FX Update: USD downtrend looking for fresh fuel, or else.

FX Update: USD downtrend looking for fresh fuel, or else.

Forex 5 minutes to read
John J. Hardy

Global Head of Macro Strategy

Summary:  The markets have pressed the pause button on the recent USD sell-off, as rising long US yields and rocky risk sentiment have offered some support and fundamental support for the move via widening yield spreads and other factors is not particularly in evidence. With the US CPI up today and Fed Vice Chair Clarida, perhaps the logjam can be broken for the USD bears, otherwise the risk of a reversal grows apace.


FX Trading focus: USD holding its breath on cross-fire of factors.

Note: lucky me, the next two workdays are holidays for those in the financial service sector in Denmark, so this column will return on Monday, May 17.

On Monday, I took a stab at a few ways the USD move lower could play out after the shocking payrolls miss for April printed on Friday, and the price action since then has shown that the moving parts of the market are moving somewhat in conflict with one another, frustrating any follow on move lower for the greenback. The chief argument for US bears was the adjustment lower in Fed expectation after the weak payrolls data, which allows Fed members to sit on their hands for longer. But offsetting this, we have US long yields climbing since friday, helping to support the US dollar, as has the recent downdraft in risk sentiment. That very combination of weak risk sentiment and weak long bonds is highly unusual, and very stabilizing if it extends much longer, i.e., sufficiently to take the US 10- and 30-year treasury yields back toward the cycle highs (which are still some way off (I would expect if that develops, the USD will continue to make a stand and refuse to roll-over. To get the US dollar sustaining more persistent downside, we need risk sentiment to stabilize and relative US real yields to head lower still relative to peers.

Today we a have the economic calendar offering up plenty of possible triggers for shifting the odds for or against the US dollar, with the April US CPI release, Fed Vice Chair Clarida out speaking and a 10-year US treasury auction up later in the day.

In Europe, strong euro move of late is trying to find some more support from rising EU yields after the German Bund (10-year German sovereign yield) closed at a new local cycle high yesterday just shy of the post-pandemic outbreak high of -15 basis points. As with the above comments, this level likely needs breaking together with a stabilization of risk sentiment to set us on to the path of 1.2350+ in EURUSD, otherwise we risk bogging back down in the range with a close back below 1.2050.

Elsewhere, the CAD move remains impressive, almost too impressive, and it may be up to Bank of Canada governor Macklem to raise the strong CAD as an issue at a speech tomorrow to reverse or slow the move lower in USDCAD. Note EURSEK pushing on the local 10.10 area support as the last area ahead of 10.00, a fairly strong performance for SEK, given the recent weak global risk sentiment, and partly driven by a slightly hotter than expected 2.5% YoY inflation print, which was 0.1% above expectations (as were the month-on-month at 0.3%). That’s negative 3% real yields for Swedish deposit holders, for anyone that is counting. Apparently not many are counting, as Hungary yesterday printed a blistering 5.1% headline CPI reading – with no anticipation of imminent rate rises from the central bank there (in part as the core reading was only 3.0%).

Chart: AUDUSD
AUDUSD is a decent proxy for this latest USD move lower as well as the ramp since the pandemic lows in key commodities prices that are drivers of Australia’s economy, including especially iron ore. On that latter note, one thing that has likely held back the Aussie in the recent cycle is China’s ban on importing thermal coal from Australia and some discussion that China may halt LNG imports as a next step after halting strategic economic dialog talks “indefinitely” recently. The weak US payrolls on Friday drove the pair above the prior 0.7800-25 resistance, but the price action has gone nowhere since, restrained chiefly by weak risk sentiment. Meanwhile, the RBA, while it has teased the July meeting as being in play for adjustments in guidance, remains in wait and see mode together with the Fed, so short term Australia-US yields spreads, and even 10-year yield spreads, for that matter, are not signaling huge support for a move higher – 10 years a bit more so recently than the 2-year swap spread, which mid-range from the early March peak (right near 0 basis point, currently 6 basis points…yawn.). Tactically, if the pair closes back below 0.7750, traders will have a bearish reversal on their hands, while we likely need a new jolt lower in the US dollar that shifts the fundamental indicators more sharply against the greenback (together with a shift in risk sentiment back higher) to get the bullish case back on track.

Source: Saxo Group

Table: FX Board of G-10+CNH trend evolution and strength
Not a lot of change to the recent developments since our last update, with the sterling move still strong, the AUD attempt to get something going however fading a bit, while CAD remains a standout on the trend strength.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Noting the AUDNZD and EURNOK flip-flopping hopelessly as a symptom of the near term struggle to get new momentum going in commodity-linked trades. The AUDUSD signal turned positive a full 20 session ago – at a daily closing price of…0.7728, only about a percent below the price as of this writing. Implied volatility is generally low and has remained surprisingly so through this latest bout of weak risk sentiment.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Apr. CPI
  • 1300 – US Fed Vice Chair Clarida (Voter) to speak on economic outlook
  • 1700 – US 10-year Treasury Auction
  • 2100 – New Zealand Apr. REINZ House Sales
  • 2301 – UK Apr. RICS House Price Balance

Quarterly Outlook

01 /

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • 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...
  • 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

  • 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...
  • 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 ...

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.