Head of FX Strategy
Summary: The USD selling has extended again with the USD reaching new lows for the cycle in places and once again mulling a break of 1.1900 in EURUSD in its third attempt in three weeks. The JPY is curiously stronger across the board, although that move has faded today as risk appetite strengthened again. Volatility continues to drop ahead of the US election.
Another extension of broad USD weakness into today’s trading has taken the USD to new cycle lows versus the AUD, CAD, CHF and NOK within the G10 currencies and within a pip of new lows versus the EUR, as EURUSD tries above 1.1900 for the third major attempt at that level since the first one some three weeks ago. The USD weakness is helping feed enthusiasm in risk sentiment, it seems, as US megacaps/tech stocks have scraped to new all-time highs and European stocks are even managing to pull higher today despite the strong euro.
Somewhat curiously, the JPY has suddenly come to life and recovered from much of the downside it suffered at the hands of the US dollar recently – chiefly inspired by the strong uptick last week in US yields, a development that has faded over the last few sessions, though it hasn’t faded as strongly as the JPY has rallied. Quite often in recent market cycles, the JPY and USD are correlated in the crosses, so EURJPY and EURUSD are normally highly correlated, so it has been rather interesting to observe the divergence of the last couple of sessions, if it is a bit early to require an explanation. If yields rise again beyond recent highs, we would expect a bounce back in USDJPY and possibly EURUSD to come under downside pressure, though less conviction about any linkage there for now.
Today we watch and wait on whether the USD is punched down through the next round of supports, particularly 1.1900+ in EURUSD and eventually the 105-104.50 area in USDJPY. Looking ahead, we have the FOMC minutes up tomorrow, but more interesting from the Fed will be the conclusion of their policy review, available soon, and any signals Fed members care to send at what would have been the Jackson Hole symposium but is now merely the video-based Kansas City Fed symposium coming up on August 27-28. Yield curve control, financial repression via digital currencies and letting inflation run hot likely to be high on the agenda, though in the long run, if these policies are a given, it is more about fiscal policy’s willingness to pull out all of the stops to realize the potential implications of these policies.
Chart: USDCHF
USDCHF beat EURUSD to the punch in setting new lows for the cycle for the greenback. It’s been a curious and ponderous sell-off that took a full trading week to retrace from the local range highs back to the new lows. We have highlighted the very stretched positioning in the EURUSD speculative longs (USD short positions) in the US (important as EURUSD and USDCHF are usually closely correlated due to little movement in EURCHF. Though only a fraction of the size, it is worth noting that the CHF long versus the USD in futures positioning is at its highest since 2011.) USD bull holdouts will have to hope that the bullish momentum divergence here (new price lows without a new low in the momentum indicator we show here) is a sign of bearish trend exhaustion, which is only confirmed with a sharp back-up into the range and falsified if momentum continues strongly to new lows for the US dollar. The SNB is likely getting restless as broad CHF measures have only traded at this level of strength or higher during two brief episodes – during the EU sovereign debt crisis for a time back in the summer of 2011 and as the ECB was set to unleash its QE programme and the SNB abandoned the ceiling on the CHF in early 2015.
The G-10 rundown
USD – the US dollar is weak and we are entering a difficult time to call direction as the election approaches and the market expectations feel far more finely balanced than Biden’s fairly strong lead in the polls. An important week on that note with the Democratic National Convention through Thursday. As noted above, also watching Fed signals through the KC Fed symposium later this month.
EUR – the consolidation after the long run higher from the prior 1.12-1.14 area has been shallow and tight, a comforting sign for bulls. The only alarm bell is the record speculative long in US futures and perhaps lack of fresh triggers in the form of US fiscal or monetary policy to push the USD lower from these levels.
JPY – again, USDJPY is running out of Fibonaccis to test after the rally to 107.00+, with the 105.50-00 area an important one for finding support if the pair is to remain in the range.
GBP – Brexit negotiations getting back under way today, will be watching headlines closely for whether the EU is trying to leverage delay tactics to force concessions from the UK. GBPUSD is eyeing the cycle highs due to USD weakness as EURGBP is locked down in the range.
CHF – see USDCHF chart above, with the new low there somewhat academic as long as EURUSD remains rangebound and EURCHF locked in a tight range.
AUD – The RBA may want a weaker currency, but it is going to have to work hard to get one in this environment, particularly when Australia’s chief export iron ore continues to set new highs for the cycle, up some 20% since the beginning of July.
CAD – CAD poking to new highs versus the USD with little fanfare as WTI crude remains bid, if quiet. The 1.3000 area is the next major chart zone for that pair. Tomorrow sees July CPI data from Canada.
NZD – the kiwi firmly under the Aussie’s thumb and would expect this to remain the case as long as iron ore continues to shoot the lights out and we have a commodities reflation narrative afoot.
SEK – the krona not playing according to the script that says a strong EUR sees a stronger SEK, especially on a day when risk sentiment is enjoying strong support. Modest squeeze risk in EURSEK for a test of higher resistance if 10.35 comes under pressure as stale SEK longs are unwound.
NOK – just as Brent crude prices are perched at the highs of the cycle and each contract expiry sees a roll to higher prices, EURNOK remains pegged near the cycle lows around the psychologically important 10.50 level . This is a strong consensus trade by now, so any concern that crops up on the vaccine front or for the outlook in general in coming days/weeks could derail NOK upside.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
