FX Update: Mounting forward concerns on US fiscal
Summary: The US dollar is not making any broader statement here as treasuries jump back and forth and EURUSD dances on the edge of critical resistance, mostly driven by recent Euro strength rather than anything USD-related. Fresh developments are adding to the risks for a reduced fiscal impulse from the US in coming months, with possibly negative implications for the US dollar.
FX Trading focus: Forward US fiscal concerns. Now or later for USD shorts? Sterling value?
EURUSD and USDJPY both teased key USD support levels yesterday and overnight, but the US dollar is not the chief story here, rather the surge in the Euro has been doing most of the heavy lifting in the case of EURUSD and the same for JPY in USDJPY’s recent correction. In fact, in recent sessions, it seems that the polar opposites in this market are the most negative yielders, which have seen significant support from the recent consolidation in bond yields, and commodity-based FX on the weak side as the pause in the reflationary commodity trade has weighed on sentiment there. The most interesting technical situations, in any case, are to be found in some of the commodity currencies, versus the USD, JPY and even EUR, as highlighted in this morning’s Saxo Market Call podcast. EURAUD has made a bid though the interesting 1.5600+ area resistance today – need to see the weekly close there and follow-up action last week. Some thoughts on USDCAD below. Meanwhile, the JPY rally attempt has been a choppy affair to say the least, with two way action since yesterday.
Also on the pod, I discussed a new development that is a strong concern for the forward potential for more fiscal outlays from the US, including Biden’s proposed infrastructure bill – and that is Democratic Senator Joe Manchin’s avowal yesterday to not support the elimination of the Senate filibuster nor any further reconciliation-based major spending until a more serious effort has been mounted to negotiate with Republicans. Manchin has based this position on seeing the January 6 Capitol Hill riots and has the reasonable point of view that it is unproductive to rule on pure party votes at every turn. More practically, the Senator is an unusually conservative Democrat that represents one of the most Trump/Republican leaning states and is up for election in November of next year. Senator Manchin really is a king-maker and can keep the entire fiscal potential of the Biden administration on hold as long as he sticks to his guns – which he will probably only do up to a point, certainly on infrastructure, where has been a loud proponent of generous spending. But until then, what does the second half of this year look like if we have descended into political gridlock with no real prospects for fresh powerful fiscal impulses? Possibly not good for the US dollar if this means yields calm further and the Fed revs up fresh dovish forward guidance. This Manchin story comes on top of the other concerns noted yesterday: the Biden administration intent to try to offset infrastructure spending with new taxes and the Yellen global minimum tax idea.
Broadly speaking, I am torn between waiting for another bout of consolidation in the popular reflationary trades (CAD, NZD, AUD and even NOK a bit lower) and only enter USD shorts only then or whether that time is already now, given that we have seen almost three weeks of indecision since the USD took its initial stand against these currencies. In terms of expressing a view through options in the US dollar, GBPUSD looks interesting here for longer term upside calls as a start, and maybe even tactically in spot on a strong close today above 1.3750 after teasing below tactical support. And EURGBP shorts are a far more interesting proposition here as well after the steep back-up, perhaps with a stop somewhere above 0.8750.
Chart: USDCAD
An example of the focus on commodity FX versus the G3, we have USDCAD at an interesting crossroads here ahead of the March jobs report from Canada. The March Ivey PMI just missed a record reading at a stunning 72.9, imitating the strength in the ISM surveys south of the border recently, even as Canada’s vaccination effort badly lags that of the US. But a bit of trend exhaustion and crude oil bogged down into a range has seen an interesting recent reversal in USDCAD after a poke all the way below 1.2400 in March. Arguably, we have a rather tilted, inverted head and shoulders formation with the sloping neckline coming in not far above 1.2600. If we are in for a bout of concern on the prospects for follow-on fiscal packages, the commodity dollars could be in for another round of consolidation lower before putting up a stand further down the line. A break of resistance here would likely shift the focus to the big 1.3000 area.
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: Forward US fiscal concerns. Now or later for USD shorts? Sterling value?
EURUSD and USDJPY both teased key USD support levels yesterday and overnight, but the US dollar is not the chief story here, rather the surge in the Euro has been doing most of the heavy lifting in the case of EURUSD and the same for JPY in USDJPY’s recent correction. In fact, in recent sessions, it seems that the polar opposites in this market are the most negative yielders, which have seen significant support from the recent consolidation in bond yields, and commodity-based FX on the weak side as the pause in the reflationary commodity trade has weighed on sentiment there. The most interesting technical situations, in any case, are to be found in some of the commodity currencies, versus the USD, JPY and even EUR, as highlighted in this morning’s Saxo Market Call podcast. EURAUD has made a bid though the interesting 1.5600+ area resistance today – need to see the weekly close there and follow-up action last week. Some thoughts on USDCAD below. Meanwhile, the JPY rally attempt has been a choppy affair to say the least, with two way action since yesterday.
Also on the pod, I discussed a new development that is a strong concern for the forward potential for more fiscal outlays from the US, including Biden’s proposed infrastructure bill – and that is Democratic Senator Joe Manchin’s avowal yesterday to not support the elimination of the Senate filibuster nor any further reconciliation-based major spending until a more serious effort has been mounted to negotiate with Republicans. Manchin has based this position on seeing the January 6 Capitol Hill riots and has the reasonable point of view that it is unproductive to rule on pure party votes at every turn. More practically, the Senator is an unusually conservative Democrat that represents one of the most Trump/Republican leaning states and is up for election in November of next year. Senator Manchin really is a king-maker and can keep the entire fiscal potential of the Biden administration on hold as long as he sticks to his guns – which he will probably only do up to a point, certainly on infrastructure, where has been a loud proponent of generous spending. But until then, what does the second half of this year look like if we have descended into political gridlock with no real prospects for fresh powerful fiscal impulses? Possibly not good for the US dollar if this means yields calm further and the Fed revs up fresh dovish forward guidance. This Manchin story comes on top of the other concerns noted yesterday: the Biden administration intent to try to offset infrastructure spending with new taxes and the Yellen global minimum tax idea.
Broadly speaking, I am torn between waiting for another bout of consolidation in the popular reflationary trades (CAD, NZD, AUD and even NOK a bit lower) and only enter USD shorts only then or whether that time is already now, given that we have seen almost three weeks of indecision since the USD took its initial stand against these currencies. In terms of expressing a view through options in the US dollar, GBPUSD looks interesting here for longer term upside calls as a start, and maybe even tactically in spot on a strong close today above 1.3750 after teasing below tactical support. And EURGBP shorts are a far more interesting proposition here as well after the steep back-up, perhaps with a stop somewhere above 0.8750.
Chart: USDCAD
An example of the focus on commodity FX versus the G3, we have USDCAD at an interesting crossroads here ahead of the March jobs report from Canada. The March Ivey PMI just missed a record reading at a stunning 72.9, imitating the strength in the ISM surveys south of the border recently, even as Canada’s vaccination effort badly lags that of the US. But a bit of trend exhaustion and crude oil bogged down into a range has seen an interesting recent reversal in USDCAD after a poke all the way below 1.2400 in March. Arguably, we have a rather tilted, inverted head and shoulders formation with the sloping neckline coming in not far above 1.2600. If we are in for a bout of concern on the prospects for follow-on fiscal packages, the commodity dollars could be in for another round of consolidation lower before putting up a stand further down the line. A break of resistance here would likely shift the focus to the big 1.3000 area.
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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