Macro: Sandcastle economics
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FX Update: Narrative flip or noise?
John J. Hardy
Chief Macro Strategist
Summary: Many view the data and the action last week as a sign that the narrative is shifting to one in which investors are second guessing the reflation narrative and whether the growth peak is in the rearview mirror. The more mundane explanation could be that we are merely seeing a bit of noise and uncertainty and position squaring after too little has happened in favour of the trades that were supposed to work this year, like short USD and short JPY.
FX Trading focus: Can market put together another USD and JPY surge?
My parting shot on the Friday before last, when I took off for a week of “holiday” – really a staycation involving extensive football-related distractions, yardwork and house painting – was that the weak US jobs report could get the USD bears back in business. Today, one week plus one trading day later, and the jury is still largely out. Sure, USDJPY has come tumbling down after last week’s overdue and oddly vicious JPY rally move, which finally saw the currency noting the very significant drop in US yields and the sharpness of the move likely aggravated by stale and crowded JPY shorts. The Swiss franc has echoed the JPY move as well, but we haven’t seen any notable isolated USD development, as the greenback is sideways versus the euro and generally stronger versus the pro-cyclical commodity currencies. That kind of pattern may hold and extend to significant EM weakness against the US dollar and the old safe havens CHF and JPY if we get a further rally in US treasuries (lower yields) together with some broad risk off that holds more than a mere session or two. As noted in this morning’s Saxo Market Call podcast, there are signs of weak breadth in the US equity market that are a concern just as earnings season is set to get under way in earnest this week.
If we do get a garden variety market correction and one that lasts a couple of weeks, we could see USDJPY a couple of percent lower, EURUSD a couple of percent lower and AUD, NZD and others a few percent (4-5%?) lower and offering enticing levels for a more structural view on the eventual return of the USD bear. As my colleague Ole Hansen pointed out in his latest weekly rundown of FX futures positioning in the US, the aggregate USD position is getting toward its smallest post-Covid outbreak short. I still like the long term USD downside view, but don’t like the risk-reward here where the US market is so aggressively extended.
Chart: AUDUSD
AUDUSD is one of the first USD pairs that is confronting rather structural levels of USD resistance, with a further punch lower through the 0.7400 area, and thus through the highs from late last summer, confirming the head-and-shoulders like formation break that is currently in limbo and a possible continuation toward 0.7000, the prior major level late last year.
The ECB is doing everything it can to avoid any sense that policy will revert meaningfully to its pre-pandemic policy, as ECB President Lagarde told us at the weekend to expect “some interesting variations and changes” at the ECB meeting next Thursday as she likely seeks to assuage any notion that ECB purchases are set to wind down meaningfully beyond the end of the emergency PEPP programme purchases set to be completed early next year.
China eased RRR requirements unexpectedly by 50 basis points ahead of the weekend, a move that likely marks the start of a new accommodative credit policy as growth measures there are coming down more rapidly than expected. Chinese June Trade Balance data from China is up tonight and Q2 GDP and other data is up on Thursday.
In terms of next steps for this market, aside from the Chinese data this week, we await US 3-year and 10-year treasury auctions later today, the US Jun. CPI data tomorrow, Fed Chair Powell testifying before Congress on Wednesday and Thursday and the Jun. US Retail Sales on Friday.
Table: FX Board of G10 and CNH trend evolution and strength
The FX board reflects the surge in the traditional safe-haven JPY and CHF, with USD strength also in the mix, while the commodity currencies have suffered on the stumble in the inflation narrative. I’m itching to lean against recent squeezes in the likes of USDNOK or even EURNOK, but it may be a bit early yet.
Table: FX Board Trend Scoreboard for individual pairs
Note in the trend readings for the individual pairs that USDJPY rolled over to a negative trend last week – now looking for follow through as long as it stays below perhaps 111.00, while new developments in other pairs generally reflect commodity currency weakness. Gold is just barely negative, but needs a solid pick-up in new upside momentum more than a nominal flip to positive to suggest a constructive upside outlook, as a positive trending reading will arrive if it merely stays around the 1,800 level in the days ahead on the rally off the 1,750 base as the prior sell-off fades out of view.
Upcoming Economic Calendar Highlights (all times GMT)
- 1600 – US Fed’s Kashkari (non-Voter) to speak
- 1530 – US 3-year Treasury Auction
- 1700 – US 10-year Treasury Auction
- 0130 – Australia Jun. NAB Business Conditions
- 0200 – China Jun. Trade Balance
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