AUDJPY flash crashes in overnight trade

Summary

• USDCAD: Dollar/CAD continues to struggle at Fibonacci chart resistance in the 1.3660s as traders slowly return from the holidays.  Yesterday’s move off the highs was largely driven by a strong bounce in oil prices, which occurred after reports that Saudi Arabia finally started curtailing crude exports during the month of December.  Last night’s vicious plunge in the Australian dollar helped USDCAD recover in Asian trade but chart resistance has reasserted itself again, and we now have crude oil leading us lower into the NY open today.  The US ADP Employment report for December just came in at +271k vs +178k expected.  The US ISM survey for December is up next at 10amET, with traders expecting 57.9 on the headline and 58 on Prices Paid.  USDCAD had a tremendous month of December, fueled by falling oil prices and dovish turn from the Bank of Canada, and so we’re not surprised to see some profit taking here from the funds with oil prices off their lows.  We think the market searchers for buyers here and perhaps finds them in the 1.3520s after the release of the Canadian and US employment reports tomorrow.  We’ll also have a speech from the Fed’s Powell before the American Economic Association at 10:15amET tomorrow, followed by the weekly EIA oil inventory report at 11amET.

• EURUSD: Euro/dollar traders continue to nurse losses after a tumultuous start to the year yesterday.  A plunge in German bund yields to new 2yr lows appeared to be the catalyst, with some traders pointing to the sluggish European and Chinese PMI data reported yesterday.  The EURUSD chart technicals have taken a sudden turn for the worse now, with a bearish outside day pattern now recorded.  We think the market struggles here around the trend-line level in the 1.1360s, and while traders may try to push prices back above it, we think sellers will lurk on rallies up to 1.1400.  Last night’s flash in AUDJPY had little effect on EURUSD.

• GBPUSD: Sterling was an unfortunate victim of last night’s scary move lower in AUDJPY.  We traded almost 2 big figures lower (200pts) at one point, then quickly rebounded off trend-line support in the low 1.24s when AUDJPY corrected itself.  Chart resistance for GBPUSD is now 1.2590 and support is 1.2525.  The latest headlines out of the UK have former Brexit minister David Davis urging that Theresa May delay the Parliament vote for a second time.  More here.  The House of Commons returns from the holiday break next week.  We think sterling meanders around here as traders digest today’s technical development on the charts.

• AUDUSD: The Aussie absolutely collapsed last night, during what’s now being talked about as a epic flash crash in the AUDJPY cross.  It all started with poor technical setups for AUDJPY, AUDUSD and USDJPY heading into the NY close (new lows).  Then we got the bombshell headline from Apple about how it was forced to cut its quarterly revenue forecast for the first time in 15 years due to slowing demand in China.  That sent Apple’s stock reeling over 8% lower in after hours trade, and then about an hour later AUDJPY flashed crashed 5% lower in minutes.  Very poor liquidity was also reportedly to blame as Japanese markets were still closed for the holidays.  We’ve also heard that a number of trading algorithms ran ragged.  We have yet to hear anything out of the Bank of Japan, but traders are expecting something because the Japanese central bank typically doesn’t like to see these types of moves.  AUDUSD has recovered almost all the way back to breakeven on the day now, with the upbeat US ADP report helping the market into the NY open.  Oddly enough, we think any close above the 0.7000 mark here in AUDUSD could be the recipe for a bullish reversal higher.  The fund shorts were given a gift here today and this may now be the perfect time to take some exposure off the table (ie. cover).

• USDJPY: Dollar/yen literally fell off a cliff last night, trading down 4% in minutes when AUDJPY cratered.  We tested levels not seen since 2016, and rebounded just a violently when AUDJPY recovered, but the market hasn’t yet been able to regain the 108.70s level it broke down from.  Support is now 107.00, then 105.50.  US equity futures are in the midst of trying to claw back the losses from Apple.  The US 10yr bond yield still looks in rough shape though, as it opens trading today at a new 52-week low (2.645%).  The entrenched USDJPY fund long position has arguably gotten crushed or force liquidated here, and so we think we may have seen the worst for USDJPY.  Support and resistance levels are few and far between now though and so we would be surprised to see a test of both extremes before traders determine what to do next.

Tune in @EBCTradeDesk for more real-time market coverage.

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About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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