FX Update: USD downtrend looking for fresh fuel, or else.
Summary: The markets have pressed the pause button on the recent USD sell-off, as rising long US yields and rocky risk sentiment have offered some support and fundamental support for the move via widening yield spreads and other factors is not particularly in evidence. With the US CPI up today and Fed Vice Chair Clarida, perhaps the logjam can be broken for the USD bears, otherwise the risk of a reversal grows apace.
FX Trading focus: USD holding its breath on cross-fire of factors.
On Monday, I took a stab at a few ways the USD move lower could play out after the shocking payrolls miss for April printed on Friday, and the price action since then has shown that the moving parts of the market are moving somewhat in conflict with one another, frustrating any follow on move lower for the greenback. The chief argument for US bears was the adjustment lower in Fed expectation after the weak payrolls data, which allows Fed members to sit on their hands for longer. But offsetting this, we have US long yields climbing since friday, helping to support the US dollar, as has the recent downdraft in risk sentiment. That very combination of weak risk sentiment and weak long bonds is highly unusual, and very stabilizing if it extends much longer, i.e., sufficiently to take the US 10- and 30-year treasury yields back toward the cycle highs (which are still some way off (I would expect if that develops, the USD will continue to make a stand and refuse to roll-over. To get the US dollar sustaining more persistent downside, we need risk sentiment to stabilize and relative US real yields to head lower still relative to peers.
Today we a have the economic calendar offering up plenty of possible triggers for shifting the odds for or against the US dollar, with the April US CPI release, Fed Vice Chair Clarida out speaking and a 10-year US treasury auction up later in the day.
In Europe, strong euro move of late is trying to find some more support from rising EU yields after the German Bund (10-year German sovereign yield) closed at a new local cycle high yesterday just shy of the post-pandemic outbreak high of -15 basis points. As with the above comments, this level likely needs breaking together with a stabilization of risk sentiment to set us on to the path of 1.2350+ in EURUSD, otherwise we risk bogging back down in the range with a close back below 1.2050.
Elsewhere, the CAD move remains impressive, almost too impressive, and it may be up to Bank of Canada governor Macklem to raise the strong CAD as an issue at a speech tomorrow to reverse or slow the move lower in USDCAD. Note EURSEK pushing on the local 10.10 area support as the last area ahead of 10.00, a fairly strong performance for SEK, given the recent weak global risk sentiment, and partly driven by a slightly hotter than expected 2.5% YoY inflation print, which was 0.1% above expectations (as were the month-on-month at 0.3%). That’s negative 3% real yields for Swedish deposit holders, for anyone that is counting. Apparently not many are counting, as Hungary yesterday printed a blistering 5.1% headline CPI reading – with no anticipation of imminent rate rises from the central bank there (in part as the core reading was only 3.0%).
Chart: AUDUSD
AUDUSD is a decent proxy for this latest USD move lower as well as the ramp since the pandemic lows in key commodities prices that are drivers of Australia’s economy, including especially iron ore. On that latter note, one thing that has likely held back the Aussie in the recent cycle is China’s ban on importing thermal coal from Australia and some discussion that China may halt LNG imports as a next step after halting strategic economic dialog talks “indefinitely” recently. The weak US payrolls on Friday drove the pair above the prior 0.7800-25 resistance, but the price action has gone nowhere since, restrained chiefly by weak risk sentiment. Meanwhile, the RBA, while it has teased the July meeting as being in play for adjustments in guidance, remains in wait and see mode together with the Fed, so short term Australia-US yields spreads, and even 10-year yield spreads, for that matter, are not signaling huge support for a move higher – 10 years a bit more so recently than the 2-year swap spread, which mid-range from the early March peak (right near 0 basis point, currently 6 basis points…yawn.). Tactically, if the pair closes back below 0.7750, traders will have a bearish reversal on their hands, while we likely need a new jolt lower in the US dollar that shifts the fundamental indicators more sharply against the greenback (together with a shift in risk sentiment back higher) to get the bullish case back on track.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
FX Trading focus: USD holding its breath on cross-fire of factors.
On Monday, I took a stab at a few ways the USD move lower could play out after the shocking payrolls miss for April printed on Friday, and the price action since then has shown that the moving parts of the market are moving somewhat in conflict with one another, frustrating any follow on move lower for the greenback. The chief argument for US bears was the adjustment lower in Fed expectation after the weak payrolls data, which allows Fed members to sit on their hands for longer. But offsetting this, we have US long yields climbing since friday, helping to support the US dollar, as has the recent downdraft in risk sentiment. That very combination of weak risk sentiment and weak long bonds is highly unusual, and very stabilizing if it extends much longer, i.e., sufficiently to take the US 10- and 30-year treasury yields back toward the cycle highs (which are still some way off (I would expect if that develops, the USD will continue to make a stand and refuse to roll-over. To get the US dollar sustaining more persistent downside, we need risk sentiment to stabilize and relative US real yields to head lower still relative to peers.
Today we a have the economic calendar offering up plenty of possible triggers for shifting the odds for or against the US dollar, with the April US CPI release, Fed Vice Chair Clarida out speaking and a 10-year US treasury auction up later in the day.
In Europe, strong euro move of late is trying to find some more support from rising EU yields after the German Bund (10-year German sovereign yield) closed at a new local cycle high yesterday just shy of the post-pandemic outbreak high of -15 basis points. As with the above comments, this level likely needs breaking together with a stabilization of risk sentiment to set us on to the path of 1.2350+ in EURUSD, otherwise we risk bogging back down in the range with a close back below 1.2050.
Elsewhere, the CAD move remains impressive, almost too impressive, and it may be up to Bank of Canada governor Macklem to raise the strong CAD as an issue at a speech tomorrow to reverse or slow the move lower in USDCAD. Note EURSEK pushing on the local 10.10 area support as the last area ahead of 10.00, a fairly strong performance for SEK, given the recent weak global risk sentiment, and partly driven by a slightly hotter than expected 2.5% YoY inflation print, which was 0.1% above expectations (as were the month-on-month at 0.3%). That’s negative 3% real yields for Swedish deposit holders, for anyone that is counting. Apparently not many are counting, as Hungary yesterday printed a blistering 5.1% headline CPI reading – with no anticipation of imminent rate rises from the central bank there (in part as the core reading was only 3.0%).
Chart: AUDUSD
AUDUSD is a decent proxy for this latest USD move lower as well as the ramp since the pandemic lows in key commodities prices that are drivers of Australia’s economy, including especially iron ore. On that latter note, one thing that has likely held back the Aussie in the recent cycle is China’s ban on importing thermal coal from Australia and some discussion that China may halt LNG imports as a next step after halting strategic economic dialog talks “indefinitely” recently. The weak US payrolls on Friday drove the pair above the prior 0.7800-25 resistance, but the price action has gone nowhere since, restrained chiefly by weak risk sentiment. Meanwhile, the RBA, while it has teased the July meeting as being in play for adjustments in guidance, remains in wait and see mode together with the Fed, so short term Australia-US yields spreads, and even 10-year yield spreads, for that matter, are not signaling huge support for a move higher – 10 years a bit more so recently than the 2-year swap spread, which mid-range from the early March peak (right near 0 basis point, currently 6 basis points…yawn.). Tactically, if the pair closes back below 0.7750, traders will have a bearish reversal on their hands, while we likely need a new jolt lower in the US dollar that shifts the fundamental indicators more sharply against the greenback (together with a shift in risk sentiment back higher) to get the bullish case back on track.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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