FX Update: USD cuts higher through important resistance
Summary: The USD rally has notched the intensity level higher in breaking key technical levels in a number of USD pairs, from EURUSD to AUDUSD. The JPY also continues to rally broadly as both traditional safe haven currencies are thriving despite a general lack of market volatility in equity markets yesterday and today. Other indicators point to some cause for concern across markets.
Trading focus:
USD strength has now broken important technical levels.
The US dollar rally has taken on a new significance as key resistance levels for the greenback have fallen nearly everywhere now save for in USDJPY (where the beta to the USD situation is far lower anyway since the JPY is rallying broadly at the same time). The drivers for USD strength here are partially a function of background pressures that have been building for some time and then a couple of new potential triggers. The medium term factors that have been pressuring the USD bears’ narrative include the coronavirus trajectory improving in the US while it gets significantly elsewhere – particularly in Europe and the UK – but also concerns that the expansive liquidity from the Fed and the US government that supercharged markets back in the spring is drying up. This is especially the case on the fiscal side with the risk of no new stimulus until the next presidential administration. At least yesterday, Congress was able to piece together a big enough deal to keep the government open, if only until December 11. As well, the Fed’s Balance sheet has only very slowly started to grow again, even if that is set to change as it is running out swaps and other measures to unwind, which will allow its regular purchases to resume expansion.
The proximate trigger for USD strength besides the factors noted above may also be the Fed’s weak communication of its new Average Inflation Targeting (AIT) regime – as the relevance of this policy is only tested in an environment of rising inflation, which the Fed has no power to create with its current tools – but only through fiscal forcing. This is even evident in the Fed’s own please for more fiscal, underlined in Fed chair Powell’s comments to a House Panel yesterday. The Chicago Fed president Evans commented yesterday that he thought the climb to 2% inflation would prove slow and seemed to walk back some of the conclusions of the AIT policy, saying that the Fed could raise rates before the 2% inflation level is achieved. Huh? Otherwise, he echoed other Fed officials in saying that “recessionary dynamics are going to kick in in a much bigger way” without significant fiscal support.
Finally, while more liquid markets like equities have bounced back reasonably well over the last couple of session, we are noting some moves in credit markets that suggest some underlying level of unease that is particularly significant because these markets have been so quiet for month. One widely followed Barclays high yield spread indicator popped well above 500 basis points to US treasuries suddenly on Monday and rose slightly more yesterday to 517 bps – the high since late July were barely above 500 bps. Emerging market credit spreads have also risen sharply if somewhat modestly to the highest levels since mid July and key individual countries like Turkey are showing strain. (The general direction change this week in EM to the downside has been particularly sharp.)
Chart: EURUSD
The price action this morning has gotten sticky just below 1.1700 despite the release of very weak flash Services PMI for September out of the Euro Zone this morning, with all of France, Germany and the broader Euro Zone readings south of 50 as new Covid-19 inspired behaviour change and official steps are slowing services activity. Somewhat offsetting that development was a strong Manufacturing PMI reading (56.6) from Germany and for the Euro Zone (53.7), even if France (50.9) lagged in that category. This area just below the 1.1700 level is the last Fibo of note ahead of the largely empty space down to the critical trend support near 1.1500 – flatline and doubly-significant Fibo retracement levels crowded just below. As I have written this report, the EURUSD has rebounded back above 1.1700 and some may argue that was merely saw a running on weak longs overnight.
The G-10 rundown
USD – the USD pops stronger nearly across the board – now “the hold” of levels taken critical for whether the move can continue.
EUR – the EURUSD breaks key support overnight – now a question of whether we see further directional momentum on the break. The UDS rally slowing this morning as European equities market are trying to piece together a rally (may be some circular logic, as some of the strength there likely due to euro weakness).
JPY – as USDJPY toys with the key local resistance of 105.00-50 in USDJPY, it is really a side story to the broad JPY strength elsewhere, which is likely to continue if global risk sentiment – especially in credit/fixed income/EM continues to sour.
GBP – sterling cutting through 1.2750 against the USD – a massive chart level –resistance on the way up, then a key pivot support on the way down before the break yesterday daxand where the 200-day moving average rests. The UK coronavirus situation is seeing terrible headlines, but somehow the flash Sep. services PMI for the UK avoided the weakness seen in France and Germany – although their surge started a bit later.
CHF – the franc bows before the mighty USD and JPY and here we have USDCHF back at that key level that as a focus on the way down around 0.9200.
AUD – a Westpac economist said the RBA will cut the policy rate to 0.1% in October, helping the Aussie lower. The local downside pivot level near 0.7200 is well back in the rear view mirror as the break opens up for the structurally important 0.7000 level.
CAD - the loonie passive here and the USD strength seems to be rubbing off on the loonie in the crosses – note AUDCAD sell-off etc. USDCAD technical situation is critical in the 1.3300-50 zone, a break above which risks a larger downtrend neutralization.
NZD – the RBNZ left rates unchanged and announced a new funding-for-lending programme as a way to stimulate the economy that may be launched at the November RBNZ meeting and still feels comfortable in signaling the intent to take rates negative. The NZD was back to more or less unchanged in the crosses after an odd surge higher on the announcement. NZDUSD is looking ready to dive to next pivot level into 0.6500 and below.
SEK – impressive NOKSEK this week and SEK supported at the margin yesterday as the Riksbank kept its zero rates forecast (rather than indicating a lean for negative rates) expressing a preference for QE as the chief policy tool). Like fading EURSEK rallies as long as we stay south of 10.60
NOK – EURNOK pulling up close to the major 11.00 area in EURNOK – given market correlations it could squeeze higher if risk appetite comes unglued again and crude oil hits new lows, but taking a stand in this 11.00 area is tempting, if only through options initially.
