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
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FX Update: USD narrative faces a test if volatility picks up
John J. Hardy
Global Head of Macro Strategy
Summary: The US dollar has weakened recently but the path lower may prove difficult in the near term if the US Congress is unable to bring sufficient fresh stimulus to the table, with the time window for new measures rather short. In the meantime, the toughest test for USD bears could be a setback for risky assets for that or any other reason and on a pick-up in volatility.
While I was away from the trading desk on holiday, the US dollar of course took the opportunity to lurch forcefully lower – it seems an evergreen guarantee that market excitement picks up when I go on holiday. In my last couple of posts before my short break, I took a look at the longer term drivers of a structurally weaker US dollar that I expect will eventually assert, with my final post looking at near- to medium term factors that could frustrate the path to a weaker US dollar. The chief hurdle among these and the one that is most pressing in coming days and weeks is likely whether we see a reduction of the fiscal stimulus after the end of this month with the expiration of much of the CARES act. I had a great conversation on this yesterday with our CIO Steen Jakobsen in yesterday’s Saxo Market Call podcast. Possibly, but not necessarily, linked to that issue would be a second factor that is another possible hurdle for the USD bears – any sizable sell-off in risky assets – certainly the JPY has suddenly proven more response to risk-off in recent sessions.
Finally, the other major factor at play here are the now rather protracted lull in the growth of the Fed’s balance sheet we also discussed in the podcast – an issue tightly linked to the entire USD-liquidity-as-driver-of everything argument. And at the margin, the USD could find a bit of resilience if the US continues to lose its status as the “relative basket case” in dealing with the COVID-19 crisis. On that note, the fresh breakout in Spain is already seeing real consequences for tourists as the UK requires returning tourists to go into quarantine, and Germany today announced concerns on the spread of the virus. Japan is dealing with its own accelerating outbreak in Tokyo, etc.
Chart: EURUSD
The EURUSD pair extended solidly higher on the general USD weakness, but last week’s sharp boost, was clearly prompted more by euro strength as the EU agreed to move forward with its recovery package, even if there are further hurdles, including the required passage by the EU parliament (where many are upset because pandemic spending in the proposed packaged crowds out planned spending on climate, health and other programmes – it will likely pass, but there could be wrangling on other issues). Perhaps as important is the risk that the package is rather modest relative to the size of EU GDP and insufficiently front-loaded to this year and next. The optimists would say no matter, as the package represents an initial and crucial step on the path toward mutualisation of debt and that peripheral countries can spend more or less to their heart’s content anyway as the ECB is keeping pace with its QE. A major upside objective is the 61.8% Fibo of the entire sell-off wave from the early 2018 high to March lows near 1.1825.
The G-10 rundown
USD – the US dollar a bit inconsistent in responding positively to risk-off recently – but we have yet to face a serious test. Most interesting for the broadening weakness in the USD view is USDJPY adding its heft in breaking solidly below 106.00 yesterday.
EUR – the run-up looks a bit steep, positioning is getting increasingly crowded, and the relative Euro strength is not spreading across the board, with EURJPY quick to show fatigue duringa bout of risk off today. As well, if we are expecting great things for Europe, surely EURCHF could muster a more convincing rally? Still, for EURUSD, the break higher has room to consolidate back to 1.1500 without threatening the status of the rally.
JPY – the yen has been quick to respond to risk off in recent sessions, but has yet to outpace the euro consistently. USDJPY breaking below 106.00 was the key development for that most important of JPY pairs, and AUDJPY posted a smart reversal .
GBP – sterling managing to avoid crumbling against the euro after EURGBP tested the top of the zone yesterday while passively following USD weakness in GBPUSD terms, having now cleared the important 1.2750 area. No immediate catalyst for sterling, but concerns linger on implications of current account shortfall with endless stimulus needs to get to the other side of the COVID-19 outbreak and to the other side of Brexit.
CHF – there have been a number of Monday ramps in EURCHF that smell a bit of intervention and yesterday’s was no different, with twenty-twenty hindsight as yesterday’s pump is already fading fast. The local focus for EURCHF is perhaps the 1.0725 area, where the sell-offs have faded in recent days, right on the 200-day SMA.
AUD – the resilience here in AUDUSD is rather remarkable, given a rather ugly bout of volatility in precious metals overnight and the industrial metals rally stalling out over the last week. Elsewhere,m AUD has reversed lower versus JPY and EUR and could stumble badly and more broadly on any wobble in risk appetite here. No technical weakness in AUDUSD until the pair trades sub 0.7050-00.
CAD – the USDCAD sell-off has reached the pivotal pre- and post-COVID-19 meltdown zone between 1.3300-50. Things have gone too quiet in oil markets to draw a relative signal for CAD.
NZD – AUDNZD getting interesting here as it pushes into 1.0755 neck-line like area, with the bigger 1.0865 level looming higher still – NZ perhaps weak at the margin in announcing it will join others in abandoning its Hong Kong extradition pact due to the new Hong Kong security law.
SEK – EURSEK sell-off nearly reached the 200-week moving average below 10.21 but has backed up a bit here, likely on concerns that Europe faces risk from a resurgence in COVID-19 cases. Bearish case for EURSEK only coming under strain if the pair tests through 10.35-40.
NOK – EURNOK so far posting a double bottom after it was unable to take out the 10.43 low and has thus sprung back above the 200-day moving average – reliant directionally on oil prices and concerns for a second surge in COVID-19 weakening demand for oil and growth in general..
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