FX Trading focus: Can market put together another USD and JPY surge?
My parting shot on the Friday before last, when I took off for a week of “holiday” – really a staycation involving extensive football-related distractions, yardwork and house painting – was that the weak US jobs report could get the USD bears back in business. Today, one week plus one trading day later, and the jury is still largely out. Sure, USDJPY has come tumbling down after last week’s overdue and oddly vicious JPY rally move, which finally saw the currency noting the very significant drop in US yields and the sharpness of the move likely aggravated by stale and crowded JPY shorts. The Swiss franc has echoed the JPY move as well, but we haven’t seen any notable isolated USD development, as the greenback is sideways versus the euro and generally stronger versus the pro-cyclical commodity currencies. That kind of pattern may hold and extend to significant EM weakness against the US dollar and the old safe havens CHF and JPY if we get a further rally in US treasuries (lower yields) together with some broad risk off that holds more than a mere session or two. As noted in this morning’s Saxo Market Call podcast, there are signs of weak breadth in the US equity market that are a concern just as earnings season is set to get under way in earnest this week.
If we do get a garden variety market correction and one that lasts a couple of weeks, we could see USDJPY a couple of percent lower, EURUSD a couple of percent lower and AUD, NZD and others a few percent (4-5%?) lower and offering enticing levels for a more structural view on the eventual return of the USD bear. As my colleague Ole Hansen pointed out in his latest weekly rundown of FX futures positioning in the US, the aggregate USD position is getting toward its smallest post-Covid outbreak short. I still like the long term USD downside view, but don’t like the risk-reward here where the US market is so aggressively extended.
AUDUSD is one of the first USD pairs that is confronting rather structural levels of USD resistance, with a further punch lower through the 0.7400 area, and thus through the highs from late last summer, confirming the head-and-shoulders like formation break that is currently in limbo and a possible continuation toward 0.7000, the prior major level late last year.