FX Update: USD will become a wrecking ball on further strength

Trading interest

• Maintaining EURJPY shorts with stops lowered to 118.50. Targeting 112.00
• Maintaining AUDNZD longs with stops higher now to below 1.0550, targeting 1.0700
• Putting back on USDCAD long position around 1.3300 with stops below 1.3230, for 1.3500

Risk sentiment weakened late yesterday after an attempt to put together a rally on hopes of a US-China trade thaw as Trump has made a series of friendly noises while the Chinese side has denied claims of “calls” at the weekend. After setting the yuan fix yesterday at 34 basis points weaker, the fix was only moved 4 basis points overnight and spot USDCNY/CNH is trading this morning slightly lower than yesterday’s close.

The almost sideways yuan fix may be behind the risk sentiment bounce overnight, though the USD continues to strengthen and will rapidly provide a countervailing force to further risk sentiment improvement if it rises further. We put back our focus on USDCAD upside after the nice snap-back from the sell-off and given where the fellow commodity dollars are struggling lower again against the big dollar. Already, the firmer USD has EM currencies on the defensive and credit spreads are headed in the wrong direction across EM. USDMXN has hit the 20 mark, and the China-leveraged exporter Malaysia is seeing its MYR at new lows since 2017 overnight.

Sterling is solidly bid as UK Prime Minister Boris Johnson is taking what FT calls a “narrow” approach in only asking the EU side to revisit the Irish backstop rather than a full reopening of existing deal. Meanwhile the UK opposition is in cahoots to do what it can do block a no Deal Brexit. The market is clearly hopeful that the worst case scenario for sterling will be avoided – but we’ll likely need a further breakthrough to get EURGBP down through the next key pivot area at 0.9000.

US treasury auctions this week so far proceeding with little to-do, with 5-year and 7-year notes on the block today and tomorrow. US yield curve inversion has become more profound, with the 2-10 slope this morning at -4 basis points.

Chart: USDCAD
Back to focusing on USDCAD after the nice snap-back from the sell-off that came after the bulls failed to take out the recent highs on multiple tries. A breakthrough opens the path to at least 1.3500 if not 1.3600+. CAD, because of the BoC’s relatively high policy rate is singularly vulnerable to any sign that the central bank is reluctant to find itself behind the curve in the pace of easing that other central banks have delivered. Next Wednesday’s Bank of Canada meeting is the next pivotal event risk for CAD.