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Battle between the safe havens: USD vs JPY

The Dollar Index at the peak of the Coronavirus lockdown rallied, almost touching 103 – the highest level since 2017. The Dollar index shows the relative strength of the USD to a basket of other currencies. However, a couple of currencies strengthened as everyone was hoarding the USD – The JPY.

The U.S Dollar Index
USD/JPY

If the JPY got stronger, why was everyone talking about USD being a safe haven?

The strength in the US dollar was primarily due to market participants selling risky US-based assets such as US equities due to the market turmoil. As investors and traders sold their assets, they were getting paid in US dollars, pushing the US dollar demand.

 

Why did the JPY rally?

I guess you would call this the “OG” Safe Haven. With the appreciation of the US Dollar relative to other countries but the Japanese Yen, there was a net increase in demand for the Yen relative to the US Dollar. There are many factors as to why the Japanese Yen appreciates during times of uncertainty, with one factor explaining that net demand increase – Japanese citizens’ net foreign assets peaked to 726 Billion in 2019. However, once risk-off events occur, there is a repatriation of those foreign assets (often denoted in US Dollars) bank into their home currency, the Yen. Although Government Debt to GDP is around 230%, Japanese citizens do not share this trait of excess debt. As the New York Times stated, “The Japanese Government is in deep debt, but the rest of Japan has ample money to share.”

The JPY Carry Trade

Another reason may be due to traders winding down their “positive carry” trade. In short, by buying a currency with a positive yielding interest rate and shorting a currency with an interest rate less than the currency you purchased, the overnight swap fee is positive. This is because the interest you gain by holding the former currency is less than the interest you pay shorting the latter currency. With the Bank of Japan having negative interest rates since 2016, it has been a popular short for the carry trade with currency with a relatively higher interest rate like Australia. However, in risk off events such as the Coronavirus, positive yielding currencies tend to get their respective central banks cutting rates, making the carry trade less profitable. Therefore, traders cut their positions, which requires them to cut their positions, buying back the Yen they shorted, increasing demand.

However, one of the main reasons the JPY appreciated against the USD during peak lockdown was because people believe that it is a safe haven. It does not necessarily matter why it is, only that people believe it is. If you know the relationship between risk-off and the Yen's appreciation, then you assume it to be true.

 

Correlation between Risk and the JPY

Since the market has generally been risk on/off due to the Coronavirus, it would be interesting to see whether the Yen has played out as a safe haven. If we take 20th March as the start date (peak of the Dollar index this year) and compare the prices of the SP500 and the USD/JPY pair, we find a correlation of -0.498 (~-0.5). This means on average, a 1% increase in the market, there is a 0.5% decrease in the JPY (vice versa). This shows a relatively strong relationship between risk-on and risk-off assets as off late. In comparison, the average correlation between the SP500 and the USD/JPY pair has been around -0.28. 

 

Which is better for your portfolio – the JPY or the USD?

 

The USD is likely the better choice for your portfolio as this enables you to enter into positions when the time is right. However, it may be worth noting this relationship for swing traders if you want to take advantage of risk on/risk off situations. 

PBoC, Inflation and Jobless Claims - Week ahead

The markets continue to grapple with the immediate effects of the Coronavirus. The second wave in pockets of the world has forced cities to take active measures to control the virus. Melbourne, Australia has gone into a secondary lockdown while Florida and Los Angeles see cases surge, with the Mayor of Los Angeles stating that the city is “on the brink” and a Democratic representative from Florida reports the outbreak is “totally out of control.” Here is your week ahead

Monday, 20 July – Peoples Bank of China Interest Rate decision

PBoC's Interest Rate

China’s Central Bank, the Peoples Bank of China has been wary of cutting interest rates, even during the peak of the pandemic. Ma Jun, a PBOC adviser, stated in early April, “The PBOC doesn’t use its bullets all at once. China has plenty of room in monetary policy.” The PBOC has kept interest rates at 3.85%, after dropping it 30 basis points from 4.05% in April. However, forecasts and estimates expect the PBoC to keep rates as is at 3.85% this week ahead.

Tuesday, 21 July – Inflation rate YoY Bank of Japan

With 660 new cases of the Coronavirus yesterday, Japan has struggled to keep ahead of the virus after the world praised it for its lighter approach to restrictions. However, that approach, as seen similarly from Australia, has not bode well for the country. Japan has seen triple-digit daily increases for the whole month of July. This has caused consumption and spending to decrease dramatically. Analysts predict an inflation rate of 0.1%; however, there is a high chance that this may be pushed to the downside, which may put downward pressure on the JPY.

