USD firm ahead of payrolls, earnings data
Head of FX Strategy
The last couple of Asian sessions before today’s had generated considerable unease in global markets, but overnight, Asian markets took a breather from the recent heavy selling impulse after a wildly positive US session driven by a massive ramp in Apple stock after positive earnings announcement that took the stock’s market cap above $1 trillion.
(Update: after writing the above and most of the rest of today’s article, Chinese stocks plunged suddenly by about a percentage point to a new low closing level for the cycle.)
The USD is also firm as we look around for drivers, the most prominent among which at the moment may be the ongoing rise in USDCNY, which is drawing nearer the 7.00 level that could represent a game-changer for the market’s complacency if breached.
Emerging markets did not take kindly to the combination of a stronger USD and stronger JPY and the negative spiral for TRY continues as well.
The market is itching to get a peek at China’s FX reserves next Tuesday after the recent fall in the CNY, which got under way in earnest only in mid- to late June if we look at the CNY basket. In the 2015-16 experience, the falling CNY was accompanied by large draws on reserves as capital flight was a major driver and China had to mobilise its reserves to slow the yuan’s depreciation.
Is that the same case this time around? If so, it would look less nefarious from the US’ perspective than if China accumulated reserves to drive a weaker CNY.
Today is US payrolls and average hourly earnings day, but it feels from past experiences that the bar is very high for surprises from average hourly earnings, which have gone nowhere in recent months. A miss to the downside, given the evidence of still strong economic activity elsewhere (Atlanta GDPNow for Q3 suggesting 5% annualised growth) might be brushed off as a statistical anomaly. An upside surprise might prompt more trading interest. The payrolls data, meanwhile, are largely uninteresting barring enormous surprises.
Next week’s US economic calendar has the Friday July CPI data as the only data point of real interest. But the US Treasury auction will also look to auction a decent chunk of new Treasuries, with auctions of three-, 10-, and 30-year debt Tuesday through Thursday.
According to the Wall Street Journal, the US Treasury's borrowing needs will be a staggering 63% higher for the rest of this year relative to 2017.
EURUSD finally showing signs of momentum development and yesterday’s session saw the break of the line of consolidation – though a real break lower requires a takeout of the 1.1500 level.
The G-10 rundown
USD – the USD riding high here as we keep an eye on the 7.00 level in USDCNY and the range lows in EURUSD and elsewhere. The US data needs to surprise strongly either way to serve as a catalyst – more easy to do so on the earnings data.
EUR – don’t look now, but Italian yields are rising aggressively with no known specific driver for the action – though seems likely it could have something to do with sending a message to Italy’s leaders ahead of the upcoming budget meetings. EURUSD is running out of downside range as we discuss above.
JPY – firm in the crosses as the market’s double take on the recent BoJ decision suggests that it was supportive after all. JPY strength looks most potent in the crosses – have a look at NZDJPY and GBPJPY for example, and EURJPY approaching the interesting 129.00 area.
GBP – more signs of a softer stance from the EU side in Brexit. The reaction to yesterday’s hawkish BoE shows that the market doesn’t care about a marginal upgrade to the rate outlook and is far more concerned with the Brexit outcome. The next key is whether the May/Macron meeting can produce a softening change of tone from the French president as well.
CHF – EURCHF remains soft, likely on the widening of the Italian yield spreads. A showdown over the Italian budget and further spread widening could drive further weakness there.
AUD – AUDUSD similar to EURUSD in running out of downside range toward 0.7300 – a weaker CNY and ongoing worries about China’s economic trajectory could drive further downside in coming weeks.
CAD – bulls hanging on to their USDCAD longs as long as recent lows stay in place but CAD quite firm in the crosses as the BoC outlook has managed to keep pace with the Fed’s in recent weeks.
NZD – the kiwi weakening a notch faster than the Aussie as rates at the short end of the NZ yield curve notch new lows for the year after the recent very weak earnings data – more vulnerability to the downside on the dovish RBNZ guidance.
NOK and SEK – nothing going here and seem generally vulnerable in the weak EUR backdrop. Next Friday sees the release of the latest CPI figures for both Norway and Sweden.
Upcoming Economic Calendar Highlights
• 0800 – Norway Jul. Unemployment Rate
• 0830 – UK Jul. Services PMI
• 0900 – Eurozone Jun. Retail Sales
• 1230 – Canada Jun. International Merchandise Trade
• 1230 – US Jul. Change in Nonfarm Payrolls
• 1230 – US Jul. Average Hourly Earnings Change
• 1400 – US Jul. ISM Non-manufacturing
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.