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.
Trading focus:
USD strength has now broken important technical levels.
The US dollar rally has taken on a new significance as key resistance levels for the greenback have fallen nearly everywhere now save for in USDJPY (where the beta to the USD situation is far lower anyway since the JPY is rallying broadly at the same time). The drivers for USD strength here are partially a function of background pressures that have been building for some time and then a couple of new potential triggers. The medium term factors that have been pressuring the USD bears’ narrative include the coronavirus trajectory improving in the US while it gets significantly elsewhere – particularly in Europe and the UK – but also concerns that the expansive liquidity from the Fed and the US government that supercharged markets back in the spring is drying up. This is especially the case on the fiscal side with the risk of no new stimulus until the next presidential administration. At least yesterday, Congress was able to piece together a big enough deal to keep the government open, if only until December 11. As well, the Fed’s Balance sheet has only very slowly started to grow again, even if that is set to change as it is running out swaps and other measures to unwind, which will allow its regular purchases to resume expansion.
The proximate trigger for USD strength besides the factors noted above may also be the Fed’s weak communication of its new Average Inflation Targeting (AIT) regime – as the relevance of this policy is only tested in an environment of rising inflation, which the Fed has no power to create with its current tools – but only through fiscal forcing. This is even evident in the Fed’s own please for more fiscal, underlined in Fed chair Powell’s comments to a House Panel yesterday. The Chicago Fed president Evans commented yesterday that he thought the climb to 2% inflation would prove slow and seemed to walk back some of the conclusions of the AIT policy, saying that the Fed could raise rates before the 2% inflation level is achieved. Huh? Otherwise, he echoed other Fed officials in saying that “recessionary dynamics are going to kick in in a much bigger way” without significant fiscal support.
Finally, while more liquid markets like equities have bounced back reasonably well over the last couple of session, we are noting some moves in credit markets that suggest some underlying level of unease that is particularly significant because these markets have been so quiet for month. One widely followed Barclays high yield spread indicator popped well above 500 basis points to US treasuries suddenly on Monday and rose slightly more yesterday to 517 bps – the high since late July were barely above 500 bps. Emerging market credit spreads have also risen sharply if somewhat modestly to the highest levels since mid July and key individual countries like Turkey are showing strain. (The general direction change this week in EM to the downside has been particularly sharp.)
Chart: EURUSD
The price action this morning has gotten sticky just below 1.1700 despite the release of very weak flash Services PMI for September out of the Euro Zone this morning, with all of France, Germany and the broader Euro Zone readings south of 50 as new Covid-19 inspired behaviour change and official steps are slowing services activity. Somewhat offsetting that development was a strong Manufacturing PMI reading (56.6) from Germany and for the Euro Zone (53.7), even if France (50.9) lagged in that category. This area just below the 1.1700 level is the last Fibo of note ahead of the largely empty space down to the critical trend support near 1.1500 – flatline and doubly-significant Fibo retracement levels crowded just below. As I have written this report, the EURUSD has rebounded back above 1.1700 and some may argue that was merely saw a running on weak longs overnight.
The G-10 rundown
USD – the USD pops stronger nearly across the board – now “the hold” of levels taken critical for whether the move can continue.
EUR – the EURUSD breaks key support overnight – now a question of whether we see further directional momentum on the break. The UDS rally slowing this morning as European equities market are trying to piece together a rally (may be some circular logic, as some of the strength there likely due to euro weakness).
JPY – as USDJPY toys with the key local resistance of 105.00-50 in USDJPY, it is really a side story to the broad JPY strength elsewhere, which is likely to continue if global risk sentiment – especially in credit/fixed income/EM continues to sour.
GBP – sterling cutting through 1.2750 against the USD – a massive chart level –resistance on the way up, then a key pivot support on the way down before the break yesterday daxand where the 200-day moving average rests. The UK coronavirus situation is seeing terrible headlines, but somehow the flash Sep. services PMI for the UK avoided the weakness seen in France and Germany – although their surge started a bit later.
CHF – the franc bows before the mighty USD and JPY and here we have USDCHF back at that key level that as a focus on the way down around 0.9200.
AUD – a Westpac economist said the RBA will cut the policy rate to 0.1% in October, helping the Aussie lower. The local downside pivot level near 0.7200 is well back in the rear view mirror as the break opens up for the structurally important 0.7000 level.
CAD - the loonie passive here and the USD strength seems to be rubbing off on the loonie in the crosses – note AUDCAD sell-off etc. USDCAD technical situation is critical in the 1.3300-50 zone, a break above which risks a larger downtrend neutralization.
NZD – the RBNZ left rates unchanged and announced a new funding-for-lending programme as a way to stimulate the economy that may be launched at the November RBNZ meeting and still feels comfortable in signaling the intent to take rates negative. The NZD was back to more or less unchanged in the crosses after an odd surge higher on the announcement. NZDUSD is looking ready to dive to next pivot level into 0.6500 and below.
SEK – impressive NOKSEK this week and SEK supported at the margin yesterday as the Riksbank kept its zero rates forecast (rather than indicating a lean for negative rates) expressing a preference for QE as the chief policy tool). Like fading EURSEK rallies as long as we stay south of 10.60
NOK – EURNOK pulling up close to the major 11.00 area in EURNOK – given market correlations it could squeeze higher if risk appetite comes unglued again and crude oil hits new lows, but taking a stand in this 11.00 area is tempting, if only through options initially.
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.