COT Update: IMM currency futures

FX Update: USD punching on key support with EURUSD focus

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The US dollar has lurched lower, led by the EURUSD supermajor, which is poking into the pivotal resistance zone ahead of the ECB meeting tomorrow and an even more important EU council summit on Friday and Saturday. Is a broader USD breakdown threatening here? That question should be answered by early next week.


The last couple of sessions have shown that the US dollar seems far less dependent tactically on the “risk-on, risk-off” narrative, a refreshing change of pace, although it is still difficult to disentangle a weaker US dollar and reflationary and global growth recovery hopes, as a weaker USD is a prerequisite for a brightening outlook. Specifically, EURUSD bulls have to find encouragement in the pair’s ability to find a steady bid through the last couple of volatile sessions – and the same goes for AUDUSD bullish hopes on the lack of interest from that pair in reacting to equity market gyrations during the same time frame.

Indeed, the US dollar is punching on pivotal support levels, most importantly in the EURUSD supermajor, which is well above the 1.1400 level this morning, even ahead of the key event risks over the coming couple of sessions (discussed in the EURUSD chart caption below), though we’re not expecting these to necessarily throw up any barriers to further upside. A glance over at other USD pairs for confirmation, and it would be helpful to see AUDUSD vaulting and closing above 0.7050.

Perhaps the chief driver feeding a weak USD narrative is the ongoing prospect of the Fed providing strong balance sheet expansion (yes, the balance sheet expansion has reversed in recent weeks on the Fed reversal of some emergency measures like FX swaps, but this will inevitably reverse soon on the weight of ongoing asset purchases) but more importantly, we could see the fiscal spending in the US vaulting to levels above and beyond those in other countries due to two factors: first, that it’s an election year and second on the mishandling of the COVID-19 outbreak.

The US Treasury has a cash pile of over $1.6 trillion, and one assumes that Mnuchin and company are set to deploy as much of that as they can for maximum impact in the run-up into the US election on November 3, providing a massive flood of USD liquidity and possibly driving an “ugly real rates” narrative for the US dollar if commodity prices continue to vault higher. As well, the Fed appears to be increasingly concerned about the state of the US economy, with Deputy Governor Lael Brainard yesterday intoning darkly on the “thick fog of uncertainty” surrounding the US economy and the likely need to provide fresh easing: “it likely will be appropriate to shift the focus of monetary policy from stabilization to accommodation”. The tools she mentions later in the speech are forward guidance and yield curve control – arguably largely ineffective, except in the latter case as an auxiliary to the Treasury to accommodate the blitz of treasury issuance and prevent fiscal largesse spiking treasury yields.

Today is Bank of Canada day – not looking for any fresh twist here, as the numbers for the virus and for the economy are headed in the right direction for Canada and the Bank has declared the policy rate of zero to be the lower bound, so tinkering with the forward guidance horizon and pace of QE purchases are about the only thing on the menu. USDCAD is behind other USD pairs in showing USD weakness – the pair needs to work back below 1.3500 for downside interest to pick up .

Chart: EURUSD
EURUSD is breaking up and it is doing so before a couple of key event risks in the days ahead, including tomorrow’s ECB meeting and the more important EU Council summit on Friday and Saturday. Signs of solidarity at the latter and a brushing aside of the “frugal four” concerns could further charge this EURUSD rally. Looking higher, we would look toward the 1.2000 level as the first target for a break and hold above 1.1500 on the other side of this weekend.

15_07_2020_JJH_Update_01
Source: Saxo Group

The G-10 rundown

USD – tilting lower – watching the next couple of sessions for whether the greenback is set to exit limbo of recent weeks and trend weaker.

EUR – broadly bid, also against JPY and CHF on top of USD and assuming ECB and EU council don’t throw up any barriers, ready possibly for a major move against all three.

JPY – most interested in USDJPY at the moment as a component of the USD outlook – looks ready for a try towards 100.00 if the 106.00 area gives way. Elsewhere, JPY upside relative to broader menu of currencies would like need risk off.

GBP – pulling back a couple of notches – stays out of broad trouble possibly if GBPUSD can scratch back above 1.2700 (200-day moving average) and EURGBP avoids closing above 0.9100.

CHF – EURCHF getting interesting for once on possibly more constructive EUR narrative and the pair is having a look at 200-day moving average today near 1.0740.

AUD – the key here the status of the commodity reflation story and whether AUDUSD can take out 0.7000-0.7050 in coming sessions. Latest employment numbers up tonight.

CAD – the Bank of Canada has little room to surprise, with broad CAD picture dominated by risk appetite and whether crude oil price resistance falls.

NZD – some interesting in the AUDNZD outlook again after recent rejection of downside and as AUD perhaps better positioned for a reflationary outlook, while the RBNZ is on the warpath if NZD goes any higher.

SEK – outlook heating up here as SEK likes a strong EUR and EURSEK closed yesterday at its lowest daily close since early 2019.

NOK – the big barrier for further NOK upside is that 200-day moving average in EURNOK around 10.55 currently, followed by the nominal low of 10.44 when that moving average was tested about a month ago. Bigger NOK rally probably needs Brent to bust through resistsance.

Upcoming Economic Calendar Highlights (all times GMT)

  • 12:30 – US Jul. Empire Manufacturing Survey
  • 13:15 – US Jun. Industrial Production and Capacity Utilization
  • 14:00 – Canada Bank of Canada Rate Decision
  • 14:30 – EIA's Weekly Inventory Report
  • 16:00 – US Fed’s Harker (FOMC Voter) to Speak
  • 18:00 – US Fed Releases Beige Book
  • 22:45 – New Zealand Q2 CPI
  • 01:30 – Australia Jun. Unemployment Rate and Employment Change
  • 02:00 – China Q2 GDP
  • 02:00 – China Jun. Industrial Production and Retail Sales

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)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

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.