The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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USD plunge sets the tone for the week ahead
John Hardy
Head of FX Strategy
The USD ended last week in a dramatic tailspin despite a slight beat in the core CPI readings and nothing amiss in the retail sales data for December. The severity of the action hardly appears to have been a reaction to the data surprises. Rather, we suspect that the resumption of USD weakness was an extension of the reaction to the more hawkish than expected ECB minutes and the rather dramatic lifting of forward ECB rate expectation as well as the resumption in the yuan’s sharp appreciation. This latter effect should receive particular attention and is somewhat confusing.
The recent People's Bank of China announcement of a change in daily fixing practices was interpreted by some as an attempt to halt the CNY appreciation near the 6.50 level, but the subsequent action below that level and pick-up in volatility certainly suggest otherwise. Is China managing the renminbi stronger to avoid negative fallout from its recent massive trade surplus and in fear of US trade policy later this year? Note as well the story that the German Bundesbank will add renminbi to its reserves mix.
A marathon negotiation session saw Germany’s Merkel agreeing on a coalition deal with the SPD leadership. But there is dissent in the SPD’s ranks and the party will hold an internal vote on the deal this coming Sunday that may risk a collapse and new elections – though it appears the market is assessing the odds of this outcome as slim to none. Stay tuned.
The economic calendar this week is extremely light for the US as we focus this week on:
- Signals on the renminbi out of China, first and foremost.
- Whether the USD move weaker sticks – particularly USDJPY, where the 110.85 break is more recent.
- The Bank of Canada meeting Wednesday and the forward guidance from Poloz and company, given NAFTA uncertainty.
- Australia’s employment data Thursday – the last numbers were stellar and there is a history of mean reversion month-to-month. Australian short rates have yet to crawl to new highs for the cycle, and it would be helpful for AUD bulls to have a modicum of support from a shift in Reserve Bank of Australia expectations.
Chart : USDCAD
USDCAD will be a focus this week on the Bank of Canada rate decision. The rate hike should be a sure thing, given recent Bank of Canada rhetoric and the astounding tightening in the labour market, but there is enough residual doubt due to NAFTA tensions to hold back expectations. If the USD remains weak here, the downside could pick up if the Bank of Canada fails to wax uncertain on the risks of trade tensions with the US.
The G-10 rundown
USD– the greenback weak across the board and this week will be about whether the move holds and even extends – particularly USDJPY as the break is more recent – from today’s Asian session - in the 110.85 area.
EUR– the strength of the euro likely linked to the reassessment of the ECB’s potential to more quickly unwind its QE programme and start hiking rates. Next EURUSD target at 1.2325 if the USD remains weak.
JPY– the key Japanese data not up until next week’s CPI, but in the meantime, we’ve got our eye on the 10-12 basis point level for 10-year JGB’s and any signals the BoJ sends if this level is approached on a lifting of global long yields (which have failed to maintain momentum higher…)
GBP– Netherlands and Spain have denied the story that they will support a soft Brexit deal – and yet we have little reaction in the market. It’s an impressive performance from sterling to see it resilient in the face of a strong euro rally. In GBPUSD, the next focus is the pre-Brexit vote low around 1.3835.
CHF– EURCHF manages to crawl above 1.1800 on the strength of the euro rally and the shift in ECB expectations – we’re actualy surprised it hasn’t achieved even further upside on the latest developments. Elsewhere, USDCHF has broken 0.9700, theoretically opening up lower range down to 0.9425.
AUD– as mentioned above, support for AUD from RBA expectations has been entirely absent, as it is likely that the renminbi appreciation and commodity focus are doing all of the heavy lifting. AUD upside ambition may be rather limited until/unless those Australia short rates start to rise more relative to global peers.
CAD– CAD is being held back by NAFTA fears and the exposure to a weak US dollar (over three quarters of Canadian exports are US-bound.) even as Bank of Canada expectations soar. The degree to which the BoC can look through NAFTA uncertainties will determine whether CAD strength picks up.
NZD– the kiwi rather anonymous as we await new catalysts and AUDNZD stuck in a range.
SEK– the Swedish CPI on Friday was in-line for the core, but a notch lower than expected at the headline, but SEK likely held back by the strength of the Euro post ECB-minutes, so for now, EURSEK is holding the higher range.
NOK– Norway’s short rates have lifted in recent weeks, but not forcefully enough to drive sharper appreciation. So far, the key 9.60 area support in EURNOK has survived, though the ceiling may be rather low on any rallies as long as Brent crude is anywhere in the neighborhood of 70 dollars.