Chief Macro Strategist
Summary: EURUSD parity has been revisited this morning after last week’s breakdown below range support in the pair at 1.0100. This time, unlike the episode back in July, the level is unlikely to hold the line for long if Fed Chair Powell stays on message with the intent to continue tightening Fed policy at this Friday’s Jackson Hole, Wyoming speech. Elsewhere, the CHF continues to get respect on SNB policy credibility, the still very positive Swiss current account, and lower realized Swiss inflation.
FX Trading focus: EURUSD parity back in view even as market raises ECB expectations. CHF gets respect.
Rising EU yields and even ECB rate expectations aren’t worth much as long as gas/power prices in Europe continue to spiral out of control, at multiples of what US industry is paying for its gas and power supplies, continuing to drive a worsening current account imbalance made additionally unattractive by extremely negative real rates. As we kick of another week, we now have another shutdown of Russian gas deliveries through the Nord Stream 1 pipeline, said to be for a few days of maintenance. This has spiked forward natural gas and power prices to even more absurd levels than the already dire levels of late. An observer on Twitter, one @LionHirth claimed this morning that “German industry has stopped buying power and gas forward…either prices will fall, firms say, or they’ll stop producing.”. At least some rain upstream has helped raise most of the trouble spots on the Rhine considerably, which will aid deliver of coal and diesel to power plants, but Europe remains under extreme pressure and EURUSD is under renewed pressure as well, with parity unlikely to hold like it did in July as discussed in the chart below.
The USD has been strongly bid since last Thursday as last week saw the market continuing to slowly push out its view of the timing of peak Fed rates as well as when Powell and company will eventually shift to an easing stance. The degree to which Fed Chair Powell succeeds in continuing to drive a repricing of the Fed forward curve to the upside will be an important factor for the greenback this week, as will the direction of longer US treasury yields after Friday saw a more determined jump higher in yields at the long end of the curve, with the 10-year benchmark touching 3.00% overnight.
We continue to keep USDCNH on the radar on the risk of a firmer upside break than what we have seen thus far. Overnight, the PBOC eased the 1-year rate a mere 5 basis points versus the 10 basis points expected, but eased the 5-year rate by 15 basis points, a move seen as throwing the beleaguered Chinese property market a bone. Yes, USDCNH has traded to new highs well above 6.84, but given the scale of USD strength elsewhere, this so far remains more about China moving to prevent the yuan from tracking aggravated USD strength rather than showing signs of desiring a broader weakening.
Chart: EURUSD
EURUSD has slipped back to parity and a bit worse this morning. It’s a symbolic level that may have a hard time holding this time around as long as the EU continues to wind its way to an incoming recession with no relief in sight on the power/natural gas emergency. Flash August PMI’s are up tomorrow morning for France, Germany and the Eurozone after the July survey showed German slipping into slight contraction in both manufacturing and services, France was still seeing an expanding services sector but slightest contraction in manufacturing, and the Eurozone-wide survey was near the 50 market for both numbers. A fresh sell-off could target 0.9500 next.
It’s worth pointing out the Swiss franc’s solid performance of late, even as Switzerland is suffering as well from the pressure from rising gas/power prices, although only 15% of the country’s total energy consumption is natural gas. Recall that the SNB hiked rates 50 basis points at the June meeting to take the rate to -0.25% and has allowed the EURCHF level to continue lower to ease inflationary pressures (highest headline print has been 3.4% in July, with the core at a mere 2.0%.). Unlike the Eurozone, where the overall current account turned negative over the winter due to the oil and gas import price shock, Switzerland still runs a chunky surplus, one that increased in late 2021 and early 2022 (perhaps on gold exports?) The combination keeps the country and its currency as a fortress of stability in a far-more-punitive-negative-real-rates-elsewhere world. Where will the SNB allow EURCHF to go? Why not 0.9000 or a bit further – after all, USDCHF has reversed solidly back higher recently after trading to multi-month lows, taking some pressure off the global CHF valuation picture, which might only become a bigger focus from the SNB at 0.9000 in USDCHF (versus nearly 0.9600 today). Certainly, the EURCHF downtrend sparked in motion by the mid-June SNB rate hike has been perhaps the most persistent and steady trends of the last two months.
Last week, the Norges Bank bought some credibility with its more hawkish guidance and 50-basis-point move last Thursday, but the current account angle, as noted with EURCHF, may be the important factor here. Somewhat unfairly on that same angle, EURSEK continues to rip higher, but SEK is traditional far more risk sensitive: note that NOKSEK is nearing the range highs above 1.10, which has capped the pair since 2015.
Table: FX Board of G10 and CNH trend evolution and strength.
The FX Board has yet to show isolated weakness in CNH despite the attention on USDCNH. USD strength continues to build, as does GBP and especially SEK weakness, with NZD downside also prominent in momentum terms.
Table: FX Board Trend Scoreboard for individual pairs.
Note that EURGBP flipped to positive on the trend on Friday’s close. Also, AUD is flipping positive in some pairs of late as well – note AUDNZD (need a bit more there as the pair still rangebound), with AUDCNH intriguing, although AUDCAD is headed in the opposite direction.
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