Head of FX Strategy
Summary: The FOMC meeting was largely a non-event, though Fed Chair Powell was right in reminding the audience in the press conference that it can only lend, and not spend. On that note, the standoff in the US over the next round of stimulus is an overriding concern. A weak German GDP estimate for Q2 and fears of further moves against the virus resurgence in Europe are hitting risk sentiment and boosting the USD today.
The FOMC meeting was largely a non-event as expected, with the chief change in the new July FOMC statement relative to the one from June the insertion of the sentence: “ The path of the economy will depend significantly on the course of the virus.”. In the press conference, Fed Chair Powell reminded listeners of the most important limitation for the Fed in getting the economy and inflation it wants: that it has “lending power and not spending power”, as the latter is the sole preserve of government fiscal policy. Powell also noted that high frequency data it observes like credit card spending and other data were showing a slowdown since mid-June, which is not a surprise given the resurgence in virus cases in the US since that time frame.
Yesterday, I ran down a long laundry list of factors that could frustrate the outlook for USD bears here, and the most clear and present danger for now is the lack of a breakthrough in White House and Republican negotiations with Congressional Democrats on the next round of stimulus, with Republicans apparently in disarray on their stance while Democrats for now are insisting on a larger stimulus effort. The two sides need to get their act together fast to avoid further fallout for the economy and markets. The second factor is the risk of weak risk appetite, although the USD seems to be getting less traction in this cycle from this source of support.
In risk sentiment developments, US markets managed to pull together a positive close yesterday for whatever reason, but the mood soured overnight, perhaps on the stand-off in the US stimulus package negotiations, but this morning European bourses clearly lurched lower on the news that German carmaker Volkswagen would significantly chop its dividend. This was followed a bit later with the first estimate of German Q2 GDP growth of -10.1% QoQ, worse than the -9.0% expected. The impact of weaker than expected growth is somewhat enhanced by concerns that EU economies will have to shift into a more cautious stance on opening up, and for the southern Europe economies that the window is closing on the heart of tourist season in August if travelers decide to stay at home.
Chart: AUDUSD
The AUDUSD is an interesting USD pair to watch of late because it sits astride several trading themes, including the reflationary developments in some pockets of the commodities market – mostly in industrial and precious metals. Traditionally, the Aussie has been an excellent general risk sentiment barometer within the G7 currencies, but its shift to a country running a current account surplus (after decades of, on average, large current account deficits), perhaps, as well as its exposure to reflationary themes, have likely driven the weakening of the correlation with risk appetite. From here, the AUD will continue to thrive if reflation remains dominant and bulls will only face a severe test on a combination of a setback in industrial metals prices together with risk sentiment weakness. Technically, the most significant development has been the rally through the 0.7000+ pivot area stretching back years – any failure of this level would be a significant setback for the structural outlook higher after the recent break. As long as the price action sustains above 0.7000, meanwhile, there are few resistance levels of note until 0.8000+.
The G-10 rundown
USD – fighting back from local lows on weakness in risk sentiment, but as note previously, the transmission seems weak. Noting long US yields punching on cycle lows.
EUR – German growth weaker than expected at -10.1% QoQ and Spanish GDP up tomorrow expected at -16.3% QoQ with fresh virus breakout threatening domestic activity and tourist arrivals. Ditto for Italy, which also reports tomorrow – and expecting -17.3% QoQ there (an annualized approximate -50% relative to the approx. -35% expected from the US tomorrow).
JPY – the yen not getting the support one would expect, given weak risk appetite today and strong long bonds. The most significant hurdle for the JPY is probably the reflationary we discuss for the Aussie.
GBP – sterling surprisingly punchy here, with 1.3000 falling again in GBPUSD this morning – perhaps driven as much by EURGBP as that pair is back close to the interesting 0.9000 level (the major pivot toward 0.8950-38).
CHF – the franc picking up strength against the euro again and wiping away the rest of the rally from early this week – pity the poor SNB if the USD weakens afresh and keeps USDCHF pressing at new major lows.
AUD – as noted above, the Aussie is mostly in the thrall of metals prices here – especially iron ore, which is near the post-COVID 19 highs and at historically elevated levels. Somewhat surprised to see the AUD immunity to the escalating tensions between the US and China.
CAD – the loonie in for a bit more weakness on oil prices slipping badly at times today – and the USDCAD pair never took out the early June low of 1.3316 – but the pair would need to bounce above 1.3500 and the 200-day moving average just above to register a bullish development.
NZD – NZDUSD never broke the major resistance on the scale of the AUDUSD resistance broken – most focus here on AUDNZD and whether the move above 1.0755 sustains.
SEK – outlook concerns for Europe and weak risk sentiment applying downside pressure on SEK, but concerns for a bigger squeeze don’t pick up until above 10.35-40 and the overall effort is picking spots to get short of EURSEK
NOK – EURNOK pulling sharply higher on weaker oil prices and note that the pair is near 1-month range highs of 10.75, with squeeze risk above if oil prices and risk sentiment continue to sour on outlook concerns. 10.95-11.00 is the next zone of import there.
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