Forex Today: JPY crosses resilient despite sharp drop in Asian stocks, treasury yields retreat

Forex today saw the JPY crosses post moderate gains, despite the sharp drop in the Asian equities.

Japan's Nikkei index fell 4 percent in Asia and was on course for its biggest single-day decline since March. Further, China's Shanghai Composite index dropped 3.9 percent to its lowest level since 2014 and was accompanied by a 3.8 percent decline in Hong Kong's Hang Seng.

South Korea's benchmark Kospi index also fell 3.4 percent and Australia's S&P/ASX 200 index shed 2.4%.

Clearly, the 800 point drop in the Dow Jones Industrial Average (DJIA) prompted Asian investors to sell risk. However, despite the risk-off, the financial markets did not witness a classic flight to safety.

For instance, the AUD/JPY pair - which is widely considered as a barometer of risk - rose to 79.44, representing a 0.4 percent gain on the day. The NZD/JPY also gained 0.25 percent in Asia and so did the EUR/JPY and GBP/JPY pairs. Meanwhile, Gold, a classic safe haven asset, traded flat to negative around $1,193/Oz.  

The US dollar exchange rate, as represented by the dollar index (DXY), fell to a ten-day low of 95.18 in Asia and was accompanied by a drop in the US 10-year treasury yield to an eight-day low of 3.14 percent. The pullback in the treasury yields could calm market nerves.

While the USD dropped against most majors, the broad-based weakness did little to stall the decline in the Chinese yuan. The offshore yuan exchange rate or the USD/CNH pair rose to 6.9429 in Asia - the highest level since Aug. 16.

CNH's failure to capitalize on the broad-based USD weakness has left the doors wide open for a sharp drop toward 7.00 on the back of a better-than-expected US inflation number.

The resilience shown by the JPY crosses in Asia does not necessarily mean that risk assets will stabilize in Europe. Moreover, the minor bounce in AUD/JPY could be associated with the oversold conditions, reported by the hourly chart relative strength index (RSI).

At press time, the S&P 500 futures are reporting 1 percent drop. Hence, the probability of European stocks reporting bigger losses is high. As a result, the uptick in the JPY crosses witnessed in Asia could end up being a dead cat bounce.

Investors need to keep an eye on EUR/JPY, which is looking south toward 129.02 (50% Fib R of 124.90/113.13), having closed below the 50-day moving average (MA) of 129.55. Elsewhere, GBP/JPY is stuck in a narrowing price range or pennant pattern.

Key headlines in Asia

• US Treasury Secretary Mnuchin: Not surprised markets having a bit of correction 

• IMF's Lagarde urges China to keep moving toward Yuan flexibility - Reuters

• World Bank's Kim: very concerned by Sino-US trade tensions - Reuters

• BOJ's Sakurai expects inflation to rise on gradual economic expansion and positive output gap

• RICS: Housing prices outlook weakest since Brexit - Reuters

• US President Trump calls the US Fed 'crazy', stock declines a 'correction' - Reuters

• RBA's Ellis: expansionary policy needed

Economic data in Europe (GMT)

06:45 France Sep CPI (EU Norm) final

07:00 GMT Spain HICP

Events in Europe

07:00 Riksbank’s Skingsley reports on the economic situation and current monetary policy at Profit & Loss Scandinavian conference in Brunkebergstorg, Sweden.

10:45 BoE's Vlieghe speaks on 'Global and domestic challenges for UK monetary policy' at the National Bank of Belgium in Brussels.

What's brewing in the majors?

• GBP/USD clipping higher on rising Brexit expectations
• EUR/USD sees early gains as the US Dollar takes a breather
• USD/JPY Technical Analysis: Defends 61.8% Fib support despite a 0.6% drop in S&P 500 futures