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FX Update: Still waiting for that USD pivot.

Forex
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  Friday saw a huge additional boost in risk sentiment into end-of-month and end-of-quarter as the May PCE inflation report was read as benign. This reversed out the prior day’s US dollar rally, though USD direction likely needs to see the macro data through the Friday US jobs report before revealing its intentions. The next focus is the RBA meeting on Tuesday, with market split on the likelihood of another hike.


FX Trading focus:

  • USD direction remains in limbo after Thursday rally reversed on Friday.
  • Australia’s RBA: decision less interesting than commodities and other factors

Friday saw a leap higher in risk sentiment into the end-of-month and quarter, which may have driven some of the dynamic as the US dollar reversed most of the strength from Thursday that was generated off the back of a strong US jobless claims number. While the May PCE inflation number was read as benign by risk sentiment (the month-on-month coming in at 0.3% and year-on-year at 4.6%, a touch below the 4.7% expected), US 2-year yields finished relatively unchanged from levels prior to the data release and even extended higher to within several basis points of 5.00% today. We only saw two daily closes above 5.00% before the Silicon Valley Bank collapse touched off the banking turmoil and cratering of yields that has slowly rebuilt back to these levels from the May lows.

The rise in the short end of yield curves comes as the long end remains relatively anchored (although tantalizing near important resistance ahead of 4.00% in the case of the US 10-year Treasury benchmark yield.). With the “higher for longer” Fed getting priced in, this pushes back the timing of the Fed’s eventual rate cuts and has the yield curve achieving a new modern record inversion of -109 basis points for the 2-10. As long as the market persists with its view of eventual disinflation and no profit- or credit crunch concerns from an incoming recession, the USD will have a hard time finding notable support, though it’s performance relative to broader risk sentiment is surprisingly resilient. A USD rally requires either fear and loathing or the Fed back on the warpath because inflation is reaccelerating. With the Fed thoroughly in reactive-, and not forward guidance, incoming data releases could trigger notable short-term volatility. Still, there is little chance to sustain a bigger move if US treasury yields aren’t jarred more significantly out of ranges or the overall narrative shifts.

This first week of July brings the usual busy data calendar from the US, with the ISM Manufacturing survey for June up today and expected to show a marginal improvement after a subdued 46.9 reading in May. The preliminary June US S&P Global Manufacturing PMI just missed printing the worst level since the pandemic with an initial reading of 46.3. Later in the week, after a Tuesday US holiday, the US reports the June ISM Services survey on Thursday after May’s worst showed . The S&P Global Services PMI on the other hand registered its strongest reading in over a year in April at 55.0 and the initial June reading only dipped slightly to 54.1. Finally, Friday brings the June US labor market data, especially the Nonfarm Payrolls Change number after a strong surge in payrolls of +339k reported in May, while the Unemployment Rate is expected to dip back lower to 3.6% after an odd surge to 3.7% in May. Average Weekly Earnings/Hours are also in focus as these have both been on a declining trend since early 2022.

RBA preview
The Reserve Bank of Australia is set to make its rate announcement late in Tuesday’s Asian session, with the market and observers divided on the prospects for another hike after two consecutive surprise hikes from Governor Lowe and company. The market is pricing relatively low odds for the RBA to hike tonight, pricing higher, 50/50 odds of a move at the August meeting, while analysts surveyed by Bloomberg were evenly divided on the prospects for a hike tonight. The minutes from the prior meeting were somewhat dovish relative to prior meetings, and the AUD rally deflated rapidly, likely as key metals prices remain rangebound and the Chinese renminbi has suffered a long drawdown that coincides with the continued bleak outlook in China. Tonight, the RBA will have to surprise someone with the decision itself, but we are unlikely to see the bank driving notable forward expectations shifts. Those would require a notable change in the backdrop linked to commodities and China’s outlook. The next important Australian inflation report is the quarterly one for Q2 that will be released on July 26.A dovish hike seems more logical than another pause followed by a restarting of tightening in August, which is the market’s favoured outcome, but the RBA has shown a willingness to keep the market guessing and the monthly frequency of the RBA meetings allows more flexibility. Either way – like most other central banks, the RBA is reactive to incoming data and won’t guide beyond the next meeting.

Chart: AUDUSD
The AUDUSD has backed out much of the prior impressive rally that was driven in part by the RBA’s two consecutive hawkish surprises at the last two meetings. With the price action completely embedded back in the prior range, the resistance is now 0.6700-50, with the bigger downside resistance level below 0.6500 the next focus if the outlook for China remains downbeat. Note the triangulation that has been ongoing for the better part the last year.

03_07_2023_JJH_Update_01
Source: Saxo

Table: FX Board of G10 and CNH trend evolution and strength.
The JPY remains weak as US yields trade near important levels (5.00% for the US 2-year and the 10-year teasing the range highs late last week), while the US dollar’s relatively flat performance is impressive, given the complacent backdrop/strong risk sentiment. AUD faces a test on tonight’s RBA meeting. But outside of CNH and JPY, trend readings are feeble and a bit stale, needing a refresh or new developments.

03_07_2023_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Two key NOK pairs make for compelling watching here - EURNOK and USDNOK and whether they complete what could be eventual head-and-shoulder patterns. A crude oil rally likely needed there. After Friday’s back-off in the US dollar – several key USD charts are in limbo, including EURUSD and GBPUSD.

03_07_2023_JJH_Update_03
Source: Bloomberg and Saxo Group
Upcoming Economic Calendar Highlights (all times GMT)
  • 1400 – US Jun. ISM Manufacturing
  • 0430 – Australia RBA Cash Target Announcement
  • US Holiday tomorrow

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