Chief Macro Strategist
Summary: Outside of interesting JPY and CHF moves, FX is in a tight holding pattern just as the powerful rise in global yields has paused. The market seems to be casting about for evidence on how aggressively recession risks are building and whether these should be celebrated because it will lower the path of central bank tightening, or feared because traditionally the worst bear markets for risk unfold as central banks are actually in easing mode to catch up with a failing economy.
FX Trading focus: JPY and CHF stretch in opposite directions. Quarter-end and next week’s calendar the next test for whether volatility will revive this summer.
While CHF and JPY moves are remarkable here, USD traders are grasping at straws for the next significant event risk to spark a new move as the main driver of volatility over the last few months, global bonds, have shifted into range trading territory. More thoughts on that below. For now, the focus within G10 is on the renewed pressure on the Japanese yen, even as the chief coincident indicator for JPY, long US Treasury yields, are fairly quiet, if rising again within the range. Some JPY crosses are moving close to or beyond recent ranges – consider EURJPY as discussed below. And really, while the volatility across FX is quite muted in USD pairs, the Swiss franc story is still alive and could impress further if EURCHF moves to test parity. Meanwhile, the weak JPY together with that powerful SNB shift to tightening at the June 16 meeting has set the CHFJPY to new modern-era highs save for those posted during the illiquidity mess intraday when the SNB removed the EURCHF floor back in early 2015.
Elsewhere, a pair like GBPUSD shows the market’s indecisiveness here: GBPUSD has posted a remarkable string of six days with almost no daily change in the closing price level, even as intraday volatility hasn’t been extremely quiet over the last week. Technically, the pair is poised in a pivotal area after collapsing to 1.2000, a massive long-term chart level, with the recovery since taking it the pivot zone ahead of 1.2400-50, which it needs to vault to suggest a bullish reversal of the last sell-off leg. Of course, the pause in the price action already helps unwind downside momentum but increases uncertainty. EURGBP is in a similar state – having posted a bearish reversal earlier this month, but one that has remained unconfirmed since, such that the technical relevance of that reversal has faded. Today, EURUSD had yet another go at the 1.0600 level – one that failed, but let’s have a look on the Friday close where that pair stands.
Chart: EURJPY
EURJPY is pushing on the upside resistance above 144.00 today as EU core yields rose sharply again and are closer to their respective top than, for example, US yields. As long as the ECB insists on rearranging its balance sheet to prevent peripheral yields from rising, it means the market will have to absorb far more core EU bonds, and a higher yield of those bonds. On the one hand, this is euro-supportive versus the yen from a yield-spread perspective, given the Bank of Japan’s cap on yields out to 10-year JGB’s, but at some point, existential concerns could creep back into the picture for the EU. If yields are set to rise again everywhere, EURJPY and other crosses could be set for further aggravated gains until the Bank of Japan is forced to go down in flames and relent on its policy, sooner or later (with the risk of violent bouts of ministry of finance interventions, verbal and actual).
Today’s US Consumer Confidence survey is an interesting one to watch, as discussed in this morning’s Saxo Market Call podcast, as the tension between inflation (high levels extremely confidence negative) and employment (good labor market conditions key for confidence) plays out. Traditionally, the confidence survey and the unemployment rate show a very tight correlation, with changes of trend in confidence leading those of unemployment. But this Conference Board survey having dropped from 128 to 106 (with 100 expected today) since June of last year even as the US unemployment rate has fallen to and stabilized near record lows is the most divergent episode in the modern era. The weekly jobless claims suggest some softening in the US labor market and we will watch all data labor market related for a sense of when the Fed might shift back to its dual mandate stance form its current single-minded focus on inflation.
Otherwise, the focus is on whether the always tardy PCE inflation release on Thursday (because it comes nearly three weeks after the official CPI data point for the same month) ruffles any feathers, but more interestingly, whether the ensuing start to a new quarter animates market volatility again, especially as we get the key data points of the month through next Friday, including the ISM Manufacturing this Friday (some very weak regional surveys like yesterday’s Dallas Fed survey suggest downside risk, and the preliminary S&P Global US Manufacturing PMI dropped to 52.4 – a sub-50 ISM manufacturing is a risk soon), the ISM Services next Tuesday and employment and earnings data next Friday.
A small subplot I am curious to watch the impact of the Riksbank decision this week as the bank is nearly certain to hike rates 50 basis points to take the policy level to +0.75%. Will EURSEK only trade as a function of the EU economic outlook and risk sentiment or doesn’t the SEK deserve a bit more respect versus the single currency on the bank going a long way to claw back some credibility?
Table: FX Board of G10 and CNH trend evolution and strength.
The Swiss franc rally remains the most prominent trend and watching the parity level in EURCHF to see if it can hit a new gear, while USDCHF is also a focus in the 0.9500-50 area. Elsewhere, JPY downside is the second most intense trend, with other currencies in muddled cross-currents.
Table: FX Board Trend Scoreboard for individual pairs.
The AUDNZD new downtrend attempt getting checked heavily today, but chart very rangebound there. Elsewhere, the EURUSD “trend” is non-existent as we keep bumping up against 1.0600 and await important data and calendar catalysts in coming days. Watching SEK crosses over Thursday’s Riksbank meeting this week.
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