Global Head of Macro Strategy
Summary: Yesterday saw a sharp recovery in risk sentiment in the US, with equities rebounding and treasuries retreating. But the backdrop elsewhere shows many other pieces do not fit with the notion that we are seeing a comprehensive improvement in sentiment. Establishing a more consistent picture in either direction will be critical tactically to determine the overall market mood.
FX Trading focus: Strong sentiment bounce in places yesterday, but FX not really playing ball
As noted in the intro, the currency market has hardly noticed the rather violent shift in risk sentiment yesterday in the US equity market, and to some degree the Treasury market (long yields ending the day only a couple of basis points higher but the 10-year US Treasury benchmark yield was nearly 10 bps off its lows). The USD has remained relatively firm, with AUDUSD even managing strong new lows on a weak Retail Sales report from Australia overnight, as perhaps Covid concerns continue to weigh there. Elsewhere, some of the weakest currencies, especially the petro-currencies that plummeted on the nosedive in crude oil on Monday, found the most support as oil prices staged a modest bounce. Only the JPY traded according to the usual script, weakening sharply versus the USD in line with US treasury yields picking up sharply from new lows, and consolidating modestly elsewhere.
In short, the move yesterday will need some further follow through here to suggest that we are digging ourselves out of the danger zone. No further catalysts today on the macro calendar, but plenty of focus tomorrow on the ECB meeting, which I previewed together with my Macro Strategist colleague Christopher Dembik on this morning’s Saxo Market Call podcast. It doesn’t feel as if that meeting will serve as a major catalyst for the euro in terms of any “surprise” to emerge from the meeting, but in many cases, a major event risk can simply serve as a “pause button” that holds market participants from trading until it is out of the way, and the price action in EURUSD remains heavy below 1.1800, with the risk toward the 1.1500-1.1600 zone on a post-ECB sell-off if this latest bounce in risk sentiment continues to fizzle and assuming part of this recent soft sentiment is a generalized concern that the global recovery will lose steam from here, as the EUR should trade as a pro-cyclical currency. Note that 10-year German Bund yields peaked out just after mid-May, the EURUSD peaked about a week later and the EURJPY a week after that.
Chart: EURUSD
Can’t we get this break lower out of the way already? Somewhat of a break of the major headline-like trend line noted in the chart below has been under fire for a couple of weeks, and it may be tomorrow’s ECB meeting that is holding back flow either way. We don’t think the ECB is ready to make a splash anytime soon as the next major policy initiatives out of Europe have to come on the fiscal side, and these will inevitably have to wait until the other side of the German election in late September. The next area of is the low of late 2020 near 1.1600 and then the big 1.1500 round level.
The G-10+CNH rundown
It’s been far too long since I have penned a G-10 rundown as I did in the days of yore – so here goes.
USD – as noted above, the USD not fitting with the idea we are seeing a recovery in sentiment – a weaker USD needed for any sentiment rally to extend significantly, particularly for EM.
CNH – China keeping policy tight still, but has loosened the RRR for banks as the first move in the easing direction in a long time. And questions loom over the fate of leveraged corporates like the too-big-to-fail and currently very troubled Evergrande. Meanwhile, China is also trying to put out fires in rising commodity prices. It seems happy to have the CNH trade with lo direction beta with the U dollar.
EUR – discussed above – ECB and whether EURUSD set to break down the next step.
JPY – traders seem glued to the direction in safe haven bond yields. USDJPY has rallied back above 110.00, but a very choppy chart there and 111.00+ seems unlikely unless we get a major pop in yields.
GBP – sterling edging higher today, but is severely damaged on this latest run lower – 1.3500 the next existential level in GBPUSD. Covid concerns overblown if the pressure on the hospital system in the UK remains low.
CHF – sight deposits have edged higher as the EURCHF decline has largely matched the decline in yields, though stagnating recently well ahead of the important 1.0700-50 area.
AUD – as pointed out recently, the AUD is the lowest yielding of the six highest yielding G10 currencies as RBA sits on the front of the yield curve and recent Covid distractions with a slow vaccination roll-out holding back the Aussie. Will be a boomerang story eventually.
CAD – 1.3000 is the next really major chart area after the remarkable lift-off from the lows – plenty of value in CAD between here and there, assuming oil stabilizes not more than a few dollars lower.
NZD – finding fresh support against the hapless AUD, but to get a broad rally in line with the recovery of NZ short yields, we need to see a broader shift back to a more optimistic outlook for the global economy. Watching NZDUSD for the status of the break lower that unfolded yesterday.
SEK – value in SEK here versus the Euro above 10.20 assuming we aren’t set for a major meltdown in the outlook – the prior pivot high is just south of 10.30 and could trigger a run higher for 10.50 or more if equity markets suffer another major downdraft.
NOK – for whatever reason, seems the highest beta currency to the recovery and reflation outlook, and certainly entering the value zone as EURNOK moved above 10.50, but a more significant setback for oil could yet see another spike higher.
Table: FX Board of G10 and CNH trend evolution and strength
Few changes since yesterday, although the JPY will quickly losing relative altitude versus the USD if USDJPY stays above 110. Note the further loss of momentum in Aussie and the CNH really firmly tracking the USD direction of late.
Table: FX Board Trend Scoreboard for individual pairs
Gold (XAUUSD) is threatening a flip to negative trend today again if the price action remains here solidly back below 1,800 today. The JPYNOK uptrend has pushed to nearly a reading of 10 – a rarity.
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