FX Update: The US dollar strength spreads more aggressively to EM

The Fed is on the same trail as we are in bemoaning the contraction of fiscal stimulus into the US economy since the end of July and the risk that no new deal making is possible through the election and likely through the new administration in January on the partisan showdown over Republican scheming to accomplish a Supreme Court nomination and approval just days ahead of the election. In the past, we could believe that Trump would cave on negotiating with even a few percent dip in the equity market, but the stand-off has a new severity this time around. Powell was out yesterday and will be out again today before a Congressional panel pleading for more stimulus, and some of the regional Fed presidents were also out tolling the warning bell.

Finally, in EM, interesting to see the Hungarian central bank finally digging its head out of the sand and announcing a deposit rate hike – even if a symbolic tiny one of 15 basis points to take the rate to 0.75%. Hungary’s high inflation rates have bounced back surprisingly quickly post-Covid19, meaning painfully high negative real interest rates for HUF holders, and EURHUF has pulled back within about a percent of the Covid19-panic highs from March before finally selling off today on the rate hike decision. Much more will be needed to avert further HUF weakness if the CPI doesn’t moderate quickly.

The G-10 rundown

USD – we have a King Dollar at the moment, especially with the move over the last couple of sessions, and the power of the move is becoming  a driver of weak risk sentiment unto itself and threatening the reflationary narrative as long as it continues.

EUR – the EURUSD sell-off has a bit of room to run without impacting the trend, and the euro is firm in some of the crosses against commodity currencies and EM as a kind of secondary safe haven, but if EURUSD drops much below 1.1500, a major reversal threatens – not our preferred scenario, but the odds rise with US stimulus and election uncertainty notching higher.

JPY – as is often the case, the JPY is correlating with the US dollar in the crosses, and the only distraction here is whether USDJPY is going to fully bounce back into the range, making G10 FX mostly a spectacle of King Dollar.

GBP – sterling snaps back stronger despite a lack of positive news (save perhaps for yesterday’s strong Service PMI reading , but perhaps  in anticipation that Chancellor Sunak is set to announce targeted measures to avoid job losses. Don’t look now, but GBPUSD is even back above 1.2750 – a pivotal level

CHF – the SNB continues to insist on the intervention route and even said in today’s quarterly meeting that it is ready to “intervene more strongly”. Meanwhile, SNB reserves aren’t looking quite as big as both gold and US stocks – a large holding in SNB reserves – have fallen steeply of late. USDCHF well back up through the 0.9200 levelnow.

AUD – the market suddenly pricing in higher odds of a mini-cut to take the current policy rate of 0.25% to either 0.10% or zero (implied rate for the October meeting at about 0.064% according to a Bloomberg tool as of this writing). More important is the risk-off backdrop and weak iron and other commodity prices challenging the reflationary narrative here.

CAD – USDCAD has risen above the important 1.3300-50 area, weakening the downtrend, and a rise through 1.3500-25 would start to suggest an outright neutralization of the downtrend, but one step at a time. 1.3250 zone is now support and CAD has been far less impacted than the AUD in this run against the reflationary narrative in recent days.

NZD – the NZDUSD pair took out the 0.6600 area without much ado and is now facing down the slightly bigger 0.6525-00 area, but the 200-day moving average below 0.6400 is an an eventual focus on more than a session of this backdrop continuing.

SEK – the dam finally burst after a long episode of EURSEK showing resilience to overall developments in risk appetite as a squeeze has developed here and EURSEK has suddenly zipped above its 200-day moving average around 10.55 in short order – the 10.60 zone is important and we would like to fade this move once the momentum slows, but unwilling to top-pick.

NOK – the Norwegian krone twisting in the breeze as the technicallevel of EURNOK 11.00 falls and popular long NOK trades in USDNOK is under dire pressure here. Note the SEKNOK pair interactiving with a huge range leveo near 0.9500 as well, which has defined the bottom of the range for several months.

Upcoming Economic Calendar Highlights (all times GMT)

• 1100 – Turkey Central Bank Rate Announcement
• 1230 – US Weekly Initial and Continuing Jobless Claims
• 1250 – US Fed’s Kaplan (Voter) to speak
• 1300 – ECB Chief Economist Lane to Speak
• 1400 – UK BoE Governor Bailey to Speak
• 1400 – US Fed Chair Powell and Treasury Secretary Mnuchin to Testify
• 1400 – US Aug. New Home Sales
• 1430 – US Weekly Natural Gas Storage
• 1600 – US Fed’s Bullard (and two other non Voters) to speak
• 1800 – Mexico Central Bank Rate Decision