FX Update: The US dollar is trying to break down again
Summary: The US dollar index finds itself close to the lows of the year this morning as EURUSD posted a new high and the USD was offered almost across the board this morning. The move may be able to extend here with little fuss if the US treasury market stays calm and the FOMC minutes tomorrow evening fail to shift the view on the Fed. Elsewhere, Hungary and Chile are making rare splashes in our daily comments today.
FX Trading focus: USD tilting over the edge… in places.
The US dollar is tilting lower again, with GBPUSD and especially EURUSD the major pairs driving the impression of a weak US dollar here, as we have commented recently on the breakout higher in EU yields, particularly the Bund yield. With the ECB having already promised to front-run its asset purchases (a built in taper, dare one say?) and with the services sectors set for a bounceback and the economy ready to receive a tardy stimulus cherry on top, the ECB will have a hard time cobbling together a coherent message on the need for further support for the economy at the June meeting, although if EURUSD is above 1.2350, they would likely.
It all looks pretty straightforward for USD bears at the moment, with wind at the back in terms of Fed expectations (the Fed priced near the lows of the cycle in terms of the lift-off timing for their first rate hike despite the extremely hot April CPI print of last week and rising breakevens that are driving US real yields back to the recent lows), but we continue to keep a nervous eye on the longer end of the US yield curve – any new volatility there combined with the positive correlation we have noted recently in US treasury and equity prices could suddenly turn the tables on the situation. As I noted on Friday as well, the ugly chop-fest in many of the USD crosses has made life difficult for both trend and pattern traders in recent days, particularly in the likes of AUDUSD.
Speaking of AUDUSD (and especially egregious chop-fests), the RBA minutes out overnight remind us that the commodities market and investors flows are going to have to do all of the heavy lifting for supporting any new AUD rally as the RBA is clearly looking at employment and equally wages in judging its policy shifts. On that note, we have Q1 wage data up tonight (with 1.4% YoY expected, a significant explainer of the RBA's reluctance to turn guidance more hawkish) and the April jobs report is up on Thursday.
Chart: GBPUSD
GBPUSD has traded today above its highest daily close and just below the intraday high just shy of 1.4250 reached back in late February. This after a near perfect test of the 1.4000 support just a couple of sessions ago, the critical support line in the sand, although bulls will want this move to hold above perhaps 1.4150 for a follow on rally to perhaps the post-Brexit vote high of 1.4375 initially, even if the first significant psychological level higher is more like 1.5000 – which looks a bit of a stretch for me to call just yet – we’ll start with 1.4500 for starters if this trend holds.
HUF goes vertical on euro optimism and Hungarian central bank guidance suprise. When the outlook is looking more positive for Europe, we would expect satellite currencies to perform well, and that has been the case recently for CEE currencies if less so for the rangebound SEK and NOK. But the action in HUF found an entirely new gear yesterday as the Hungarian central bank surprised with a comment that the policy rate will have to rise to counter inflation and possibly as soon as at next month’s meeting. The market seemed to have smelled some of this coming in the days prior to this, as 2-year HUF swaps had already risen 10-15 basis points, but they tacked on another 13 basis points yesterday on this surprise, and the HUF rose over a percent versus the EUR, back to the lowest level in EURHUF since August of last year. The move makes sense, given the hot 5.1% inflation reading for April in Hungary, and if risk sentiment stays elevated in Europe, there is plenty more room for HUF upside, even if I am skeptical on the ability for HUF to trend higher for more than 2-4% against the euro for now.
CLP lower on constitutional assembly vote – a vote held at the weekend in Chile to provide the constituents for a new constitutional assembly that will draw up a new constitution to replace the one from the Pinochet era, one that is so overwhelmingly left-leaning, that the left bloc won’t even have to face the risk of a veto from the opposition. CLP was already underperforming copper (Chile is world’s largest producer) as the fear was already established of extremely high royalty payments and steeply progressive taxes on big mining companies that would provide little incentive to expand production above a certain price for copper. The development saw CLP gap nearly 3% lower to start the week yesterday and the Chilean stock market was down over 9% yesterday.
