Chief Macro Strategist
Summary: The US dollar is perched near the final support levels in a number of USD pairs ahead of Fed Chair testimony later this week and a busy economic calendar through the Friday payrolls and employment data. But global animal spirits are likely the more important drive in determining whether the US bear trend is set to deepen here.
Today’s FX Trading focus:
USD at the edge of support – is the bear trend rather to follow through?
Exchange rates are awfully quiet these days, but the directional move lower in the US dollar has finally extended enough in recent days to take the greenback to key levels that tell us whether a proper trend is unfolding here. For that, we focus on EURUSD around the 1.2000 level and AUDUSD around the 0.7400 level.
For EURUSD, today’s preliminary German November CPI could help remind us of one of the key long term USD bearish arguments: the risk that real interest rates in the US will tend far more negative than elsewhere. The headline number is expected at -0.2% year-on-year, and already German inflation figures have registered three readings below 0% in recent months – something not even achieved back in 2009. Contrast that with US CPI readings that have popped well back above 1% in recent months.
Plenty of macro data for the week ahead, including the global Manufacturing and Services PMI refreshes for November tomorrow and Thursday, respectively, and the US. On that account it is notable that the strong US preliminary numbers relative to what we have seen in Europe has failed to put much of a lid on the EURUSD. Let’s see how the pair behaves technically on a move and close above 1.2000. It doesn’t hurt that many speculators have lost patience in the US futures space, where positioning is still already heavily long, but some one-third less so than at the most extreme in positioning back in late August. Note that Fed Chair Powell will appear, likely cap in hand begging for fiscal stimulus, before a Senate panel tomorrow and House panel on Wednesday.
AUDUSD: a complicated situation ahead of the RBA
AUDUSD is looking at the top of the range as the US dollar is weak and the AUD hasn’t proved particularly strong of late, at least not compared to its smaller sister the NZD, as AUDNZD has corrected some 5% from the top. The chief factor holding the AUD back may be the increasingly fraught relationship with China as the latter has already moved to limit several categories of commodity imports and in recent days moved to implement as much as 212% tariffs on Australian wine imports. Much of China’s ire is based on Australia having joined the US in prohibiting Huawei bids for its mobile networks, it’s interest in a probe into the origins of the coronavirus in Wuhan, it’s statements on Hong Kong and Taiwan and more. As Mohamed El-Erian points out in a Bloomberg op-ed, Australia is in a very awkward situation, with its security alliance oriented with the US, while its economy is one of the world’s most dependent on exports to China, not to mention inbound real estate and other investments and tourism. This is a significant forward risk for Australia and the Aussie, even if its currency will remain responsive to the pro-cylical backdrop.
Tonight’s RBA meeting is seen likely to bring a wait-and-see approach, and the RBA and Governor Lowe like to take an optimistic stance per default. Having declared that negative rates are only a policy option if other countries adopt them (for example, the BoE and RBNZ), the meeting leans more likely to lean “hawkish” rather than dovish, with hawkish meaning anything that sounds vaguely hopeful, although there is some chance that the China trade issue could be flagged as a significant concern. AUDNZD is the barometer these days for isolating AUD relative strength in the crosses, while any trigger of 0.7400+ post-RBA could trigger order flow and attention. Were it not for the tension with China, the bullish outlook for the Aussie as we transition to the post-Covid-19 economy is a far easier case to make.
Chart: AUDUSD
AUDUSD is creeping higher toward the key cycle high into 0.7414 ahead of tonight’s RBA, which is unlikely to inject any new drama into the situation on the dovish side, although the trade issues with China could be flagged. With more USD weakness from these levels, it would be hard for the pair not to test the ultimate highs here and that could incite further participation in anticipation of further upside in the months ahead.
The G-10 rundown
USD – watching and waiting. Most interesting scenario to challenge the weaker US dollar would be strong economic data that inspires higher US yields – barring that, range bound or lower yields with strong risk sentiment keep USD bears comfortable.
EUR – the big EURUDS edging slowly toward the big 1.2000 area noted above. Note the interesting apparent push coming from the EU to align with the US on a number of issues – especially policy toward China – now that the unilateral Trump is on his way out. This will be critical to watch next year and beyond. The EU export economy has been a tremendous benefactor of Chinese demand.
JPY – keeping oh so quiet and correlating with the US dollar in the crosses, suppressing USDJPY volatility, though the downside still looks like the side of least resistance if the USD remains weak.
GBP – this is the “last week” for Brexit negotiations. Haven’t we heard that before? Interesting that purported progress on the agreement on a transition period for the fisheries issue has failed to support sterling, as EURGBP probes the pivotal 0.9000 area this morning. Are we going to get a “fudge” deal – one that claims a deal has been made, but is a de facto extension?
CHF – EURCHF still above 1.0800, but probably needing an improved global outlook and new push higher in long safe haven rates to make a splash above the 1.0900 range. Meanwhile, USDCHF is back close to the big 0.9000 level. A relative recent blow to CHF lately has been the deep correction in gold prices.
AUD – discussed at length above – all about the cycle high in AUDUSD for now over the RBA and then about whether China tensions weigh more profoundly down the road.
CAD – weak oil prices holding CAD back slightly, but USDCAD is pounding on the last shreds of the range and seems ready for more if the plot doesn’t shift here on hopes for the outlook shaping up for the better next year. Next area of interest south of 1.2950 starts at 1.2500.
NZD – the chief argument for AUDNZD downside from these levels is perhaps the threat the China-Australia tension angle. Otherwise, beginning to see value in AUDNZD cross at these levels. The recent hubbub on NZ house prices is NZD supportive at the margin – though “macroprudential” measures limiting loan-to-value ratio and similar will always be the approach there, assuming inflation is quiescent.
SEK - the Riksbank surprised last week by expanding its QE programme more than expected, but the market is so fixated on the medium-to longer term growth outlook and the risk appetite backdrop, that EURSEK hardly responded - a sign of SEK resilience to be sure. 10.00 looks achievable soon if we march back to new highs in global equities.
NOK – EURNOK seems ready for a full-on challenge of the key sub 10.40 area as long as the backdrop conditions remain supportive after an incredible tailwind from stronger oil prices and post-vaccine hopes in November.
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