FX Update: The USD is breaking down again
Summary: The US dollar is breaking down through important levels to start the week after recent very strong US data failed to take the currency higher as US treasuries looked through the data. Perhaps helping the greenback lower at the margin has been a revival of risk sentiment in Asia. Medium term uncertainties abound, but USD bears may have a spell of clear sailing for a few weeks or longer.
FX Trading focus: USD is breaking down
The US dollar is breaking down again as we work deeper into the European session today, a development that comes after a week of very strong US data failing to excite renewed selling of US treasuries (and therefore higher yields), which was always the key support for the US dollar in its run higher since basing at the very beginning of this year. A very strong session for Chinese equities in Asia overnight after an ugly period of weak sentiment has also likely provided a bit of extra energy into the mix for renewed USD bears, as Chinese regulators have weighed in on what the market has perceive as support for the troubled Huarong Asset Management Company.
So EURUSD has pulled above 1.2000, the G10 smalls are outperforming as EURNOK has broken below 10.00 again even without a new cycle high in crude oil, although last week’s smart rally helped. As long as the US treasury threat remains neutralized, we could be set for a significant move lower here in the US dollar, at least a test of the lows. Forward concerns remain, of course – for example how the quickly the stimulus sugar rush fades, whether a credit cycle continues to fail to ignite in the US (note WSJ article: Americans Are Spending, Not Borrowing. That’s a Problem for Banks ($) ). And of course, there is also the pandemic itself, where the global 7-day average case count just rose to its highest ever, with the case count exploding particularly in India, where a new “double mutant” version of the virus has been reported.
So if today’s break lower in the USD is sustained, I am sympathetic with a solid leg lower, to perhaps 1.2300 in EURUSD and a test above 0.8000 in AUDUSD. But to get higher for these pairs and lower for the USD, we may need a better sense that China is shifting on its attitude on stimulus.
Chart: EURUSD
EURUSD has spilled over 1.2000 again as the big round number failed to offer much resistance. This opens up the full extent to the 1.2350 area top, assuming the market remains on a relatively hopeful footing here, as the market prices back in reflationary outcomes and a relative improvement in the outlook for the rest of the world ex-US, after the market so loudly ignored super-strength US data in recent weeks, particularly last week. We could even be set for a challenge of the early 2018 highs above 1.2500, a scenario that might require a bit more support from China in the form of signs that it is easing up on its tighter policy stance.
Odds and ends
RUB risks – despite the very weak US dollar today, the USDRUB exchange rate was actually trading slightly higher on geopolitical risks linked to jailed regime critic Navalny, who is said to be in very poor health and even dying, with the US warning of “consequences” should he die.
Central bank meetings this week – the China PBOC will announce its policy rate tonight (no change expected), the Bank of Canada will meet Wednesday, the ECB Thursday and the Russian central bank on Friday (another rate hike expected there). Of these, signals from the PBOC bear the closest watching. Yields in China at the short end of the yield curve have edged a bit lower, but no change is expected.
German CSU/CDU leadership battle – it seems inevitable that the CSU’s Söder will emerge as the eventual candidate for the Chancellorship in elections this September over the unpopular CDU leader Laschet, but clarity is still needed and the national polls bear watching after the Greens have closed to within a few percent of the CSU/CDU bloc. The EU still rests on an unstable foundation and a coalition with a strong Green representation is the most intriguing outcome for the potential for tighter EU integration.
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 is breaking down
The US dollar is breaking down again as we work deeper into the European session today, a development that comes after a week of very strong US data failing to excite renewed selling of US treasuries (and therefore higher yields), which was always the key support for the US dollar in its run higher since basing at the very beginning of this year. A very strong session for Chinese equities in Asia overnight after an ugly period of weak sentiment has also likely provided a bit of extra energy into the mix for renewed USD bears, as Chinese regulators have weighed in on what the market has perceive as support for the troubled Huarong Asset Management Company.
So EURUSD has pulled above 1.2000, the G10 smalls are outperforming as EURNOK has broken below 10.00 again even without a new cycle high in crude oil, although last week’s smart rally helped. As long as the US treasury threat remains neutralized, we could be set for a significant move lower here in the US dollar, at least a test of the lows. Forward concerns remain, of course – for example how the quickly the stimulus sugar rush fades, whether a credit cycle continues to fail to ignite in the US (note WSJ article: Americans Are Spending, Not Borrowing. That’s a Problem for Banks ($) ). And of course, there is also the pandemic itself, where the global 7-day average case count just rose to its highest ever, with the case count exploding particularly in India, where a new “double mutant” version of the virus has been reported.
So if today’s break lower in the USD is sustained, I am sympathetic with a solid leg lower, to perhaps 1.2300 in EURUSD and a test above 0.8000 in AUDUSD. But to get higher for these pairs and lower for the USD, we may need a better sense that China is shifting on its attitude on stimulus.
Chart: EURUSD
EURUSD has spilled over 1.2000 again as the big round number failed to offer much resistance. This opens up the full extent to the 1.2350 area top, assuming the market remains on a relatively hopeful footing here, as the market prices back in reflationary outcomes and a relative improvement in the outlook for the rest of the world ex-US, after the market so loudly ignored super-strength US data in recent weeks, particularly last week. We could even be set for a challenge of the early 2018 highs above 1.2500, a scenario that might require a bit more support from China in the form of signs that it is easing up on its tighter policy stance.
Odds and ends
RUB risks – despite the very weak US dollar today, the USDRUB exchange rate was actually trading slightly higher on geopolitical risks linked to jailed regime critic Navalny, who is said to be in very poor health and even dying, with the US warning of “consequences” should he die.
Central bank meetings this week – the China PBOC will announce its policy rate tonight (no change expected), the Bank of Canada will meet Wednesday, the ECB Thursday and the Russian central bank on Friday (another rate hike expected there). Of these, signals from the PBOC bear the closest watching. Yields in China at the short end of the yield curve have edged a bit lower, but no change is expected.
German CSU/CDU leadership battle – it seems inevitable that the CSU’s Söder will emerge as the eventual candidate for the Chancellorship in elections this September over the unpopular CDU leader Laschet, but clarity is still needed and the national polls bear watching after the Greens have closed to within a few percent of the CSU/CDU bloc. The EU still rests on an unstable foundation and a coalition with a strong Green representation is the most intriguing outcome for the potential for tighter EU integration.
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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