FX Update: Wondering if strong US dollar chooses new victims
Summary: As global yields have risen recently, the chief victims among currencies have been the lowest yielders and traditional safe-haven currencies like CHF and JPY, but we are curious to see if continued US dollar strength and weak risk sentiment begin to weigh more heavily on traditional pro-cyclical currencies this week, where the calendar highlights of the week are the two treasury auctions on Wednesday and Thursday.
FX Trading focus: USD and US yield wrecking ball still swinging – new victims?
A brief update today, as tomorrow I will be hosting an FX webinar you can sign up for to get a full interactive update from yours truly.
The short summation of last week is that Fed Chair Powell failed to push back rhetorically against the rise in US yields, which has unsettled the market and triggered both weak risk appetite and a much stronger US dollar. My chief point of curiosity this week is whether the victims of the stronger US dollar will shift more towards the pro-cyclical currencies like the commodity dollars and EM rather than the recently struggling low- and negative yielders, especially JPY and CHF. Such a development this week would likely require that risk sentiment continues to crater while further yield rises are somewhat muted.
We noted in this morning’s Saxo Market Call podcast that the correlation between equities and treasuries has gone positive of late, which would seem to aggravate volatility levels. At some level, however, I would expect that if deleveraging continues in risky assets would help put a bid into sovereign bonds, especially if commodities finally find themselves under some selling pressure as well. This is a tactical idea only – the $1.9 trillion US stimulus passed with minor changes by the US Senate at the weekend will mean a screaming hot US economy in months to come if US consumer behavior reverts to anything resembling normality.
Next steps for this market are likely the US 10-year Treasury auction on Wednesday and T-bond auction Thursday followed by the FOMC meeting next Wednesday. There are no Fed speakers between now and then as the Fed maintains radio silence.
Chart: AUDUSD
A very technical support was found late last week in AUDUSD before it bounced at the 38.2% retracement of the rally off the November lows. If the Aussie is dragged lower here by some more consolidation in key metals markets and the rather scary recent descent in Chinese equity prices, the next critical area is 0.7400, just below which is arguably a mission critical Fibo retracement for keeping the medium term focus higher for AUDUD. A break of that would point to 0.7000 – let’s take one development at a time, though, watching risk sentiment, the two treasury auctions this week noted above and then next week’s FOMC meeting.
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 and US yield wrecking ball still swinging – new victims?
A brief update today, as tomorrow I will be hosting an FX webinar you can sign up for to get a full interactive update from yours truly.
The short summation of last week is that Fed Chair Powell failed to push back rhetorically against the rise in US yields, which has unsettled the market and triggered both weak risk appetite and a much stronger US dollar. My chief point of curiosity this week is whether the victims of the stronger US dollar will shift more towards the pro-cyclical currencies like the commodity dollars and EM rather than the recently struggling low- and negative yielders, especially JPY and CHF. Such a development this week would likely require that risk sentiment continues to crater while further yield rises are somewhat muted.
We noted in this morning’s Saxo Market Call podcast that the correlation between equities and treasuries has gone positive of late, which would seem to aggravate volatility levels. At some level, however, I would expect that if deleveraging continues in risky assets would help put a bid into sovereign bonds, especially if commodities finally find themselves under some selling pressure as well. This is a tactical idea only – the $1.9 trillion US stimulus passed with minor changes by the US Senate at the weekend will mean a screaming hot US economy in months to come if US consumer behavior reverts to anything resembling normality.
Next steps for this market are likely the US 10-year Treasury auction on Wednesday and T-bond auction Thursday followed by the FOMC meeting next Wednesday. There are no Fed speakers between now and then as the Fed maintains radio silence.
Chart: AUDUSD
A very technical support was found late last week in AUDUSD before it bounced at the 38.2% retracement of the rally off the November lows. If the Aussie is dragged lower here by some more consolidation in key metals markets and the rather scary recent descent in Chinese equity prices, the next critical area is 0.7400, just below which is arguably a mission critical Fibo retracement for keeping the medium term focus higher for AUDUD. A break of that would point to 0.7000 – let’s take one development at a time, though, watching risk sentiment, the two treasury auctions this week noted above and then next week’s FOMC meeting.
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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