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FX Update: USD faltering, with Wednesday CPI the next key test.

Forex
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  A huge sentiment shift in FX late last week has seen the smaller G10 currencies, particularly the commodity dollars, taking the lead together with the Norwegian krone against the weakest majors, the US dollar and Japanese yen. Several USD pairs are perched near key levels ahead of the macro event risk of the week, Wednesday’s US CPI release. Sterling has set new highs for the year against the greenback.


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FX Trading focus: Huge sentiment shift on late last week has USD pointing lower and pro-cyclical currencies as the new leaders. USD focus on CPI on Wednesday, technical breakouts. CAD rips stronger on sentiment relief/BoC Governor Macklem hints.

Bias shifts today:

  • AUD and CAD: Huge reversal in sentiment has these currencies suddenly leading. AUDUSD potentially unleashed if 0.6800 break can hold for try toward 0.7000+. Won’t fully have grasp of status for USD this week is CPI on Wednesday.
  • JPY: weak on recovery in yields and risk sentiment, but still looking to fade USDJPY rallies that fail to hold 136.00-50 zone. As for other USD pairs, Wednesday’s CPI release is the key test day for USD.
  • NOK: the lows are likely in with this high momentum reversal, risk-reward difficult now after NOK has rallied this hard, but focusing back toward EURNOK 11.20 to start on the downside and NOKSEK toward parity.

Weaker USD, and JPY dips again, too. The USD fell further on Friday as risk sentiment improved further on the US April jobs data coming in stronger than expected, although the +90k beat of expectations was marred by a -71k revision of the March payrolls data. And the pessimists will have us believe that the trend toward more negative revisions suggests that the “birth and death” model that assumes much of what is initially reported in the payrolls data every month is over-estimating payrolls growth. Then again, at these very low levels of unemployment and a labor force that only grows as a function of a higher participation rate (due to fairly stagnant potential labor force), payrolls don’t need to be much over 100k to keep the current record low modern unemployment rate steady.

But the strong bounce in the US regional bank stocks, the immediate area of concern lately, late last week and especially Friday is likely a stronger source of sentiment relief and USD weakness. There was no readily identifiable catalyst for the bank stock rally, as regional banks continue to suffer headwinds in the form of deposits leaving and higher funding costs. The US economy can apparently take 5% rates for now, while small and medium sized US banks need more like 3%. Elsewhere, the solid bounce in yields late last week also capped the JPY’s comeback ambitions for now, with the major JPY crosses still in the shadow of the recent sell-off, while AUDJPY has nearly “reversed the reversal”. For now, the USD looks on its back foot and could run lower still, especially if the equity market continues to climb the wall of worry on the eventually urgent issue of the US debt ceiling.

Chart: AUDUSD
AUDUSD has refused to throw off directional signals for weeks, partially supported recently by a more hawkish than expected RBA, but held back by the sputtering China re-opening story and key metals prices that refuse to support the AUD-bullish case. This latest rally has the pair testing the 0.6800 level once again. Wednesday’s US CPI release is the next critical test for USD pairs. A reading that cements market conviction in its forward view of the Fed and sees a break higher in US equities could finally see the pair testing above resistance. The next resistance area is arguably the 61.8% retracement of the sell-off earlier this year that comes in near 0.6930, but the bigger levels are the psychological resistance at 0.7000 and then the 0.7150+ highs of the year om early February, which would probably require a more robust commodities rally coming in as coincident support.

08_05_2023_JJH_Update_01
Source: Saxo Group

CAD one of strongest currencies on Friday in delayed reaction to BoC Governor Macklem speech. The Canadian dollar rallied sharply on Friday in what appears a delayed reaction to a speech last Thursday from Bank of Canada Governor Macklem, who admitted that the Bank of Canada may need to tighten policy further and generally indicated more uncertainty on the path to returning inflation to 2%. "If we start to see signs that inflation is likely to get stuck materially above our 2% target, we are prepared to raise rates further”. The same speech also fretted the risk of uncertain financial conditions, so the reaction was limited Thursday, when troubled US banks were most in focus last week. But when financial conditions/risk sentiment cleared dramatically on Friday and oil bounced, CAD and NOK were the strongest among G10 currencies, rallying more than 1% against the US dollar as USDCAD returned below its 200-day moving average and below 1.3400. The next level of note is the April pivot low of 1.3302.

Table: FX Board of G10 and CNH trend evolution and strength.
Note the red on the left half of the FX board, save for sterling, and the blue on the right, as the smaller currencies have rebounded versus the majors in recent days. NOK and CAD have the most upside momentum, while CHF is losing altitude quickly after the Friday rebound in EURCHF.

08_05_2023_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The EURNOK uptrend looks to end in coming days after a remarkable 110 days and counting (flipped to an uptrend at around 10.50) GBPUSD has run away to the upside – lots at stake there with Bank of England on Thursday after the Wednesday US CPI data.. Elsewhere, note the faltering EUR pairs as its appeal as a pro-cyclical currency is less pronounced.

08_05_2023_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1400 – ECB Chief Economist Philip Lane to speak 
  • 1800 – US Fed releases Senior Loan Officer Survey
  • 2000 – US Fed releases May Financial Stability Report
  • 2045 – US Fed’s Kashkari (Voter 2023) to speak
  • 0030 – Australia May Westpac Consumer Confidence

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