Head of FX Strategy
Summary: The US dollar reversal to the strong side continued yesterday and deepened the risk of a tactical trend reversal for USD bears after EURUSD tumbled lower from the 1.2000 touch on Tuesday. In EM, the firmer US dollar is already threatening to break higher versus both the Russian ruble and Turkish lira, while the Mexican peso eyes cycle highs versus the US dollar.
Today’s Potential New Breakout Signals
With the reversal in price action for most USD pairs late yesterday, we have no new breakout signals of note on yesterday’s closing prices, but we are keeping an eye on the Russian ruble and the Turkish lira for the risk of a breakdown as the ruble was impacted by German demands for answers from Russia’s leadership after German Chancellor Merkel said German medical teams have found that the Russian opposition leader currently undergoing treatment in Germany, was poisoned by the notorious nerve agent novichok. This has USDRUB back towards the highs of the cycle as noted below.
Elsewhere, the breakout potential to the downside in the Swiss franc yesterday has been partially neutralized as EURCHF fell back down below 1.0800 – the USDCHF situation remains a bit more interesting if the greenback follows through higher, but less so than EURUSD if CHF is outperforming the euro in the cross. Stay tuned there. EURCAD managed a new 19-day low close yesterday, although it is back against the prior rally wave and is in a choppy descending channel.
Chart highlight: USDRUB
UDSRUB changed direction in rapid fashion yesterday, popping some 2% higher on the news that German Chancellor Merkel wants answers from the Russian leadership on German evidence that Russian opposition leader Navalny was poisoned by nerve agent novichok. Another RUB-weakening factor in play is the steep sell-off in oil prices. As a side note, Russia has very significant gold holdings and if this sell-off in gold transforms into a deeper rout on further USD strength, the ruble could suffer a triple whammy of headwinds.
Chart: USDMXN
Among EM currencies, one that is in a very different situation than the RUB or TRY is the Mexican peso (MXN), which is eyeing new highs against the US dollar here even as the latter currency has firmed notably recently. Driving the MXN higher, and USDMXN lower, in part are recent signs that the Mexican central bank is easing off expectation for further rate cuts as well as perhaps the sense in the background that a US-China disengagement could favour Mexico as the site of relocation of production capacity.
Table: Today’s Breakout Monitor
The breakout monitor below offers an overview of recent daily breakouts (a close above or below the prior 19-day highs or lows and 49-day highs and lows to give an indication of whether it there is also a medium term development). Note that as of the snapshot below, USDTRY is currently trading above its prior 19-day high close and USDRUB is trading right at its 19-day high close.
2024: The wasted year
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.
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.
