FX Update: USD focus on stand-off over next round of stimulus.

FX Update: USD focus on stand-off over next round of stimulus.

Forex 5 minutes to read
Picture of John Hardy
John J. Hardy

Global Head of Macro 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+.

30_07_2020_JJH_Update_01
Source: Saxo Group

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.

 

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.