FX round-up: Optimism on Australian dollar on frail foundations, Rabobank says

The pound put in a modest gain in a risk-off session that saw the dollar fall to within a whisker of its weakest level against the Japanese yen in a year.

Against the greenback, Sterling was 0.25% higher to 1.41321 by the close of trading, while the euro had added 0.41% to stand at 1.23530.

Meanwhile, dollar/yen shed 0.52% to 104.738 with CMC Markets UK's Michael Hewson having said earlier that a close below 105.0 might open the way for a move towards 103.0.

On an intra-day basis, dollar/yen slipped as far as 104.69, just a shade above its 52-week lows of 104.64.

Commenting on the market backdrop, analysts at Rabobank said: "The initial expectation of many investors is that a trade war centred on the US would undermine the greenback based on the negative implications for growth in the country.

"A trade war between the world largest economies, however, would create a whole catalogue of secondary effects that are set to resonant through most of the global economy. As a consequence we see several other currencies as more vulnerable than the USD over the medium-term."

So while, Rabobank was "not surprised" by yen strength over the preceding 24 hours, it did take issue with gains in the Aussie and Kiwi.

"AUD bulls are arguing that Chinese tariffs on US goods could open opportunities for other producers. This, however, ignores that fact that the AUD along with the currencies of other commodities producers would be in the firing line if a trade war caused the Chinese economy to slow," Rabobank continued.

Analysts at the Dutch broker also pointed out how the news-flow around the US tariffs overnight - including exemptions for the likes of EU, Australia, Brazil and South Korea, alongside prior ones for Canada, Mexico and South Korea - could help explain some of the moves seen in FX markets overnight.

"Turkey, Japan and Russia were not on the list," Rabobank also pointed out.

"We retain the view that under the shadow of currency wars that the USD will outperform a wide range of EM currencies this year in addition to the AUD and the NZD due to their trading links with China. The EUR may hold up relatively well due to the Eurozone’s large current account surplus which could allow it to display safe haven tendencies," the broker added.

In other asset classes, the S&P 500 added to the prior's session's large fall for a near 6% decline over the latest five-day stretch, its worst showing in over two years, even as Brent crude oil futures hit a fresh 52-week high on geopolitical concerns - after the White House named John Bolton as its new national security adviser.

Over in fixed income markets, the yield on the benchmark 10-year US Treasury note was again lower, down by one basis point to 2.81% and near its weakest levels in a month.

On that note, on Thursday Bill Gross at Janus Henderson said in his latest monthly investment outlook that the American and world economies were too leveraged to be able to withstand a Fed funds target rate of more than 2% in a world where inflation was running at 2%.

As of the market close on Friday, Fed funds futures were pricing-in a probability of 75.5% of two more interest rate hikes by the US central bank of a quarter percentage point each by year-end.

"So, while markets have been wobbly since early February, things have now turned decisively worse. This past week saw the biggest drop in US equities in more than two years, combined with a rally in so-called safe assets. As a very seasoned investor suggested to me, the 'buy the dip' mantra, which ruled markets for the past year, has suddenly been replaced by "don't try to catch a falling knife,'" said Erik F. Nielsen at UniCredit Bank.

"But the balance of advisors around this volatile president (or at least their influence) has now changed in an unfortunate way, leading to a flurry of really bad policies out of Washington. And it's unlikely to get better any time soon. Yesterday, Lionel Barber, editor of the FT, tweeted: "After two days in US, main impression is Trump unbound. Back to organized chaos in White House, no process, just tight group of loyalists reinforcing President's prejudices/gut instincts. Something is going to pop [...]"."