FX Update: Central bank cavalcade into year-end

FX Update: Central bank cavalcade into year-end

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  Nine of the ten G10 central banks meet in the coming week and the next, with interesting subplots for nearly all of them.


The November US jobs report
The US jobs report was a mixed back, with the unemployment rate ticking back up to 4.2% versus a steady 4.1% reading expected, with the additionally negative angle that this was despite a 0.1% drop in the participation rate (more unemployed despite the slightly smaller labor force). In the initial reaction this has edged out the relatively positive news that the Nonfarm Payrolls Change rose +227k for the month vs. +220k expected, with a +56k revision to the two prior months' data. The US dollar was poised near key levels like 1.0600 in EURUSD as we discuss below, so the consolidation of the post-election USD strength could be set to go full circle back to Election Day levels if the post-jobs reaction holds here. New local lows in US treasury yields are supported the USD softness in the wake of the jobs numbers. USDJPY is having a justified look back below 150.00 and could test recent lows if US yields continue lower.

Central banks in focus this week and next
A cavalcade of central banks kicks off with RBA Tuesday, followed by Bank of Canada Wednesday and ECB and SNB on Thursday. Five more G10 central banks report the following week. We preview each of these in the rundown for the event risk highlights below. The most anticipation is around the size of the Bank of Canada and Swiss National Bank moves as the market weighs whether they will move 25 or 50 basis points. I lean in favour of 50 from the BoC and only 25 (low conviction) in the case of the SNB, which only has 100 total basis points of positive policy rates to work with before hitting zero. We all thought that the ZIRP era was completely behind us, but the remarkable Swiss are proving us wrong, as the one-year, one-year forward hit zero this week there. The RBA is in a tight spot PR-wise on its hawkish hold – could it soften that stance up Tuesday? AUDUSD has reached key levels near 0.6400 this week!

Chart: EURUSD
EURUSD pulled through the critical 1.0600 area after the US jobs report, which was a clearly drawn up line of resistance and near the former low of 2024 before the downdraft to sub-1.0400 levels that was quickly recovered. The next resistance level of note is up to 1.0750+, which is near the pre-US election lows. The bears would need a weak close well back south of 1.0600 today (Friday) to pounce again sooner rather than later.

Source: Saxo

Euro finds support as focus turns fiscal
The collapse of the French government saw little fallout – certainly not for EURUSD which stayed resilient after an initial dip early in the week.  And French yield spreads to Germany actually tightened well back below 80 basis points by later in the week as well after ballooning to 88 basis points at the start of the week on Marine Le Pen’s threats to take down Barnier in moving against his austere fiscal plans. The sovereign debt resilience is a strong indicator that the situation will not deteriorate in the near term, so the Euro would have to weaken for other reasons outside of debt stability concerns for now. Further supporting the euro is the story run by FT and others that Europe could be looking to fund massive new defence spending with large-scale debt issuance, perhaps as much as half a trillion euro. This, together with the fate of the French government budget and the new German government after elections presumably next February are critical for the longer term picture.

Top highlights for the week ahead: (times are GMT where shown):

The calendar is dominated in the coming week by the US CPI release and four central banks, kicking off with Australia’s RBA on Tuesday.

  • China Nov. PPI and CPI (Mon 0130) – China is in deflation (the important PPI deeply negative at negative 2.9% YoY in October and same expected for November) The government needs to reflate the economy, with these data unlikely to counter that notion. The chief longer term question is whether China is biding its time for Trump 2.0 to see how US policy shapes up, and then the degree to which the US-China relationship hardens in the direction of a more adversarial and confrontational one or whether the “Mar-a-lago” accord direction (for more, read here  and here is possible.
  • Australia RBA Cash Target (Tue 0330) – The RBA expected to hold firm at 4.35%, but the weak Q3 GDP release has the market bringing forward the anticipated first RBA cut – the 2-year Aussie rate is some 10 basis points lower than prior to that announcement. Could Bullock soften up the rhetoric at this meeting with some more conditionality? 1.0950-1.1000 is the bull-bear demarcation zone for AUDNZD as it has cautiously tilted into bearish mode without full confirmation and 0.6400 is a critical area for AUDUSD. The election next year (no date set but must happen before mid-May) could see political pressure heaped on the RBA due to its hawkish stance – does this raise the risk of the RBA wanting to avoid negative attention and hence softening up a bit or will Bullock stick to her hawkish guns.
  • US Nov. NFIB Small Business Optimism (Tue 1100) – not usually a market-mover and likely strongly influenced by politics (business owners pro-Trump on average).
  • US Nov. CPI (Wed 1330) – this is the data release of the week after the October core figure rose to 3.3% YoY. Those core CPI figures of 0.3% MoM and 3.3% YoY from October expected to repeat for the November prints.
  • Canada Bank of Canada rate decision (Wed 1445) . The market is 50/50 on the prospects for a 50-basis point versus 25 basis point cut to take the rate to 3.25% or 3.50%, respectively. Such a setup encourages strong reaction to the decision and the forward guidance as USDCAD got stock after breaking the key 1.4000 level, even with the short US yield advantage to Canada still pegged near multi-year highs.
  • US Treasury auctions 10-year Treasury Notes (Wed 1800)  Interesting to see the level of demand for US treasuries after recent post-US election lows in the 10yr yield.
  • Australia Nov. Employment Change / Unemployment Rate (Thu 0030) – The unemployment rate is expected to tick back up to 4.2% from 4.1% in October, a level it hit for the first time in this cycle back in July. The payrolls are a choppy data series, but the market more sensitive to worse than expected data unless the RBA meeting turns the tables on the setup (by softening its stance significantly, which would mean a strong report could churn the market reaction to the RBA, etc.).
  • Switzerland SNB rate decision (Thu 0830) and Chairman Schlegel presser (0900) – as with the Bank of Canada decision, the market is divided…
  • ECB Rate Decision (Thu 1315) and ECB President Lagarde presser (Thu 1345) – a strong majority now looking for only a 25 basis point cut from the ECB at this meeting. More analysis above on the EUR and ECB.
  • US Weekly Initial Jobless Claims and Continuing Claims (Thu 1330) – The data the prior week disrupted the persistent rise in continuing claims though headline initial claims ticked up, but the latter are so low that we need to see three weeks of significant pickup to register any level of concern.
  • US Nov. PPI (Thu 1330) – the core PPI YoY figure rose back above 3.0% to 3.1% in October after hitting as low as 1.8% last December.
  • US Treasury to auction 30-year T-bonds – the longest end (for now) of the US yield curve
  • Japan Q4 Tankan Business Sentiment Surveys (Thu 2350) - the non-manufacturing Tankan surveys for small and large companies at very elevated levels. Market more sensitive to inflation and wage data as this survey is too infrequent.
  • UK Oct. Manufacturing Production, Index of Services, Trade Balance (Fri 0700) This is second tier data.

Table: FX Board of G10 and CNH trend evolution and strength.

Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.

The JPY strength stands out on the positive side for G10 currencies, although it has lost some momentum, possibly to be regained after the weak US jobs data. AUD clearly the weakest currency here and the only surprise side for the RBA next week is.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
NOKSEK trying to establish a new downtrend and GBPUSD a new uptrend today, let’s see where things are on the close Friday and in the couple of days ahead to see if these stick. Elsewhere, AUD weakness stands out almost universally in AUD.

Source: Bloomberg and Saxo Group

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992