Chief Macro Strategist
Summary: USD strength continues to broaden out, with the yen and Swiss franc increasingly under the thumb of the big US dollar. USDJPY is eyeing a major resistance level that could fall. A response to the strong US dollar from the Trump administration may be hampered by the distraction of impeachment proceedings. Key US data dead ahead and through the end of this week.
Japan has put its new higher sales tax rate of 10% into effect, a rise from the 8% level and a move that is expected to hit the economy hard in Q4, Japanese government bond yields are on the move, particularly at the long end of the curve, where they are rising after the Bank of Japan recently announced a shift in its purchasing intentions away from the longer end and toward the shorter end of the curve and after the huge Japanese government pension fund changed its rules overnight to allow for more buying of foreign bonds (albeit on a hedged basis, making US treasuries particularly unattractive). The market is anticipating a refresh of the BoJ’s commitment to steepening Japan’s yield curve at the October 31 BoJ meeting. USDJPY has bobbed higher again as we discuss below.
Sweden’s Sep. Manufacturing survey printed at 46.3, vastly lower than the 52.0 expected and 52.4 in August. This had SEK on offer ad close to 10.80 as of this writing, a level EURSEK has closed above only three times this year. The Riksbank has nothing left in its toolbox to address the situation as the focus will have to move to fiscal policy, where the Swedish government has far more leeway than most in bringing relief as the Swedish economy nosedives into recession here.
Australia’s RBA lowered rates 25% as the majority of observers expected, and the statement offered a clear bias for further easing. Still, we have yet to see a more robust discussion of the potential for QE from the RBA, a policy tool that has been aired as a possibility on prior occasions, but not recently. RBA governor Lowe will speak later this morning. If QE down under on the way, we are likely far from the lows for the cycle in AUD.
Chart: USDJPY
USDJPY deserves additional focus here as we watch the USD strength broadening and note that the BoJ is likely set to bring further easing attempts – possibly rate cuts to help steepen Japan’s yield curve (although short rates also spiked higher overnight) – at its meeting at the end of this month. The local focus is on the recent highs just above where we are trading this morning, but the structural chart level that likely unleashes a considerable change of sentiment (and running of stops) would likely be a move above the 109.00 area, that includes the 200-day moving average.
The G-10 rundown
USD – USD strength is moving beyond a tipping point. Ordinarily we would expect imminent risk of a Trump administration response, but the distraction of impeachment proceedings may hamper this for now.
EUR – the euro weakening further here, even if the move unfolds in rather slow motion fashion. We are currently at the lower edge of the declining envelope, so an acceleration would market a new behaviour.
JPY – in positioning terms, the USDJPY rally is a pain trade that could risk an acceleration if the 109.00 area gives way in the coming sessions. BoJ activism and impact a higher risk here than anything from the ECB, for example, as well
GBP – sterling maintaining altitude here as we await Brexit developments.
CHF – CHF weakening, perhaps in line with the weak JPY and as USDCHF grabs focus on the move above local highs and into the parity area.
AUD – some positives noted in the RBA statement from Governor Lowe, but the sense that the RBA on course to continue to cut rates keeps AUD under pressure and 2-year AU swaps were off a chunky 6 basis points overnight.
CAD – the Loonie is too strong given the backdrop of broad USD strength and weaker oil prices – any miss in Canadian data – today’s July GDP, for example, could jolt the moribund USDCAD chart into action.
NZD – the kiwi edging back higher versus the Aussie, where fresh selling has come in after the RBA meeting overnight – would prefer the 1.0750 area to hold in AUDNZD, otherwise we risk a probe of the 1.0700 area support.
SEK – a terrible manufacturing PMI print this morning that looks like a delayed reaction to the weakness in manufacturing across Europe. EURSEK looks set to challenge the highs for the cycle and even 11.00 if nothing shapes up on the fiscal front very soon.
NOK – a bit of collateral damage from the weak SEK perhaps being felt in NOK, and as oil prices pushed lower still yesterday, taking the Brent benchmark below 60 dollars per barrel.
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