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 tilting over the edge… in places.
The US dollar is tilting lower again, with GBPUSD and especially EURUSD the major pairs driving the impression of a weak US dollar here, as we have commented recently on the breakout higher in EU yields, particularly the Bund yield. With the ECB having already promised to front-run its asset purchases (a built in taper, dare one say?) and with the services sectors set for a bounceback and the economy ready to receive a tardy stimulus cherry on top, the ECB will have a hard time cobbling together a coherent message on the need for further support for the economy at the June meeting, although if EURUSD is above 1.2350, they would likely.
It all looks pretty straightforward for USD bears at the moment, with wind at the back in terms of Fed expectations (the Fed priced near the lows of the cycle in terms of the lift-off timing for their first rate hike despite the extremely hot April CPI print of last week and rising breakevens that are driving US real yields back to the recent lows), but we continue to keep a nervous eye on the longer end of the US yield curve – any new volatility there combined with the positive correlation we have noted recently in US treasury and equity prices could suddenly turn the tables on the situation. As I noted on Friday as well, the ugly chop-fest in many of the USD crosses has made life difficult for both trend and pattern traders in recent days, particularly in the likes of AUDUSD.
Speaking of AUDUSD (and especially egregious chop-fests), the RBA minutes out overnight remind us that the commodities market and investors flows are going to have to do all of the heavy lifting for supporting any new AUD rally as the RBA is clearly looking at employment and equally wages in judging its policy shifts. On that note, we have Q1 wage data up tonight (with 1.4% YoY expected, a significant explainer of the RBA's reluctance to turn guidance more hawkish) and the April jobs report is up on Thursday.
Chart: GBPUSD
GBPUSD has traded today above its highest daily close and just below the intraday high just shy of 1.4250 reached back in late February. This after a near perfect test of the 1.4000 support just a couple of sessions ago, the critical support line in the sand, although bulls will want this move to hold above perhaps 1.4150 for a follow on rally to perhaps the post-Brexit vote high of 1.4375 initially, even if the first significant psychological level higher is more like 1.5000 – which looks a bit of a stretch for me to call just yet – we’ll start with 1.4500 for starters if this trend holds.
HUF goes vertical on euro optimism and Hungarian central bank guidance suprise. When the outlook is looking more positive for Europe, we would expect satellite currencies to perform well, and that has been the case recently for CEE currencies if less so for the rangebound SEK and NOK. But the action in HUF found an entirely new gear yesterday as the Hungarian central bank surprised with a comment that the policy rate will have to rise to counter inflation and possibly as soon as at next month’s meeting. The market seemed to have smelled some of this coming in the days prior to this, as 2-year HUF swaps had already risen 10-15 basis points, but they tacked on another 13 basis points yesterday on this surprise, and the HUF rose over a percent versus the EUR, back to the lowest level in EURHUF since August of last year. The move makes sense, given the hot 5.1% inflation reading for April in Hungary, and if risk sentiment stays elevated in Europe, there is plenty more room for HUF upside, even if I am skeptical on the ability for HUF to trend higher for more than 2-4% against the euro for now.
CLP lower on constitutional assembly vote – a vote held at the weekend in Chile to provide the constituents for a new constitutional assembly that will draw up a new constitution to replace the one from the Pinochet era, one that is so overwhelmingly left-leaning, that the left bloc won’t even have to face the risk of a veto from the opposition. CLP was already underperforming copper (Chile is world’s largest producer) as the fear was already established of extremely high royalty payments and steeply progressive taxes on big mining companies that would provide little incentive to expand production above a certain price for copper. The development saw CLP gap nearly 3% lower to start the week yesterday and the Chilean stock market was down over 9% yesterday.
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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