FX Update: European FX catching a virus?

FX Update: European FX catching a virus?

Forex 4 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  The latest virus numbers in parts of Europe are ringing alarm bells, adding to the ones that have been clanging for several weeks since the spike in natural gas prices. Peripheral EU FX is feeling the squeeze on this, from the Swedish krona to the CEE currencies, some of which are reaching cycle lows versus the single currency. Elsewhere, watching the longer end of the US yield curve as an important coincident indicator.


FX Trading focus: European FX feeling the pinch from latest Covid wave, perhaps security concerns as well.

Forward concerns on EU growth have been gathering on the natural gas and power crunch that developed into early autumn and is driving an ugly kind of tightening on the economy before the ECB ever gets around to contemplating a rate lift-off. And now we have the latest wave of Covid concerns, especially in Germany where the case count acceleration has been remarkable, as an additional factor that could hold back confidence and activity. This is all adding to the pressure on the euro after strong US inflation numbers and solid jobs and survey numbers in the US have brought Fed expectations to new highs for the cycle – even if the longer end of the US yield curve remains a conundrum in my book. South of 1.1500-25 and the trend is the trend, but the pair is getting very cheap at these levels based on traditional fair value calculations.

With a weaker euro it is no surprise to see even weaker peripheral currencies around the single currency, as EURSEK squeezes back above 10.00 (see more in chart below) and NOK frets the weaker oil price, while the two most tracked CEE currencies, PLN and HUF are poking at cycle lows versus the single currency. Given that the CZK is rock solid with this current backdrop, it shows that the Czech central bank’s more robust signaling on rate hikes and the defense against inflation is paying off. But as well, we have additional idiosyncratic concerns in CEE in the form of an escalating confrontation between Poland and Belarus at the border over the latter importing migrants from the Middle East and then sending trying to send them over the border. Poland has called for an emergency EU summit on the issue as the diplomatic situation looks uncomfortable, to say the very least. This, together with US accusations that the Poland/Belarus border situation has been masterminded by Russia. That together with US officials today warning on Russian forces massed at the Ukrainian border and the weaker oil price also have USDRUB backing up aggressively – watching whether the 72.50-73.00 area holds there.

Chart: EURSEK
The Swedish krona is traditionally one of the most sensitive G10 currencies to risk sentiment. We have hardly suffered much of a setback in risk recently, but the focus on growth concerns in Europe on the natural gas debacle and perhaps now even on Covid, as the SEK in the firing line, given its often that it often is seen as a high-beta proxy to EU economic strength. The squeeze has entered an interesting area – the psychologically important 10.00 area that was the clear support line back in the first couple of months of the year. Watching whether stop may be lined up that can risk squeezing the action higher here short term, but we would likely need a more significant rout in risk sentiment to threaten a structural reversal of the medium term trend, which would need for the action to back up above 10.10-15. I like fading the squeeze into early next week as long as we stay south of that zone, but setting stop levels is difficult here on a Friday and would like to have another look on Monday.

Source: Saxo Group

Elsewhere, the most salient market development is that China continues to maintain its exchange rate at strong levels versus a very strong US dollar, with USDCNY closing the week right on the lows since June at 6.38.

For next week, the US macro calendar highlights include the first of the regional November US manufacturing surveys, the Empire and Philly Fed surveys on Monday and Thursday, respectively, while the data highlight of the week is perhaps the US Oct. Retail Sales figure on Thursday. But from one moment to next during US waking hours, the overhanging risk for short term volatility will be on President Biden’s Fed Chair nomination announcement, with the algos primed to jump on the Brainard-or-Powell headline, even as it is unlikely that this changes the Fed policy outcomes. I would also like to highlight an intriguing speech up next Friday from Fed Vice Chair Richard Clarida, who is scheduled to speak on Friday on “global monetary policy coordination, cooperation and collaboration” with a Q&A. If this US dollar is set for significant further gains, global central banks will have no choice but to coordinate policy to send it back lower.

As for other currencies, a couple of individual data releases with potential extra impact are the UK Claims and Employment numbers from Tuesday and the Australia Q3 Wage Price Index on Wednesday, as the respective central banks are sensitive to employment and wage numbers.

Table: FX Board of G10 and CNH trend evolution and strength
The CNH and XAU and XAG strength really stick out here as they are outgunning a quite strong US dollar, while the commodity currencies struggle.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Interesting to note the JPY is in a positive trend against everything save for against CNH, USD and CHF, while the CNH is positive against everything save for gold and USDCNH is pegged near cycle lows ahead to close the week. How much currency strength does China wish to signal?

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1350 – ECB Chief Economist Philip Lane to speak
  • 1400 – UK Bank of England’s Haskel to speak
  • 1500 – US Sep. JOLTS Job Openings
  • 1500 - US Nov. Preliminary University of Michigan Expectations

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 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.