FX Update: Tactical do or die for USD bears over next few sessions

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  key USD pairs are close to key levels, or even beyond in the case of AUDUSD, making life difficult for USD bears, even if the broader picture is not entirely decisive and may not be until we have a look at the US jobs numbers this Friday. Emerging market currencies have rebounded smartly on fading geopolitical fears and a strong CNY.


The market is rebounding from the risk-off move inspired by the US-Iran showdown over the US assassination (or targeted killing, depending on your news source/views) of the Iranian military leader Soleimani. The move across FX largely fit with this overall resumption of risk on, with a couple of notable exceptions, especially the struggling AUD, which is at critical levels here versus the USD and JPY, likely as confidence has been heavily impacted by Australia’s bushfires and perhaps has many in the market fearing that RBA rate cuts could yet yield to quantitative easing, though the market consensus is for a terminal rate of 0.50% through the end of this year. A move in AUDUSD below 0.6900, as we discuss in the chart segment below, spells trouble for bulls in that pair positioning long after the break above that level into year-end.

We posed the question yesterday whether this US dollar is finally for turning lower, and the answer is so far “it depends what you are looking at” as EM trades are as hot as they have ever been on as-good-as-it-gets financial conditions encouraging a reach for yield. Confidence in EM trades also likely bolstered by the USDCNY moving sharply lower overnight through 6.95 and therefore through the 200-day moving average for the first time since last May. One note of caution on the EM front: even as EURPLN notches new lows for the cycle, savers in PLN are now suffering some of the worst negative real rates out there as Poland just printed a 3.4% inflation rate for December, the highest level since 2012. And look over at USDMXN, which is pushing on the lows despite Mexico in recession (though the real rates picture here couldn’t be more different from Poland as Mexico features a 7.25% policy rate with inflation running around 3.0% while Poland has a 1.5% policy rate and now inflation running above 3.0%)

Chart: AUDUSD
The AUD is the weakest of the G10 currencies to start the year as confidence and growth levels are likely to be impacted in the near term by the terrible spate of bushfires, though a fiscal impulse to deal with the aftermath could provide some offset down the road. For now, traders focusing on the major AUDUSD cross will struggle to maintain a bullish view on a close below 0.6900, as the 0.6900-35 area was a key level on the way up and the 0.6900 area is now the 200-day moving average, a technically prominent MA several times in 2019.

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