 Tuesday, 21 July – Reserve Bank of Australia minutes

Australia is continuing to grapple with the effects of the Coronavirus, with Melbourne being put back into lockdown and the state of Victoria imposing mandatory mask restrictions. With RBA minutes earlier in the year having a tone of optimism, likely, that tone will not continue here. The second lockdown is a massive blow to the country, socially and economically. The Trans-Tasman bubble between New Zealand and Australia has been delayed, with economic activity in the state of Victoria plummeting. We may see Aussie weakness against its New Zealand counterpart as Australia reels back their reopening.

 Thursday 21st July – Canada Consumer Price Index (CPI)

Canada continues to post double-digit daily Coronavirus cases as they, too, implemented a looser lockdown restriction like Japan and Australia.  We saw a drop in the CPI from March to April as citizens decreased their spending. We saw a slight increase in the Month of May, however, analysts expect to stabilize around 137 for the month of June.

Thursday 23 July, US Initial Jobless Claims

US Initial Jobless claims. Source: Bloomberg

With Initial Jobless Claims posting the smallest decline since March last week, the US jobs market is showing a slight rebound. However, we are all aware of the current situation with the Coronavirus cases in the US. Florida and Los Angeles are posting daily record numbers every week, while President Donald Trump focuses on reopening the economy and the US-China trade deals. I expect this number to slowly creep up as the full effects the second wave of the Coronavirus becomes evident. Analysts predict Jobless Claims to drop to 1.29m from 1.3m previously.

We have seen this mindset in the market, which discounts negative news and rallies on positive news. This is partially due to liquidity propping up many markets. Investors and traders must take this into account when placing trades.

Trade safe!

Week Ahead: Rates, Jobs, GDP and CPI Data

The Financial Markets have a heavy data week ahead. With geopolitical tensions ratcheting up, and concerns turning to how governments will slowly pull back their unprecedented support, we are starting to see how the world reacts to a post-Covid world. Currently, they are 8.92 Million confirmed cases globally, with 467k deaths. Here is your week ahead.

Global Coronavirus Cases in Blue, Coronavirus Deaths in Red

Reserve Bank of New Zealand Interest Rate decision –  Wednesday, 24th June

With New Zealand entirely out of lockdown, threats of random Coronavirus cases popping up have increased. Facts have emerged from individuals entering the country with special exemptions and not adhering to the quarantine rules. Currently, the country has 1,161 confirmed cases, with 22 deaths. With the RBNZ implementing asset purchases of $30 Billion, the central bank was ready to take the full brunt of the Coronavirus for the financial markets. With that said, analysts predict the central bank to keep rates as is at 0.25%. Chairman Adrian Orr stated that negative rates are not out of the question; however, it is highly unlikely and will not come till next year. (Also a partial reason as to why negative rates could not be implemented in the first place is due to banks’ computers not being able to handle negative rates)

ECB Monetary Policy Report – Thursday, 25th June

Similarly, to New Zealand’s Reserve Bank, the ECB has dedicated a sizable chunk to help the European economy recover from the Coronavirus. The Policy meeting hopes to discuss the future of the European economy, future monetary policy stance, and provide guidance on economic developments. This report will be fundamental in determining the mindset of the ECB, and what the future financial environment will be in the European Union.

US Initial Jobless Claims, US GDP Growth rate QoQ and US Core Price Index – 25th, 26th and 27th June

With Coronavirus cases increasing above their average in many states, the virus remains front in center for many Americans. With election season coming up, President Donald Trump has resorted to opening the states with regard to the rising cases. Peaceful racial protests continue to fuel the spread of the Coronavirus. The previous unemployment claims dropped to 1.52 million last week, showing signs of American citizens going back to work. Analysts predict that figure to drop to 1.508 Million unemployment claims. With the consumer being touted as the backbone of the American economy, hopes are on the consumer to provide that initial boost to the economy. Analysts predict a drop of the Core Price index to 0.9% year over year, down from 1%. Furthermore, analysts predict a -5% Quarter over Quarter growth rate.

Investors and traders need to be careful of sudden policy changes affecting their trades and investments in the week ahead. Here is your market recap over the weekend

Happy trading!

America’s Coronavirus response vs the rest: How are they stacking up?

30.3 Million – The number of jobless claims made in the United States since the start of the Coronavirus Pandemic. It’s an astounding number, primarily when charted on a graph that shows weekly jobless reports since 1967.

Source: St Louis. Fed

The question arises – is the jarring rise in filings for unemployment consistent around the world?

Figures from the St Louis. Fed, Federal Employment Agency of Germany, Government of UK, National Bureau of Statistics in China, and Upright Asset Management. Figures are from March 13th onwards. All $ figures following are in USD

United States
United States’ jobless claims represent 18.41% of their labour force. This is on the back a total of 1.03 million confirmed Coronavirus cases or just under 33% of the confirmed cases in the world. 

