DE-US forward rates differential | Source: Refinitiv


US Dollar Stages Modest Recovery After Big Drop On Friday, With Gains Against Euro, Swissie

One of the notable developments since the beginning of the year has been the collapse of the correlation between US-JP short rates differentials and the JPY spot rate; prices have been much more driven by risk-on / risk-off moves (deleveraging leading to stronger funding currencies like the yen and euro)

Rolling Correlation Between the USD/JPY Spot Rate And US-JP 18x24 Forward Rates Differential | Sources: ϕpost, Refinitiv data


Euro Rises, Japanese Yen Falls After FOMC Sets Path For Feds Funds Rate Liftoff Next Year

One-month ATM implied volatilities are falling rapidly, and risk reversals in EUR, JPY are showing a moderate skew towards a weakening of the USD, as the consensus and rates differentials favor a stronger dollar

EUR CNH JPY 1-Month ATM Implied Volatilities | Sources: ϕpost, Refinitiv data


Dollar Index Up Today As Further Rise in US Short-Term Rates Widens Rates Differentials

Emerging market currencies have been weakening since the start of the week, with both the Omicron risk-off sentiment and higher US rates making EM carry less attractive

MSCI EM Currency Index (USD) | Source: Refinitiv


US Dollar Rises On Light Macro Agenda, With Busy Week Of Central Bank Meetings Ahead

After a strong correlation over the last few weeks, with a macro focus on monetary policy, US-JPY rates differentials and the JPY spot rate have been less tightly coupled since the omicron discovery

21-Day Correlation Between Spot JPY and US-JP Forward Rates Differential (6-month rates in 18 months) | Source: ϕpost, Refinitiv data


Tightening Rates Differentials Take The US Dollar Index Down To End The Week

A quieter overall week from a macro standpoint, with rates and FX volatilities coming down, but the FOMC next Wednesday will bring back event risk in a big way

CitiFX Economic Surprise Indices | Sources: ϕpost, Refinitiv data


US Dollar Rises As Worries About Global Growth Widen Rates Differentials

The Australian dollar is one of the most vulnerable currencies in this context, with the dovish central bank and risk sentiment the two drivers of negative AUD performance

Elevated JPY Implied Volatilities Still Skewed To A Strengthening of the currency | Sources: ϕpost, Refinitiv data


As Rates Volatility Recedes Slightly, Differentials Come Back To The Fore And Drive Yen Down, Euro Up Against The Dollar

Sovereign credit spreads have come down quite dramatically this week across emerging markets, benefiting currencies like the Mexican peso, Brazilian real, South African rand

Brazilian real spot rate and Brazil 5Y USD Sovereign CDS Spread | Source: Refinitiv


Risk-On Sentiment Takes The Canadian And Australian Dollars Higher, Following The Rise In Commodities

Although rates volatility remains high, most emerging markets did well today, with the tightening in sovereign credit spreads increasing the attractiveness of recently battered carry currencies like the Brazilian real

CitiFX Macro Long Term Risk Index | Sources: ϕpost, Refinitiv data


Yen, Swiss Franc, Euro Fall Against The US Dollar On Widening Rates Differentials

Pro-risk currencies like the Canadian Dollar and Australian dollar made good gains today, as core commodities like crude oil and copper rebounded after poor performances last week

Euro spot rate vs EUR-USD Rates Differential (6-Month Rates 18 Months Forward) | Source: Refinitiv


Volatile Week For Currencies Ends On A Quieter Note, With The Dollar Index Edging Up On Friday

The past week has been a good example of how carry trades have a negative convexity to volatility, while funding currencies like the Japanese Yen and Swiss Franc have a positive convexity (rising the most when volatility is highest)

US Dollar Index Front-Month Future Prices | Source: Refinitiv


Not A Great Deal Of Movement For The US Dollar Index Today, With Slight Weakening In The EUR And JPY

Emerging market currencies rebounded today with the risk-on sentiment, lower sovereign credit spreads and a bounce in commodities; the notable exception was the Turkish Lira, which fell hard again, now just below the 14.00 level

Brazil, South Africa, Turkey 5Y USD CDS Spreads (basis points) | Sources: ϕpost, Refinitiv data


Modest Losses For Major Currencies Against The US Dollar, With The Exception Of The Yen

Volatility in US rates and credit has caused Japanese investors to sell some exposure to positive carry assets, creating upward pressure on the JPY and big moves in out-of-the-money JPY implied volatility

Changes In The JPY 1-Month Implied Volatility Smile | Sources: ϕpost, Refinitiv data


The US Dollar Index Dipped Further Today, Despite Strong Tailwind In Short-Term Rates Differentials

The magnitude of Friday's risk-off rise in the Japanese yen was easy to spot in 1-month 25-delta risk reversals (see chart below), with the one-year z-score moving down over 4 standard deviations

1-Year Z-Scores In EUR, JPY, CNH Risk Reversals | Sources: ϕpost, Refinitiv data


Euro And Yen Spot Rates Down Today, As Changes In Real Rates Differentials Favor US Dollar

Implied volatilities fell back to start the week, after a dramatic risk-off move on Friday generated a 5 standard-deviations drop in 1-Month 10-delta JPY risk reversals

One-Year Performance Of Major Currencies Against The US$ | Sources: ϕpost, Refinitiv data


The Rise In US Short Rates And Widening In Rates Differentials Bring Down Yen, Euro

Notable moves today: the Turkish Lira rebounded nicely (up 6%), while the Kiwi dollar fell over 1% after a 25bp hike in the guiding rate (in line with consensus) disappointed bulls who had hoped for 50bp

EUR/USD Spot Rate vs EUR-USD 18x24 Forward Rates Differential | Source: Refinitiv


Good Macro Data In Europe Helped Rates Differentials Firm Up, Driving The Euro Slightly Higher Today

The big story in FX was the huge drop in the Turkish Lira, down over 11% in a single day to its lowest level ever, after Erdogan praised the current accommodative monetary policy in the midst of double-digit inflation

Turkish Lira spot price intraday (inverted Y axis) | Source: Refinitiv