FX Update: Strongest themes getting overdone?
Summary: The contrarian in me is making a bit of a fuss as recent market developments like JPY weakness and commodity currency strength look extremely extended for at least the short term. This week looks short on macro catalysts, but US yields pressing back higher could add some fresh energy and a pushback against the sharp relief rally in risk sentiment last week.
FX Trading focus: Market very extended in spots
As mentioned in Friday’s update, this market looks very extended on recent themes of commodity strength and JPY weakness. On Friday I pointed out that the Japanese Yen real effective exchange rate (adjusted for CPI inflation) is nearing its lowest ever from the 2015 time frame and this morning on the Saxo Market Call podcast I pointed out the remarkable advance in NOKJPY as an example of how extended that specific pair looks after ripping more than 10% higher in the space of less than two months. At the start of this week, we theoretically have fresh ammunition for JPY bears as US 5-year yields are rushing to new highs since just before the markets were cratered by the pandemic last year, while 10-year yields are back toward the recent cycle highs from last week. But note that 30-year US yields are still at the lower end of the range and an interesting counterpoint as the US yield curve from 5 to 30 years flattens aggressively. Certainly, USDJPY has reached a major chart point by having risen to the 114.50 area that provided resistance for much of 2017 and even parts of 2018.
Elsewhere, the kiwi got a big boost overnight on a very hot CPI reading – more in the NZDUSD chart below. And ECB President Lagarde at the weekend still wants to call inflation risks transitory, while Bank of England Governor Bailey said the bank “will have to act” on rates to counter inflation, further boosting short UK rates after a huge rise last week. He also said, by the way, that central bank policy doesn’t have the tools to deal with supply chain issues and that he still viewed the recent rise in inflation as temporary.
Chart: NZDUSD
After the very hot New Zealand Q3 CPI reading of 2.2% QoQ in particular (vs. +1.5% expected) and +4.9% year-on-year, the market expectations overnight for the November 24 RBNZ meeting ripped higher, taking expectations to about 50/50 of a 50 basis point move at that meeting. At the same time, we have covid restrictions in Auckland extended for another two weeks, though this doesn’t seem to affect RBNZ expectations. NZDUSD rallied sharply to the 200-day moving average and 0.7100 area before retreating on weak risk sentiment overnight, with the latter likely in control for whether the pair can break out of the choppy downtrend of the last many months.
The macro calendar for the week ahead is fairly quiet, with interesting bits and pieces, however.
Today, we get a look at Poland’s Sep. Core CPI reading, the latest US Industrial Production data point and one of the more leading indicators on the US housing market, the NAHB Housing Market survey, which has remained strong relative to pre-pandemic years, but is well off the peak readings of late last year.
Tuesday: We have Hungary’s rate decision up tomorrow after the central bank surprised with a smaller than expected the last time around and with EURHUF poised near the top of the range. By the way, a challenger, Peter Marki-Zay, won a primary election to face off against Viktor Orban under the banner of a united opposition in the spring 2022 election. Polls shows the opposition is in a dead heat with Orban’s Fidesz, which has dominated Hungary’s politics for more than a decade and has the country in hot water with the EU over rule-of-law issues. The prospects for a transfer of leadership could have considerable influence on HUF in coming months of the polls begin to tilt in favour of the opposition. Also up tomorrow are US September Housing Starts and Building Permits.
Wednesday: China to make a decision on rates, with no signs that the PBOC is climbing down from its tight monetary policy. The UK CPI is up as the last inflation reading ahead of the November 4th BoE meeting, with most of a 25-bp rate hike priced in as of today and after Bailey comments at the weekend (see above). We also have the US Fed’s Beige Book, where the anecdotal reporting on the degree of labour shortages and supply chain issues could make for interesting reading. Canada’s September CPI is up as the market is pricing BoC liftoff for as early as January of next year, with higher odds at the April meeting.
Friday: UK Sep. Retail Sales and the global flash October PMI’s, including those that get the most attention from the market in Europe.
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: Market very extended in spots
As mentioned in Friday’s update, this market looks very extended on recent themes of commodity strength and JPY weakness. On Friday I pointed out that the Japanese Yen real effective exchange rate (adjusted for CPI inflation) is nearing its lowest ever from the 2015 time frame and this morning on the Saxo Market Call podcast I pointed out the remarkable advance in NOKJPY as an example of how extended that specific pair looks after ripping more than 10% higher in the space of less than two months. At the start of this week, we theoretically have fresh ammunition for JPY bears as US 5-year yields are rushing to new highs since just before the markets were cratered by the pandemic last year, while 10-year yields are back toward the recent cycle highs from last week. But note that 30-year US yields are still at the lower end of the range and an interesting counterpoint as the US yield curve from 5 to 30 years flattens aggressively. Certainly, USDJPY has reached a major chart point by having risen to the 114.50 area that provided resistance for much of 2017 and even parts of 2018.
Elsewhere, the kiwi got a big boost overnight on a very hot CPI reading – more in the NZDUSD chart below. And ECB President Lagarde at the weekend still wants to call inflation risks transitory, while Bank of England Governor Bailey said the bank “will have to act” on rates to counter inflation, further boosting short UK rates after a huge rise last week. He also said, by the way, that central bank policy doesn’t have the tools to deal with supply chain issues and that he still viewed the recent rise in inflation as temporary.
Chart: NZDUSD
After the very hot New Zealand Q3 CPI reading of 2.2% QoQ in particular (vs. +1.5% expected) and +4.9% year-on-year, the market expectations overnight for the November 24 RBNZ meeting ripped higher, taking expectations to about 50/50 of a 50 basis point move at that meeting. At the same time, we have covid restrictions in Auckland extended for another two weeks, though this doesn’t seem to affect RBNZ expectations. NZDUSD rallied sharply to the 200-day moving average and 0.7100 area before retreating on weak risk sentiment overnight, with the latter likely in control for whether the pair can break out of the choppy downtrend of the last many months.
The macro calendar for the week ahead is fairly quiet, with interesting bits and pieces, however.
Today, we get a look at Poland’s Sep. Core CPI reading, the latest US Industrial Production data point and one of the more leading indicators on the US housing market, the NAHB Housing Market survey, which has remained strong relative to pre-pandemic years, but is well off the peak readings of late last year.
Tuesday: We have Hungary’s rate decision up tomorrow after the central bank surprised with a smaller than expected the last time around and with EURHUF poised near the top of the range. By the way, a challenger, Peter Marki-Zay, won a primary election to face off against Viktor Orban under the banner of a united opposition in the spring 2022 election. Polls shows the opposition is in a dead heat with Orban’s Fidesz, which has dominated Hungary’s politics for more than a decade and has the country in hot water with the EU over rule-of-law issues. The prospects for a transfer of leadership could have considerable influence on HUF in coming months of the polls begin to tilt in favour of the opposition. Also up tomorrow are US September Housing Starts and Building Permits.
Wednesday: China to make a decision on rates, with no signs that the PBOC is climbing down from its tight monetary policy. The UK CPI is up as the last inflation reading ahead of the November 4th BoE meeting, with most of a 25-bp rate hike priced in as of today and after Bailey comments at the weekend (see above). We also have the US Fed’s Beige Book, where the anecdotal reporting on the degree of labour shortages and supply chain issues could make for interesting reading. Canada’s September CPI is up as the market is pricing BoC liftoff for as early as January of next year, with higher odds at the April meeting.
Friday: UK Sep. Retail Sales and the global flash October PMI’s, including those that get the most attention from the market in Europe.
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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