Forex Today: USD/JPY drops below 112 handle, yen takes up haven flows

Analysts at ANZ explained that US equities continued to sink, following weakness through the Asian session, as markets continue to digest the combination of higher US rates, ongoing trade tensions, and Chinese growth concerns:

"At the time of writing the S&P 500 was off 1.9%. GBP remained under pressure as a result of prolonged Brexit uncertainty, while Italy’s political dramas continue to affect European markets. The DAX fell 1.1%, the CAC fell 0.6% And FTSE was off 0.4%. Fixed income markets were generally firmer, with the yield on the US 10-year note falling 4bps to 3.16%. Italian BTP yields rose 14bps. Commodity markets were generally under pressure. Oil fell 1.4% to USD69.3/bbl and gold was up 0.4%."

Currency action:

EUR/USD saw the biggest one-day fall in fact for October so far below the cloud base located at 1.1546 as the dollar continues to gather pace as markets turned heavily sour in Asia that bled through to both European and US markets. Soured risk drove EUR/JPY down near 128.30. Also, the US benchmark 2yr yield came n at the highest since 2008 with the FOMC minutes indicating a risk that they could raise rates beyond the neutral (3%) level. Sovereign bond spreads widened as EU-Italy budget tensions rise - (ECB's Draghi: undermining EU budget rules carries a high price for all) -  The DE-US yield spreads hit new trend wides - However, the pace of the euro's decline slowed down in North American markets and the pair ended the session around 1.1450. Cable was holding onto the 1.30 handle even after worse than expected UK Sept retail sales that were coming in down 0.8 pct vs -0.4 pct f/c, up 3.0 pct YY vs +3.6 pct f/c - This follows a lower CPI reading as well, trimming down expectations of a BoE rate hike so soon. Instead, the focus was on Brexit. After rejecting the EU's proposals and visa-versa, PM May seems open to extending the transition period to try and overcome the Brexit impasse which was at first glance taken as supportive to the pound.

However, the political battle that PM May will have to face at home will likely weigh heavily on the pound. The cross certainly showed the market's thoughts there with a rally from the 0.8770's to a high of 0.8806. USD/JPY was unable to keep the bid alive and was capped at 112.73 on Wed and at 112.65 in European markets on Thursday gave the stock market fall out in Asia. The pair slid heavily from there to a low of 111.95 with supply coming in around the Tenkan and Kijun lines at 112.79 and 112.87 - So it is now clear that the yen remains the number one haven currency - (USD/CHF rallies to trend highs).  AUD/USD gave up its precarious jobs data bid and fell mercy to a drop in EM-FX and risk as the euphoria wore thin. USD/CNH rallied to a new short-term high and bears are all over the commodity currency that will struggle in an environment of higher US yields, a stronger dollar and lower commodities as global growth forecasts drop. 

Key notes from US session:

Wall Street closes in red, Nasdaq leads losses as tech underperforms