FX Update: USD breakdown has unfolded, requires constant equity fuel

Today’s FX Trading focus:

USD breakdown: check. But…
The USD breakdown is seeing EURUSD find a bit more company, as AUDUSD joined in pushing through to new highs and USDCAD has poked to new lows for the cycle as well, as has the US dollar against the odd EM currency like the Ruble (note OPEC meeting today). The market picked and chose in reacting to yesterday’s headlines, in the end with the glass-half-full view winning out after House Speaker Pelosi announced she and Democratic Senate leader Schumer are ready to look at the bipartisan $908 billion stimulus package as the basis for discussion (therefore climbing down from her insistence on a bigger deal and making it more likely that the two sides can meet in the middle – the next key is Republican Senate lead McConnell and whether he is in play and then whether grumpy lame duck Trump is ready to cooperate on any front – probably?)

So it all looks fine and dandy for the USD bears here, but as I look at in the chart below, I can’t help but feel that the USD is merely a passive participant as a flip-side of global risk sentiment animal spirits, where it is tough to find much differentiation with other risk assets, like the Nasdaq 100 futures. And as we discussed in today’s Saxo Market Call podcast, we wonder how stable US equity markets are when the driving factor in the market is clearly call option trading in incredible volumes and driven in large part by retail traders. If something goes bump in the night – a.k.a. we get an exogenous shock, we could suffer a mini-crash or worse, which, given the correlations noted below would suddenly scotch any USD weakening movement in the near term, even if we are on board for the longer term negative USD drivers.

One exogenous shock could be a lack of a stimulus deal going through, although that seems an inevitability. Another would be over-baked vaccine expectations. Geopolitical shocks or a US yield shock (US 10-year benchmark rising aggressively above 100 basis points) are other candidates.

Chart: AUDUSD versus S&P 500
The chart below from Bloomberg shows the degree to which FX traders of the US dollar have in many places merely been trading proxies for risk sentiment in the equity market, which we represent here with the AUDUSD in black and the Nasdaq 100 futures in blue. It doesn’t “feel right” to trade the AUDUSD with any aggressive view as long as this slavish correlation holds. As well, the USDCNY has not participated fully in this latest downdraft in the US dollar – although in the past it has been happy to do its own thing and doesn’t have to prove a signal unless the divergence deepens. Theoretically, the move above 0.7400 opens the chart toward 0.8000+, but given the stock market correlation, it seems we might need another 30% advance in the Nasdaq 100 to get us there unless the correlations shift.