FX Update: USD finds new gear on risk aversion
Summary: The consolidation in the US dollar bear trend continues as global markets start the week on wobbly footing on some of the usual suspects returning and grabbing the spotlight, from Covid-19 concerns looking more global again, to longer term concerns on the US-China relationship and maybe even on the implications of Trump finding himself locked out of his social media platforms.
FX Trading focus:
USD: benign consolidation – unless…
The US dollar continues to back up, adding to its strength since mid-week last week. The initial pull higher was on the back of the break higher in long US yields that we gave prominent coverage last week, with this latest addition to the greenback’s resurgence on a bit of risk aversion to start the week. There are multiple angles on what may be driving a sudden risk off move, with the most straightforward simply a heavy dose of negative Covid-19 news, as the super-contagious variant could win the initial part of the sprint to vaccinate, and where previous major winners in fighting the virus are dealing with record levels (Japan) and with a sufficiently serious new outbreak to require the total shutdown of a major city (Shijiazhuang in China). Regarding that super-spreading variant plaguing the UK, it is rapidly spreading elsewhere and in Denmark, to take an example, it is expected to become the dominant strain of the virus by mid-February, frustrating any hopes that activity can normalize any time soon.
The negative tone today is quite a contrast with Friday, where equities surged to a new record despite US December jobs data coming in weak (-140k on December non-farm payrolls and only weaker participation driving the reported drop in the unemployment rate). Sure, it is no surprise to see major losses in the hospitality and other service jobs, but the market’s apparent trust that all will be well remains jarring relative to the news flow.
I suspect another potential source of unease could be the shutdown of Donald Trump by social media companies and the uncertainty on the risk of further unrest that could ultimately become more disruptive. The mob occupying Capitol Hill last week somehow failed to have any initial effect, but any aggravation or spreading of this phenomenon, whether in Washington DC or across the country could change the market’s stance on the issue. As counterintuitive as it sounds, US unrest could support the US dollar via weak risk sentiment. Specifically, pro-Trump groups are encouraging demonstrations on January 17 – this Sunday – and there is dark talk that some would like to show up armed for the occasion.
Finally, the US-China relationship is a credible source of potential long-term unease and uncertainty, just as headlines linked to Trump huffing and puffing on trade issues serially pumped and dumped the market for the year prior to the Covid-19 pandemic and the trade deal that was finally signed almost a year ago today. It seems that the outgoing Trump administration is laying down all manner of anti-China landmines that the incoming Biden administration will have to deal with from day one and seemed designed such that any step back from them can be used by the Republican opposition as proof of a “soft on China” stance.
Looking across the G-10 currencies, besides the stronger US dollar, the most interesting developments are the pull higher in USDJPY, where 104.50-105.00 is the area where this consolidation would become something more. For sterling, GBPUSD is arguably already in trouble on any close back below the huge 1.3500 level. Other USD pairs are less close to levels that suggest a meaningful challenge to the bear trend, although that could change suddenly on an unanticipated deleveraging event of considerable scale. We use EURUSD, as noted below, as the key pair for assessing the status of the USD trend. Most other currencies are trading according to their position in the risk correlation hierarchy, although SEK is an interesting holdout in relative terms, especially versus NOK (NOKSEK longs were likely a recently popular trade on the oil resurgence).
Chart: EURUSD
The status for EURUSD is the anchor for the status of the USD sell-off, and still has plenty of room to consolidate lower without upsetting the USD bears’ apple cart. The next level of note lower is perhaps the 38.2% retracement area around 1.2065, followed by the important 1.2000 level, which looks the existential level for USD bears, although arguably the 1.1888 level, the 61.8% retracement of the last large rally wave, is the real “uncle point” that reverses the trend – it’s also below the 100-day moving average now. The straightforward approach for USD bears will be to buy half a position on dips below 1.2100 with initial stops well below 1.2050 and wait for a pattern reversal suggesting that support is coming in before establishing a full position.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank 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. This content is not intended to and does not change or expand on the execution-only service. 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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.
FX Trading focus:
USD: benign consolidation – unless…
The US dollar continues to back up, adding to its strength since mid-week last week. The initial pull higher was on the back of the break higher in long US yields that we gave prominent coverage last week, with this latest addition to the greenback’s resurgence on a bit of risk aversion to start the week. There are multiple angles on what may be driving a sudden risk off move, with the most straightforward simply a heavy dose of negative Covid-19 news, as the super-contagious variant could win the initial part of the sprint to vaccinate, and where previous major winners in fighting the virus are dealing with record levels (Japan) and with a sufficiently serious new outbreak to require the total shutdown of a major city (Shijiazhuang in China). Regarding that super-spreading variant plaguing the UK, it is rapidly spreading elsewhere and in Denmark, to take an example, it is expected to become the dominant strain of the virus by mid-February, frustrating any hopes that activity can normalize any time soon.
The negative tone today is quite a contrast with Friday, where equities surged to a new record despite US December jobs data coming in weak (-140k on December non-farm payrolls and only weaker participation driving the reported drop in the unemployment rate). Sure, it is no surprise to see major losses in the hospitality and other service jobs, but the market’s apparent trust that all will be well remains jarring relative to the news flow.
I suspect another potential source of unease could be the shutdown of Donald Trump by social media companies and the uncertainty on the risk of further unrest that could ultimately become more disruptive. The mob occupying Capitol Hill last week somehow failed to have any initial effect, but any aggravation or spreading of this phenomenon, whether in Washington DC or across the country could change the market’s stance on the issue. As counterintuitive as it sounds, US unrest could support the US dollar via weak risk sentiment. Specifically, pro-Trump groups are encouraging demonstrations on January 17 – this Sunday – and there is dark talk that some would like to show up armed for the occasion.
Finally, the US-China relationship is a credible source of potential long-term unease and uncertainty, just as headlines linked to Trump huffing and puffing on trade issues serially pumped and dumped the market for the year prior to the Covid-19 pandemic and the trade deal that was finally signed almost a year ago today. It seems that the outgoing Trump administration is laying down all manner of anti-China landmines that the incoming Biden administration will have to deal with from day one and seemed designed such that any step back from them can be used by the Republican opposition as proof of a “soft on China” stance.
Looking across the G-10 currencies, besides the stronger US dollar, the most interesting developments are the pull higher in USDJPY, where 104.50-105.00 is the area where this consolidation would become something more. For sterling, GBPUSD is arguably already in trouble on any close back below the huge 1.3500 level. Other USD pairs are less close to levels that suggest a meaningful challenge to the bear trend, although that could change suddenly on an unanticipated deleveraging event of considerable scale. We use EURUSD, as noted below, as the key pair for assessing the status of the USD trend. Most other currencies are trading according to their position in the risk correlation hierarchy, although SEK is an interesting holdout in relative terms, especially versus NOK (NOKSEK longs were likely a recently popular trade on the oil resurgence).
Chart: EURUSD
The status for EURUSD is the anchor for the status of the USD sell-off, and still has plenty of room to consolidate lower without upsetting the USD bears’ apple cart. The next level of note lower is perhaps the 38.2% retracement area around 1.2065, followed by the important 1.2000 level, which looks the existential level for USD bears, although arguably the 1.1888 level, the 61.8% retracement of the last large rally wave, is the real “uncle point” that reverses the trend – it’s also below the 100-day moving average now. The straightforward approach for USD bears will be to buy half a position on dips below 1.2100 with initial stops well below 1.2050 and wait for a pattern reversal suggesting that support is coming in before establishing a full position.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank 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. This content is not intended to and does not change or expand on the execution-only service. 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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.
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