I hope everyone had a great weekend and survived NFP day on Friday. Despite the moves in the equity markets, the FX reaction was fairly muted.

Hardly surprising perhaps as the headline number did come in very close to what the market was expecting. This week would begin quietly with China, Hong Kong and Australia all celebrating holidays.

Ongoing demonstrations in Hong Kong are making most of the early headlines, but the markets choose to shrug them off. By the time the US day begins, FX markets are almost unchanged from the Friday close with AUD and NZD being the only real movers among the major currencies. Both would slip 25 points on weaker equity markets.

The US day gets going to quiet markets, although the DJ does open down 100 points on concerns over the US-China trade talks.

For FX, it was a slow grind with the USD generally better bid against the major currencies, edging up to 107.05 against the JPY and 1.0985 versus the EUR.

Then a headline hits the wires that China is willing to do a trade deal on all areas that both parties agree on, with other tougher issues to be discussed next year.

Stocks shoot higher, the DJ up 60 points and the USD makes gains across the board, sending USDJPY to 107.45 and EURUSD down to 1.0965.

GBP drops to 1.2290 and XAU fall to $1,488. Late in the US day stocks turn with the DJ ending down 95 points as traders are still concerned about trade talks with the Chinese.

Interestingly, FX barely reacts to the reversal in stocks aside from USDJPY moving back to 107.25. I guess we can see what this week’s main theme will be!

Elsewhere it was a positive start to the week for crypto, with BTC heading up to $8,200 and ETH to $180. No real reason for the rally, but I have seen a couple of analysts calling for this correction in BTC to be near the end.

Another day for equities to take centre stage and for FX to remain in familiar ranges.

Yes USDJPY broke Friday’s post-NFP highs suggesting the market is happy to hold USD regardless of the outcome of trade talks and other economic developments.

But otherwise, it was an inconclusive day for FX.

Looking at a 4H USDJPY chart with the S&P index (in orange) overlaid, we can see a strong correlation between the two. Thus why we often hear ‘risk-on’ and ‘risk-off’ trades involving the JPY.

However we can see there has been some divergence since June which begs the question, who will play catch up? Is USDJPY about to rally higher or are stocks getting ready to break down? Keep an eye on this chart over the coming days.

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David Hannigan
Author

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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