Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Macro Strategist
Summary: The action on the first real trading day of the year for USD traders suggests that at least some of the USD weakness at the end of last year may have been down to end-of-year flows. Weak regional German December CPI prints ahead of the national data today also helped the euro weaken, with EURJPY plunging to new multi-month lows as the yen enjoys lower yields, although JPY crosses have bounced from intraday lows, particularly USDJPY.
Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: The USD wakes up with a bang on first real trading day of the year in the US. USDJPY bounces hard, even as JPY enjoys strength on a plunge in global yields today.
The vicious rally in the greenback today came seemingly out of the blue, but there can be no doubt that the calendar roll effect is in play somewhere in the mix as traders are putting capital to work on the first real trading day of the year in the US, as treasury market futures opened up overnight and US traders are back to work with markets open everywhere save for Japan (which comes back online with the Wednesday session tonight).
The EURUSD is particularly heavy today, with perhaps four drivers in the mix. The first is the calendar year roll (though that could have unleashed flows in either direction) and the second is positioning: the futures positioning in the US is shows a non-commercial long EURUSD position that has rarely been exceeded in recent history. The last time the net long non-commercial position was above the current +146k contracts (as of last Tuesday) was for a few months in the summer of 2020, when the positioning reached an extreme of +215k, and when the long topped out around 150k in early 2018. (To be fair, some of that may be on EUR-cross trades, but the market is extremely long of euros, given that the speculative positioning in most other USD pairs is long the USD). Third, the regional German December CPI prints out this morning were far weaker than expected ahead of the national number this afternoon – adding to the “peak inflation” narrative that would soon have the market second guessing the ECB’s relative hawkishness if that development deepens. As well, with record “heat” across much of Europe in recent days, Germany has remarkably even been able to build natural gas supplies in the middle of the winter, while power prices are tumbling. Finally, there is the technical development of EURJPY plunging to new multi-month lows and through fairly well-defined range support
The move in the US dollar today can be taken at face value if it sticks into the close today as it suggests considerable pent-up capital flows being put to work that may have been bottled up heading into the year-end, awaiting the clean P/L slate of a new calendar year. The odd combination, however, of a strong US dollar and strong US treasuries and strong risk-on is an odd one, although the last of these has faded as the European session has passed lunch time. Interesting to see if the key US data this Friday pushes back against the strength in the treasury market or encourage it and the impact on the US dollar. If yields bump back higher, the JPY strength, already reversing sharply versus the US dollar and elsewhere today, could turn into a deeper consolidation. USDJPY is attempting a hammer reversal in today’s daily candlestick if it can close near 131.00 or higher after trading sub-130.00 intraday.
Chart: EURUSD
The bottom has dropped out of EURUSD suddenly as 2023 get underway in earnest with today’s first trading session in the US. As discussed above, a number of factors are likely conspiring to drive EURUSD lower and it was overdue a consolidatory move after very little two way action in the rally that was sparked shortly after the November 3 FOMC meeting. Friday’s US data is the next test for USD pairs, and this chart can now easily consolidate back toward the 200-day moving average below 1.0350 without necessarily re-establishing the old down-trend. Parity is the bigger area for major trend implications, and lies only six pips north of the 61.8% retracement of the entire rally off the 0.9536 lows to the 1.0735 high, which comes in at 0.9994.
Table: FX Board of G10 and CNH trend evolution and strength.
The weak USD reading rapidly unwinding today, but would take some time to register a new broad up-trend. The JPY rally reading has intensified, but we have seen an interesting back-up in USDJPY today – maybe it has done most of what it is going to do against the greenback for now, but what about in other pairs? Still looks heavy there (see below for the individual JPY pairs).
Table: FX Board Trend Scoreboard for individual pairs.
A small victory for the mean-reversion argument case I made for NZDCAD back when it was trading slightly higher a month ago (and went higher still before the large reversal – could be more to come there). USDCAD is already teasing an upside trending move, but clearly needs to break out of the current congestion area. NZDUSD is also crossing over into negative and looks a more promising candidate for USD bulls, followed by AUDUSD if it takes out the range lows.
Upcoming Economic Calendar Highlights
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)