Macro: Sandcastle economics
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FX Update: Sterling funk deepens. USD directionless.
John J. Hardy
Chief Macro Strategist
Summary: The US dollar firmed last week and the outlook remains pivotal, although the greenback still has a significant hurdle to clear before we can declare that the currency is on the comeback trail. Positioning on the short side is increasingly crowded. Elsewhere, sterling is circling the drain as Brexit negotiations get under way in earnest again this week.
The Covid19 acceleration in the US finally became sufficiently alarming to knock US equities into something resembling a consolidation and as we mentioned on today’s Saxo Market Call podcast, the technical situation is look pivotal at current levels for the risk of a larger consolidation episode. Transmission into FX has been weak, which looks relatively par for the course. The currencies that should prove most sensitive to any deepening concern from this worsening outbreak are those that have bounced most enthusiastically with the comeback from the lows and those pricing a global rebound and reflation – so EM, AUD, CAD, etc... Of these, AUD is mired in the range and entirely lacks a pulse at the moment, while CAD was tipped gently over the edge of the local USDCAD range on the added pain of weak oil prices, but that pair needs to move considerably more (challenging above 1.3850) to signal something bigger is afoot.
On today’s podcast, we also noted the increasingly heavy long EURUSD positioning evident in the US futures market, as shown in our Ole Hansen’s great weekly COT report charts. The positioning is at its longest since early 2018, even as the EURUSD price action has bogged down after the big move off the 1.0800 area. In general, the market is remarkably short of US dollars on the assumption that the Fed will continue to provide sufficient liquidity to prevent any rebound. A move below 1.1160 in EURUSD could feed a bigger move lower if crowded longs abandon ship, though we can only talk of a structural reversal if the pair works down into the 1.1025-00 range.
In EM we focus on the ruble today after accusations that Russia was offering rewards for deaths of US servicemen in Afghanistan, which have some in the US congress pressuring Trump to move on the issue.
This week’s highlights arrive heavy on Thursday ahead of a long weekend in the US (Friday sees US markets closed in recognition of Independence Day on Saturday – a day that risks considerable strife in public places if parades are confronted with demonstrators, etc…). Namely, Thursday sees the latest US weekly initial jobless claims and continuing figures and the June Nonfarm Payrolls Change and other employment data.
Chart: GBPUSD
Sterling is trading very heavily here at the beginning of the week, as Brexit talks are set to resume. There are no support levels of note on a break below the lows here until the sub-1.2100 lows. The idea that the UK should trade like an EM currency is gaining ground, given its isolation from the EU and negative current account and monetary policy mix and intent to possibly go negative on the policy rate. The currency is likely to continue to suffer as long as risk sentiment is on the defensive, as the country needs a massive boost of inbound capital flows to offset its external deficits.
The G-10 rundown
USD – The US dollar has rebounded, but there is a “gap” with little price action in the broad US dollar of about 1.5% that needs to be filled before we can position this move as a major comeback. That comeback only shapes if concern about the shape of the recovery continues to mount.
EUR – the euro not cutting much of a profile in broad terms as existential concerns are on a distant back burner, while Covid19 outbreak concerns are a headwind for the EU’s export engine Germany.
JPY – the yen price action has become moribund again after USDJPY avoided a melt-down attempt through local support last week. The yen needs bond market strength and weak risk sentiment to thrive and it hasn’t even done that well after last week’s wobbles – an erosion of confid
GBP – sterling is on the move lower as Brexit talks are set to resume this week. EURGBP is posting new highs this morning and GBPUSD threatens a full test of the range as noted above.
CHF – EURCHF continues to threaten lower as the price volatility has declined in recent days, and the evidence is there in the latest weekly sight deposits release that the SNB is already leaning against further CHF strength.
AUD – surprised to see the AUD this immune to the latest batch of concerns on the shape of the recovery and what that could mean for Australian exports, but traders may have an eye on offsetting factors like still lofty industrial metals prices that support the reflationary narrative.
CAD – USDCAD has tried above the local former resistance around 1.3650, but isn’t getting sufficient support yet from USD buying elsewhere to drive a challenge of the bigger 1.3850 level.
NZD – after last week’s RBNZ it seems clear that the bar is high for the central bank to drive the currency lower with its guidance and AUDNZD has churned sideways now for three weeks.
SEK – tough to get long the SEK when risk sentiment is in bad shape, but we have been impressed with the relative resilience here. Still, if second-wave Covid19 concerns rise, the risk of a back-up in EURSEK, for example, rises. Key zone to the upside is 10.60-66, capped by the 200-day moving average.
NOK – repeat from Friday as oil prices continue to correct: notable squeeze danger for NOK if this souring in risk sentiment extends and takes oil down at anything resembling the recent pace of declines. EURNOK technical level of 11.00 bears watching – would eventually like to fade any spike, but volatility risk high above there.
Upcoming Economic Calendar Highlights (all times GMT)
- 0830 – UK May Mortgage Approvals
- 0900 – Euro Zone Jun. Economic, Industrial, Services, Consumer Confidence
- 0930 – Bank of England Governor Bailey to Speak at Climate Finance Event
- 1230 – Canada May Building Permits
- 1230 – Bank of England’s Vlieghe to Speak
- 1430 – US Jun. Dallas Fed Manufacturing
- 2330 – Japan May Jobless Rate
- 2350 – Japan May Flash Industrial Production
- 0100 – China Jun. Manufacturing and Non-manufacturing PMI
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