FX Update: USD remains top dog when sentiment sours
Head of FX Strategy
Summary: Yesterday demonstrated that, for now, the US dollar rises against every other currency when sentiment sours, which it did yesterday on concerns that the Covid19 outbreaks in the south and the west of the US will hamper the recovery. The accompanying sell-off in oil has brought CAD and NOK into the crosshairs.
The Covid19 pandemic is worsening across swathes of the US, with at least seven states reporting record new case counts yesterday and Houston, Texas authorities announcing that hospital intensive care units are close to max capacity. Given the timeline of complications from Covid19, the resurgence appears clearly linked to the opening up that took place in late May – especially around Memorial Day weekend. In market action, weak risk sentiment saw the USD rising across the board as one would expect, with petro-linked currencies most on the defensive as crude oil suffered its deepest correction in some time. Still few isolated FX stories at the moment, though we note the SEK resilience to the negative mood yesterday as worth noting, and we will watch the EM space on today’s Turkey and Mexico rate announcements (both looking for a fresh cut.)
A drumbeat of negative trade news may also be impacting sentiment, as the US is considering assessing tariffs on over $3 billion of goods from the EU and UK, and the US Pentagon made available a list of twenty Chinese companies that it sees as linked to the Chinese military. Besides state-owned enterprises, two companies with NY listings were also on the list (China Mobile and China Telecom). We note the ongoing danger of a further US-China falling out as the November US election approaches, especially when equity markets are trading at new highs, the most likely conditions for emboldening Trump to take a more aggressive posture.
Elsewhere, it was interesting to note the fizzle in AUDNZD as risk sentiment may be quicker to impact the more “reflation theme” driven AUD, despite the RBNZ’s attempts to out-dove nearly every other central bank and tout its clear intent to intervene in the currency market if the NZD strengthens any further (in broad terms, it should be noted. The NZD was sharply lower versus the UDS yesterday).
USDCAD is one of the closer USD pairs to move to a pivotal break point, in this case the range high around 1.3685. Note that the pair is in an area of maximum uncertainty, the recent large sell-off having just touched the prior major resistance area, now support area of 1.3300-50, while the rally has cut the damage done in the break down below 1.3850 support just about in half. Those two areas define the status for the pair, with a bit more local suspense around that 1.3685 pivot level and perhaps the 200-day moving average and 1.3500 psychological level that was tested earlier this week. Upside risks on weak risk sentiment and Covid19 concerns impacting oil, with downside more likely if the market sees the recovery outperforming expectations and solid signs of reflation.
The G-10 rundown
USD – the USD surging yesterday on the back of generally weak risk sentiment - the move would have to extend significantly to begin “breaking things”.
EUR – EURUSD churning around in the lower part of the recent range, spoiling the status of the recent rally, but nothing breaking until 1.1170 area falls and structurally, not until we are below 1.1025-00.
JPY – the yen not impressing anyone in this latest weakening of risk sentiment as USDJPY reversed back above 107.00. If volatility pick up further, would expect relative heaviness in JPY crosses, but the bar is high to get excited about yen potential.
GBP – sterling looks passive at the moment as the recent break above 0.9000 in EURGBP hasn’t yet triggered fresh momentum. More headline risk for sterling next week as post-Brexit talks with the EU get under way again.
CHF – uninspiring price action in EURCHF – further weakening of risk sentiment could drive the pair back to the 1.0500 base where SNB seems to have drawn a line in the sand.
AUD – the Aussie seems one of the most sensitive currencies to risk sentiment and the reflation narrative and yesterday’s backdrop knocked it a bit lower, though we’re still in the middle of the now over three-week range between 0.6777 and 0.7073
CAD – we have USDCAD a bit closer to a pivot than many other USD pairs as the weak crude oil move yesterday added a bit more volatility in USDCAD, which has risen rather close to the 1.3685 range top as discussed above.
NZD – the kiwi getting no real isolated follow-on selling in the crosses after the dovish RBNZ meeting, as the AUDNZD move on the back of that meeting has now quickly faded.
SEK – SEK resilience is notable and fresh EURSEK shorts worth consideration here for whether we can drive to new lows below the big 10.40 area.
NOK – notable squeeze danger for NOK if this souring in risk sentiment extends and takes oil down at anything resembling the recent pace of declines. EURNOK technical level of 11.00 bears watching – would eventually like to fade any spike, but volatility risk high above there.
Upcoming Economic Calendar Highlights (all times GMT)
- 1100 – Turkey Central Bank Announcement
- 1130 – ECB Minutes of June Meeting
- 1230 – US May Durable Goods Orders
- 1230 - US Weekly Initial Jobless Claims and Continuing Claims
- 1330 – US Fed’s Kaplan (voter) to Speak
- 1800 – Mexico Central Bank Announcement