Relative to other countries, the US has had a muted and weak reaction towards the Coronavirus. Cases continue to pick up, with New York being the epicenter of the pandemic. The rhetoric out the Whitehouse has been of optimism for the future, as their deaths top 60,000. Jared Kushner, President Donald Trump’s senior adviser, touted the administration’s response to the Coronavirus as a “great success story.”

The Senate approved an unprecedented $2 Trillion Stimulus package, giving Americans and additional $1,200 to assist households as lockdowns continue.

Germany
Germany’s jobless, “Kurzarbeit” (short-time work subsidy) claims currently represent only 1.08% of their labour force. However, Hubertus Heil, the country’s labor minister, stated that there would be “many more” workers taking from the Kurzarbeit wage subsidies. Over 1.4m people received the funds during the peak of the global financial crisis of 2009.

Germany’s response to the Coronavirus has been strong. The extensive testing capacity of over 900,000 a week for a population of 83 million, strong leadership, and a robust public healthcare system all combine to a marvelous attempt in combatting the virus. Out of the 162k infected with the Coronavirus, around 6,500 have died, giving a fatality rate of just under 4%. This is in comparison with the United States fatality rate of 5.8%.

The Germany Government approved an $810B Stimulus package primarily to help all businesses maintain liquidity and keep employment throughout Germany. Alongside the short time work subsidy, Germany’s attempt to bolster the strength of business contrasts with the United States’ method of directly giving cash infusions to households.

United Kingdom
The United Kingdom’s universal credit claims represent a 2.08% of the labour force. The scheme helps individuals are low on income or out of work.

The UK has been hit with criticism with their reaction to the Coronavirus, with Prime Minister Boris Johnson stating that he “shook hands with everybody” at a hospital including coronavirus patients. This was three weeks before he caught the Coronavirus. This casual attitude has skeptics wondering whether the government was doing enough to combat the virus and whether it is too little, too late with over 26.7k deaths representing a 15.8% mortality rate, the highest in the world.  

The UK Government approved a $424b Stimulus package to help with household mortgages, airlines, retailers, and the hospitality industry. 

Canada
Canada’s jobless claims reached 2.13 million, or 11% of their labour force.  

Canada has shut down borders to who is not a citizen, a permanent resident, or a US citizen; however, the country is not in lockdown. Canada’s Prime Minister, Justin Trudeau, urged citizens to impose self-quarantine. This is on the back of 3,180 deaths, or just under a 6% fatality rate. As Canadian territories slowly loosen restrictions, it will be seen whether their relatively flexible reaction towards the Coronavirus will balance economic recovery and the safety of the population.

The government has pledged over $1.1T in support of Coronavirus related costs, half of which represents support to municipal governments for small businesses and households.

China
Officially, the number of unemployed citizens only represents 6.2% of the labour force (the labour force includes 290m migrant workers). However, an estimation by Liu Chenjie, chief economist at Upright Asset, stated that including migrant workers, the Coronavirus might have pushed 205 million workers into “frictional unemployment,” or 24.45% of the labour force.

Being ground zero for the Coronavirus, China implemented the first and strictest lockdown in Wuhan. With a population of 11 million, residents of Wuhan were the first to experience the suspension of public transport and roads, with stores that sell food and medicine remaining open. Fifty-nine days after the initial lockdown, Chinese authorities slowly lifted the lockdown but urged citizens to practice self-isolation when need be. China’s official numbers stand at 84,373 confirmed cases, with 4,643 deaths, representing a fatality rate of 5.5%. 

There has been plenty of criticism regarding China’s response to the Coronavirus. From not allowing foreign scientists access in the country and access to essential data, the silencing, and death of Dr. Li Wenliang, the doctor who first spoke out about the Coronavirus to the world alongside skepticism with their official coronavirus figures. But as the first country to be hit with the effects of the Coronavirus, they are also the first country to emerge from the height of it. Krish Sankar, a Senior Research Analyst at Cowen, states that Apple’s supply chains in China are 90% operational, giving a sense of movement and productivity in the country. 

China’s central bank, the Peoples Bank of China, has injected over $220B into the money markets to support liquidity and lending. However, the Chinese government has not issued any direct fiscal stimulus, unlike their western counterparts over concerns of inflation and increasing an already all-time high budget deficit.  

What’s next?
It will be a while till we get a solid look at the toll the Coronavirus has had on the world. However, reliable data on the economic and societal damage of the Coronavirus may come to light in the next couple of months, possibly giving us a better prediction of how the world will move forward with regards to this devastating pandemic. With nations slowly creeping out of lockdown with cautious optimism, we may soon experience a seismic shift in how we go on with our daily lives. However, as the past has told us, we will emerge out of this crisis victorious.

Anish Lal, an Senior Analyst at Blackbull markets gives a technical overview on the historic SP500 gains closing a tumultuous month on the back of the US's historical unemployment claims number. Watch the video here: