Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
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Waiting for traders to kick USD over the edge
John J. Hardy
Global Head of Macro Strategy
Summary: The dollar appears poised on a precipice as risk sentiment in emerging market assets rebounds. We look to EURUSD and NZDUSD as potential bellwether pairs for the dollar.
Yesterday we touted the market’s resilience to higher rates and the possible implications for further USD and JPY weakness if we could restart the policy convergence theme. It was a bit too early to reheat this theme, apparently, as markets downshifted back into neutral on the day even as rates marched higher. Today sees traders having another go, as traditional risky currencies are champing at the bit for further gains, led by the commodity dollars and emerging market FX.
As a sign of strong sentiment for risk, the South African rand has pulled sharply stronger even ahead of the South African Reserve Bank’s announcement and the Brazilian real managed a stronger close despite the lack of a rate hike, though the central bank there did sound a cautionary note on inflation risks and mention of economic policy after the upcoming presidential election.
UK Prime Minister May’s objection to the European Union’s proposed Irish border solution saw sterling ending its run higher yesterday, catching traders on the wrong foot after the UK earlier in the session had printed a much stronger than expected CPI number. The news flow could just as easily switch back to the positive side as EU leaders will likely be moved to extend themselves enough to at least try to avoid a debacle in the UK parliamentary vote. That latter vote is the higher hurdle than whether the UK government and the EU can come to terms.
Chart: NZDUSD
A minor USD pair, but the swing higher in NZD rates picked up pace overnight on a positive GDP print and the NZDUSD pairs is now more clearly through the local upside pivots, possibly leading to a bigger squeeze if the next layers of resistance give way – especially the 0.6700 area, which unleashes the risk to bigger targets like the 38.2% of the entire sell-off sequence from the 0.7400+ top near the otherwise also pivotal 0.6850 area.
As a sign of strong sentiment for risk, the South African rand has pulled sharply stronger even ahead of the South African Reserve Bank’s announcement and the Brazilian real managed a stronger close despite the lack of a rate hike, though the central bank there did sound a cautionary note on inflation risks and mention of economic policy after the upcoming presidential election.
UK Prime Minister May’s objection to the European Union’s proposed Irish border solution saw sterling ending its run higher yesterday, catching traders on the wrong foot after the UK earlier in the session had printed a much stronger than expected CPI number. The news flow could just as easily switch back to the positive side as EU leaders will likely be moved to extend themselves enough to at least try to avoid a debacle in the UK parliamentary vote. That latter vote is the higher hurdle than whether the UK government and the EU can come to terms.
Chart: NZDUSD
A minor USD pair, but the swing higher in NZD rates picked up pace overnight on a positive GDP print and the NZDUSD pairs is now more clearly through the local upside pivots, possibly leading to a bigger squeeze if the next layers of resistance give way – especially the 0.6700 area, which unleashes the risk to bigger targets like the 38.2% of the entire sell-off sequence from the 0.7400+ top near the otherwise also pivotal 0.6850 area.
The G10 rundown
USD – the US dollar remains on its back foot against the risky currencies, especially across EM, but needs to find itself thoroughly under the euro’s thumb to call this a broader USD rout – EURUSD above 1.1700-50 zone and sticking a daily close above there would be a start.
EUR – the singles currency trading indifferently as the market focus is on currencies that offer higher beta to risk but focus could swivel back if EURUSD can manage a break above the recent trading range below 1.1750.
JPY – the upside break in USDJPY not looking terribly convincing, given both currencies are weak here – if the Bank of Japan is seen as holding the line on its commitment to yield-curve control, the pair may continue to chug higher as long as longer US yields do likewise.
GBP – sterling in for a brief trainwreck yesterday on the UK CPI-inspired surge before the Brexit deadlock news saw a sharp retreat. Trading could remain headline plagued, with more interest in GBPUSD building if the USD remains weak and the Brexit newsflow flashes positive.
CHF – franc sellers sinking their teeth into the rising global bond yields theme yesterday before the Brexit hiccup derailed GBPCHF longs for the moment. Still, constructive on further CHF weakness as the SNB stayed true to form today and fails to make any indication of a policy shift, saying that the franc remains overvalued.
AUD – the backdrop of positive risk sentiment and China’s assurances to not devalue the RMB providing a boost for the Aussie as AUDUSD has broken above the 0.7200-50 zone and put a squeeze into play that takes on potential bigger proportions if the descending channel line – not very far away and falling with each session – is taken out to the upside.
CAD – Canada and the US struggling to agree to new trade deal terms and the clock is winding down if Mexico’s lame duck president is to sign the deal. We have USDCAD below the 1.3000 pivot area, but there are a few shreds of range support left and the important CPI data up on Friday.
NZD – a tardy Q2 print (Q4 starts in 10 days!) comes in slightly above expectations, but not sufficiently so to prompt a serious attempt at warming rate hike implications from King Dove Orr. Still, the short end of the NZ yield curve has picked up and NZDUSD is pulling through the upside pivot zone – may be more legs on this move.
SEK – one of the few good trends going at the moment and there may be plenty of further room for SEK strength – though the NOK mishap today could distract for a session or two.. Looking at 10.20-25 first in EURSEK and possibly all the way to 10.00-10.10.
NOK – NOK weakening hard as Norges Bank hikes as expected, but oddly slightly lowers its policy forecasts for the near future and keeping them largely unchanged for further out. Given the very NOK-supportive backdrop (risk on and Brent pressing on $80/barrel), the move higher may not extend much and we note the key 9.60 area 200-day moving average.
USD – the US dollar remains on its back foot against the risky currencies, especially across EM, but needs to find itself thoroughly under the euro’s thumb to call this a broader USD rout – EURUSD above 1.1700-50 zone and sticking a daily close above there would be a start.
EUR – the singles currency trading indifferently as the market focus is on currencies that offer higher beta to risk but focus could swivel back if EURUSD can manage a break above the recent trading range below 1.1750.
JPY – the upside break in USDJPY not looking terribly convincing, given both currencies are weak here – if the Bank of Japan is seen as holding the line on its commitment to yield-curve control, the pair may continue to chug higher as long as longer US yields do likewise.
GBP – sterling in for a brief trainwreck yesterday on the UK CPI-inspired surge before the Brexit deadlock news saw a sharp retreat. Trading could remain headline plagued, with more interest in GBPUSD building if the USD remains weak and the Brexit newsflow flashes positive.
CHF – franc sellers sinking their teeth into the rising global bond yields theme yesterday before the Brexit hiccup derailed GBPCHF longs for the moment. Still, constructive on further CHF weakness as the SNB stayed true to form today and fails to make any indication of a policy shift, saying that the franc remains overvalued.
AUD – the backdrop of positive risk sentiment and China’s assurances to not devalue the RMB providing a boost for the Aussie as AUDUSD has broken above the 0.7200-50 zone and put a squeeze into play that takes on potential bigger proportions if the descending channel line – not very far away and falling with each session – is taken out to the upside.
CAD – Canada and the US struggling to agree to new trade deal terms and the clock is winding down if Mexico’s lame duck president is to sign the deal. We have USDCAD below the 1.3000 pivot area, but there are a few shreds of range support left and the important CPI data up on Friday.
NZD – a tardy Q2 print (Q4 starts in 10 days!) comes in slightly above expectations, but not sufficiently so to prompt a serious attempt at warming rate hike implications from King Dove Orr. Still, the short end of the NZ yield curve has picked up and NZDUSD is pulling through the upside pivot zone – may be more legs on this move.
SEK – one of the few good trends going at the moment and there may be plenty of further room for SEK strength – though the NOK mishap today could distract for a session or two.. Looking at 10.20-25 first in EURSEK and possibly all the way to 10.00-10.10.
NOK – NOK weakening hard as Norges Bank hikes as expected, but oddly slightly lowers its policy forecasts for the near future and keeping them largely unchanged for further out. Given the very NOK-supportive backdrop (risk on and Brent pressing on $80/barrel), the move higher may not extend much and we note the key 9.60 area 200-day moving average.
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