By Simon Derrick, Chief Currency Strategist, BNY Mellon
- Post early January recoveries in AUD & CAD against JPY similar to activity seen in early 2008
- Slide seen last week in both also echoed what happened at this point in cycle in 2008
- A further piece of evidence of the environment facing investors and central bankers
While it’s true that the composition of the S&P 500 has changed substantially over the past decade and a half, the index continues to provide a surprisingly reasonable reprise of its performance in both late 2007 and early 2008 and at the end of 2000.
It’s also hard to avoid the simple point that the emergence of the kind of market behavior associated over the past two decades with market reversals came as the Fed’s program of balance sheet reduction began to gather pace last year.
This certainly doesn’t imply a set path for US equities from here. In particular it seems reasonable to assume that the FOMC is very well aware of these pressure and that much of it is due to the reemergence of the Fed "put".
Nevertheless, it does help highlight that the current environment is very similar to that seen at both these key junctures for markets.
It’s therefore interesting to note that there has also been a familiar feel to the recoveries seen in both the AUD and CAD against the JPY since the first week in January.
Coincident with the stabilization seen in the S&P 500 in late January 2008, the AUD (which had lost significant ground against the JPY over the previous three months) began to stage a recovery against the JPY.
This rally ran in tandem with the move seen in the S&P 500 and saw the AUD gain around 10% over the next month.
Over the same period the CAD staged a 6% recovery. Much of the excitement came early on, with 10-day realized volatility in both currency pairs peaking out about five trading days after the trend reversal, before tracking steadily lower over the next month.
By way of comparison, by Tuesday of last week the AUD had risen about 9% from the lows seen against the JPY at the start of January with the majority of the gains coming early on.
Similarly, the CAD gained around 7% over the same period with a significant proportion of the gains coming in the first week or two.
Given this, it’s worth noting that this was almost exactly the spot in the cycle in 2008 that both the AUD and CAD began to experience renewed downward pressure as US equities endured fresh selling (driven by the collapse of Bear Stearns).
It’s also worth noting that the falls seen in the AUD and CAD through the latter part of last week seemed to closely follow the pattern set 11 years ago.
It’s always worth reiterating that history rarely repeats itself exactly. The reason for highlighting the similarity in performance over the past month in AUD/JPY and CAD/JPY is not to argue that both will necessarily see the kind of falls that occurred in 2008.
Instead, it’s to highlight that the environment that central banks are facing right now continues to have some very distinct echoes of that seen at two of the biggest turning points for markets in over 40 years.