FX Update: Poking at pain points for USD bulls.

FX Trading focus: Further important USD supports under pressure

Yesterday, I looked at the potential for JPY volatility to come unglued should risk sentiment continue to deteriorate in combination with a significant further drop in long US treasury yields amid mounting evidence that the US economy faces headwinds. Yesterday, treasury yields did dip to new three-week lows in the wake of weekly US jobless claims ticking up to the highest levels since late January and an ugly miss for the Philly Fed survey (2.6 vs. 15.0 expected and 17.6 prior), now the second US regional manufacturing survey in May to hit a huge air pocket after the volatile Empire figure turned suddenly negative this month. But while USDJPY poked below the first pivot lows of 127.50 in the wake of the US data yesterday, there was little follow through and then both the JPY and the USD were sent back lower. Boosting that move and sentiment overnight was a larger than expected rate cut in China (for the 5-year Loan Prime Rate generally associated with real estate loans) of 15 basis points has helped to buoy sentiment further.

The USD pair showing the most volatility over the last few sessions is USDCHF, which managed to pull all the way above parity at the peak of the strong USD wave before retreating sharply all the way to below 0.9700 as of this morning before finding support. Surprisingly, that more than 300 pip retracement has only seen the pair testing slightly through its 38.2% retracement from the end-March lows below 0.9200 (!). The franc has found support on lower safe-haven yields that have also supported the JPY recently, but also after yesterday saw the SNB President Jordan out with the first firm hint that the bank is concerned about the inflation outlook and the risk of second round effects. No specifics, and Swiss rates haven’t really responded, but the CHF jumped on the news. All of this after the recent EURCHF attempt on 1.0500 has failed and USDCHF posted that parity milestone. Will revisit this if EURCHF Is down through 1.0200 support, for now the CHF move looks a bit of an overreaction.

Chart: USDCHF
USDCHF has managed the rare feat of providing significant volatility in recent weeks after a long period of choppy action as both currencies have often been classified as “safe-havens” in recent years. After launching a rocket ride from the sub 0.9200 base, USDCHF rose as high all the way above parity on the extreme Fed-SNB policy divergence story (Swiss short government debt will be some of the last negative yielding stuff standing for this cycle) as well as the disproportionate pressure on all things European in the wake of the Russian invasion of Ukraine. The consolidation has been sharp for the reasons noted above, but is still far above the break-out line below 0.9500. Looks like the pair has staked out the new range above that figure and at least to the old range highs into 1.000-1.0200 for now. Looking cheap here?