Global Head of Macro Strategy
Summary: Strong risk sentiment continues and a fresh surge in industrial metals has helped AUDUSD to new highs. But our focus should be squarely on sterling today and in coming days as Brexit crunch time has arrived and disaster insurance buying has picked up on the latest uncertainty. Elsewhere, we look at the last remaining hurdles for USD bears heading into year-end.
Today’s FX Trading focus:
Brexit crunch time is here
UK Prime Minister Boris Johnson is set to meet with EU commission head Ursula Von Der Leyen this evening for dinner in Brussels in an effort to move forward the stuck Brexit negotiations. The critical outstanding issue is the “level playing field” or “state aid” issue. While we have assumed all along that some sort of a deal would inevitably be hashed out between the two side, even if it was a rather thin deal that disguises the need for ongoing negotiations on particulars based on a loose framework of principles. But the latest turn in negotiations has raised the fear of a proper stand-off that brings with it a cliff-edge risk into year end. I still suspect some sort of fudge, or at worst, delay is more likely than a cliff edge, but we should all respect the uncertainty of the situation.
The market is certainly respecting the uncertainty more than is shown in the choppy action in the spot GBP exchange rates, as GBPUSD 1-month implied volatility has pulled higher toward 13% and the 10-delta options are 5.5% more expensive for puts than calls – getting close to where they were during the pandemic meltdown, for perspective. As soon as in the wake ofthis evening’s meeting between Johnson and Von Der Leyen we should have a headline indicating the latest temperature of the situation and whether we are moving in the “right” direction or toward a nail-biting stand-off.
Elsewhere – USD weak but requires extension of speculative froth for more downside
As we pointed out in this morning’s Saxo Market Call podcast, some measures of risk sentiment are nearing remarkable extremes, after November was the most positive month in global market history. Many have pointed out that the very strongest runs of risk appetite often yield to even more upside statistically, so far be it from us to call the end to this remarkable run for global markets, but the USD lower argument seems entirely bound up in soaring risk sentiment and it may be a reflexive trade.
On that note, perhaps only three readily identifiable risk events can spoil the party ahead of the end of the year.
After the end of the year, the Georgia Senate runoffs are an additional wildcard on January 5 – more on that later.
Chart: AUDUSD
AUDUSD is enjoying a fresh surge as risk appetite remains robust and industrial metals have been on quite a ride higher in recent sessions, particularly the Aussie- important iron ore. AUDUSD is now well free of the 0.74000 area, with no real notable resistance until the 0.80-0.8100 zone that capped the action back in early 2018.
The G-10 rundown
USD – the flipside of the global surge in risk assets.
EUR – the euro may be held back a bit by its negative yielding status and the wait for stimulus as well as the ECB set to deliver new easing tomorrow, but don’t see the latter as a major event risk with so much already priced in.
JPY – the yen more or less tracking the USD in the crosses here and likely to continue to do so unless risk sentiment sours badly, which would be JPY supportive unless the source of angst is rising US yields, in which case you have confusing crossfire.
GBP – very short term calls are one way to position for a breakthrough in the Brexit logjam – plenty of binary risk at any point starting from any statements made after this evening’s Brexit dinner in Brussels.
CHF – Is EURCHF fearing a more aggressive ECB? Doubt that the latter is much of a catalyst here and suspect that global bond yields are more important, with rising yields potentially pushing back against CHF strength.
AUD – the go-to currency if the current environment extends, especially metals prices.
CAD – Bank of Canada meeting later today – not expecting anything there. CAD could be set for a run for 1.2500 quickly on another surge higher in crude oil prices together with a strong run in risk assets into year end – the caveats are listed in the USD commentary above.
NZD – the kiwi at risk of relative weakness in the crosses if commodities continue to grab the headlines – thinking especially of AUDNZD here, where another surge toward 1.0600 would begin to disrupt the late downtrend.
SEK – the krona has taken a turn for the worse in not responding to what normally have been supportive conditions – seasonal pension flows might be a driver and we like fading SEK weakness against the euro eventually, with the caveat that 10.30 falling in EURSEK could see a bit more of a squeeze.
NOK – a real breakdown in EURNOK below 10.50 may require a new leg higher in Brent above 50 dollars/ barrel.
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Global Head of Macro Strategy
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Global Head of Macro Strategy
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Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
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Head of Commodity Strategy
Quarterly Outlook
Global Head of Macro Strategy
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Head of Fixed Income Strategy