Global Head of Macro Strategy
Summary: The soft US CPI numbers engineered a breakdown in the US dollar, with EURUSD stretching to new highs for the year above 1.1100 and the USD Index breaking its lows for the year as well. The focus on the strong JPY eased off, in part as more pro-cyclical currencies were the heavy gainers yesterday, led by a stunning rebound in the Swedish krona. How long the move can extend will depend on additional incoming data and Fed guidance, but the momentum build is so far impressive.
FX Trading focus:
USD breaks lower after soft US CPI
The June US CPI data came in softer than expected, triggering an ugly slide in the US dollar as the core numbers were particularly in focus: not only missing the 0.3% M/M that was expected, but narrowly missing dropping below 0.2% with a 0.157% reading. The Y/Y number fell to 4.8%, the lowest since last 2021, and the headline dropped all the way to 3.0% on what will prove the most favourable year-on-year basing comparison for some time. There are some ironies here, in that the big come down in inflation on key expenses like energy, the fact that many US homeowners have stayed put in their current residence after their refinancing at record cheap mortgage rates during the 2020-21 pandemic years, and with higher incomes from strong wage gains, risk seeing services inflation in particular staying at a higher level for now as economic growth could extend before the long and lagging effects of the Fed’s policy tightening and banks’ credit tightening begin to weigh.
Another potential contributor to a reheating of the US economy and inflation are the financial markets themselves, as options-based compensation will be a boon for elite incomes and the wealth effect (feeling more confident about consuming because portfolios are in good shape) may kick in. For now, this does not concern the market, which seems happy to trade what we called the Disinflationary-no-landing-nirvana scenario in today’s Saxo Market Call podcast, which has Fed policy expectations for next year dropping like a stone from their peak of just a week ago. Even as the market holds its view that the Fed will likely hike the week after next, it is pricing more than 150 basis points of Fed rate cuts by end of next year. The June 2024 SOFR contract has rallied more than 50 basis points off its lows of a week ago. All of this apparently without fretting a recession (the easing yields feeding a powerful extension of risk-on in asset markets). Sounds to good to be true and the irony here may be that the market will have to price a higher Fed peak – but that is getting ahead of ourselves.
The move lower in the US dollar has such strong momentum, it may carry through for a while here, starting with a level like 1.1500 for EURUSD and 0.7000+ for AUDUSD. Whether the AUD and other pro-cyclical currencies (SEK suddenly a phoenix-from-the-flames yesterday) continue to get a leg up in this market will depend on whether the global growth story shapes up more strongly in coming weeks, especially from China, which reported ugly trade numbers for June overnight (probably what kept AUD on the soft side in the AUDNZD cross – but watching metals prices for a possible shift in sentiment more in favour of AUD). The recent broad JPY strength is suddenly less of a focus with risk appetite enjoying a strong spell. If energy prices extend after their breakout and the sentiment on global growth improves, JPY performance could prove indifferent for a spell.
Chart: EURUSD
EURUSD has broken up above the year highs just ahead of 1.1100, extending above 1.1160 in today’s trade and could be on its way to 1.1500 or even higher, although the move is so steep, some consolidation could set in, perhaps as soon as the 1.1275 (the 61.8% Fibo of the entire sell-off from post-pandemic highs to the panic lows of late last year)? Only some climax reversal in the next few session would bring some caution for bulls here.
GBP: Some exhaustion setting in?
Sterling has been the strongest performer among G-10 currencies this year, lifted by the hot UK inflation numbers that have continued higher at the core in recent months to new cycle highs and strong wage increases that risk second-round effects. But two factors could hold back sterling in broad terms from here. The first is that if we are seeing a wider anticipation of slower inflation, the market has perhaps priced in more further tightening from the BoE than it can deliver. The other factor is that if we are switching to a growth focus globally, the UK has less potential for a growth rebound, hampered by higher policy rates weighing on the economy, particularly through the impact on household budgets from the incoming brutal mortgage resets, and no real leverage to global demand on the export side of its economy. Yesterday’s EURGBP reversal from new lows for the year may be a sign of this, but if the outlook picks up more broadly on growth, other sterling pairs could be in for a considerable (further) correction, for example GBPAUD and GBPSEK.
The Bank of Canada was largely a non-event, with the BoC hiking as the market was partially leaning for, but with only conditional guidance on more hikes to come from governor Macklem. Oil prices and risk sentiment in the driver’s seat for USDCAD here after a string of tepid Canadian data on balance.
Next up we have today’s weekly US initial weekly jobless claims, which have posted two weeks below 250k after a series of weeks well above that level, although continuing claims have been sliding consistently from the early April peak. The Fed’s Waller (hawkish) is up speaking tonight on the economic outlook.
Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar momentum shift has been downright stunning over the last five days (-6.8), while CNH remains weak even as USDCNH has corrected back lower. CAD often follows USD in the crosses, while the Scandies are on fire and sterling momentum has eased off.
Table: FX Board Trend Scoreboard for individual pairs.
Some very strong trend readings suggest very extended trends here – can we continue to see the kind of momentum we have seen of late in a pair like GBPUSD which has hit a very high trend reading of 7.8? Watching the trend status of JPY pairs now that the broad JPY strength has suddenly eased off, as not all JPY pairs shifted to the negative side on the JPY rally.
Equity outlook: The high cost of global fragmentation for US portfolios
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