US-China trade war background image

FX Update: USD punched lower despite only modest yield dip.

Forex
Picture of John Hardy
John J. Hardy

Chief Macro Strategist

Summary:  The US October jobs report on Friday was somewhat mixed at best, despite the positive beat on payrolls, and US yields eased lower. More interestingly, the US dollar sold off steeply despite the modest volatility in rates. Was this a key day reversal of the USD rally action in the wake of the hawkish Fed Chair Powell presser, or just some noise ahead of the next, more important data point -this Thursday’s US October CPI?


FX Trading focus: USD punched lower despite only modest dip in yields. Signal or noise?

The US October jobs report wasn’t worth much of a reaction, as there was something for everyone: a solid beat on payrolls, a small beat to the upside on average hourly earnings, but an ugly household survey that dragged the unemployment rate sharply back higher despite a small fall in the participation rate. It made sense that US yields took a break on this mixed data after their aggravated rise on the back of the hawkish Powell FOMC presser on Wednesday, but the huge reaction in the US dollar to the downside suggests something else may be afoot. I am not entirely ready to commit to what that might be, but it could simply be so much noise from hefty hedging or pent-up flow around the US jobs data, or it could be a sign that we are reaching or have reached peak Fed tightness, at least for a spell. As the USD continues to trade with a range here even after the chunky sell-off Friday and into today, nothing technical has yet broken down. And we still have what has proven the most important macro data point of the last few months ahead this week: the October US CPI data point on Thursday. So: holding off judgement until after that data point this week, with the most interesting scenario a softer than expected core number and how the market treats that.

Elsewhere, and possibly more importantly, there is considerable noise on the potential for a Chinese policy pivot on zero Covid, even despite the latest official commitment to that policy at the weekend. The scale of the market reaction on Friday to further chatter on a Chinese Covid policy pivot (copper, AUDUSD, etc.) suggests what may unfold if we do get more confirmation of a lifting of this growth-stifling policy: namely higher commodity prices, especially for energy and metals. This in turn could of course also aggravate the risks of higher inflation globally – not at all what a stagflationary Europe can absorb well or that the ECB or BoE will have an easy time responding to, if possibly a positive for EU-based exporters.

Similarly for the US, the Fed is likely hoping that that a slowing economy will at least help to ease price pressures from weaker demand for commodity inputs as in prior cycles in recent memory. But if China is driving a new global inflation impulse (rather than the “helpful” disinflation that it has provided over the last 12 months of keeping its economy in some degree of lockdown) the Fed and other central banks will have a hard time easing up much as they could in previous easing cycles. Shortly put, Friday may have shown us that an eventual change in China’s policy stance on Covid may have far greater impact than further Fed guidance, as incoming US data may fail to drive Fed expectations materially higher from here.

Chart: AUDUSD
A pair like AUDUSD sits across multiple themes, from the overall comparative pace of tightening of the two central banks to the possible impact on commodity prices from a shift in China’s policy on Covid, as discussed above. Technically, while we saw a tremendous impulsive comeback on Friday in AUDUSD, we continue to trade within the range. To see a large bullish reversal, we’ll need to see the pair trading above the neckline-like area indicated for the upside-down head-and-shoulders formation, or simply the most recent pivot high just above 0.6500. Above there, the next major upside swing level is arguably the 61.8% retracement way up at 0.6768, and the structural level of note isn’t really until 0.7000.

07_11_2022_JJH_Update_01
Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
If we are set for a further yield drop and a grinding worry that global growth is set to slow further (with no change in China’s Covid policy), the JPY might enjoy a rally, but if the pivot is toward more Chinese stimulus that pumps inflation higher and eventually policy rates higher as well, the more likely winner will be the commodity currencies and select EM currencies. Watching the moving parts on that front in coming days, as well as the next critical test of the USD trend in the form of this Thursday’s US CPI release.

07_11_2022_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Some USD pairs trying to edge back into an uptrend, but the key breakdown levels for the USD more broadly are lower than what we have seen thus far: 145.00 area in USDJPY, the 1.0089 pivot higher in EURUSD, 1.1645 for GBPUSD – let’s have a status check after the Thursday US CPI release.

07_11_2022_JJH_Update_03
Source: Bloomberg and Saxo Group

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • 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

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

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

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

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