Risk appetite rolled over late last week, supposedly on discouraging comments from the Trump administration officials on the status of US-China trade negotiations and President Trump’s announcement that he would not be meeting Xi Jinping before the March 1 negotiation deadline.
US yields are also lower all along the yield curve as the market begins to game the timing of the Federal Reserve’s first rate cut – currently only about 25% odds of a cut at the December Federal Open Market Committee meeting priced in thus far. The USD is very firm and broadly so, with EURUSD opening this week poised just above the 1.1300 area and nominal mostly intraday lows below that level. USDJPY also failed to correct lower – an interesting sign of resilience, as we discuss below.
This week, the chief focus will be on that broad US dollar picture and whether resistance gives way for another leg higher, driven by preference for the liquidity of the US dollar as the global outlook remains concerning on all fronts. The risk remains that investors are unwilling to commit to a breakout until we see what emerges from US-China trade negotiations and Brexit.
Given that implied volatilities for major USD pairs (outside of GBPUSD) remain very low, the market is not showing symptoms of enormous pent-up energy and long USD volatility, regardless of direction, offers compelling potential reward for the risk, assuming something eventually breaks loose after the March 1 timeframe. Given the enormous shock administered to global markets in December, it’s hard to believe we can revert to abject complacency.
Elsewhere this week, we have pivotal event risks for NZD and SEK, with the Reserve Bank of New Zealand and Riksbank set to make their latest announcements. The commodity dollar trio was punished last week on a variety of developments that pointed the needle back to the downside, particularly if we are set for further rough seas in global asset markets.
The Swedish krona, meanwhile, saw its lowest weekly close versus the US dollar since late 2016 (that weekly close in USDSEK, in turn, was the highest since 2002). We would argue that the RBNZ is set to wax increasingly dovish in line with collapsing short-term interest rates in NZ and the Riksbank has every reason to do the same – and has long raised using the currency as a tool to provide easing.
EURUSD is mere pips away from the key range low toward 1.1300, and a solid break could finally open up for more volatility this week. Inconveniently, however, we continue to await news from US-China trade negotiations and Brexit, so will traders long caught whipsawed by prior breakouts in both directions be willing to chase a move lower? Don’t know, but the price action looks heavy and some may decide that they need exposure to the breakout if one develops and have to chase it. Next levels lower will likely zero in on 1.1000, given the pair’s affinity for big round levels.