FX Update: EM under pressure as USD rises broadly FX Update: EM under pressure as USD rises broadly FX Update: EM under pressure as USD rises broadly

FX Update: EM under pressure as USD rises broadly

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The rising US dollar starting to impact emerging market currencies, which have recently enjoyed such supportive conditions. The Fed has been required to respond to spiking demand for USD liquidity and will increase its next repo operations, a theme that we will likely see repeated into year end due to regulatory rules for large US financial institutions.

Yesterday the market tried to piece together a recovery in sentiment after many saw the Trump administration’s account of President Trump’s phone call with the Ukrainian leader as less damning than initially thought, though that certainly depends on whose opinion you read in the hopelessly biased media reporting landscape. Trump also tried to make promising noises on the prospects for a US-China trade deal just a day after bashing China before the world at a UN speech.

Working against the recover in risk sentiment late yesterday, the US dollar rallied broadly, likely driven by ongoing liquidity issues. The Fed announced that it is increasing the size of repo operations in response to demand, doubling the size of today and tomorrow’s 14-day repos to $60 billion and increasing the overnight repo to $100 billion. There may be a lull in liquidity demand once we get past the quarter end date, but expect these operations to only expand from here as the large US financial institutions look to do all they can to shrink their balance sheets (for example, by not participating in repos) ahead of year end to reduce balance-sheet-size penalties they must pay as G-SIFI’s – global systemically important financial institutions. Today also sees an auction of 7-year treasuries after yesterday’s 5-year auction went reasonably smoothly. The last 7-year auction in late August was perhaps the weakest single Treasury auction for the cycle.

EM assets markets and currencies (very often the same thing) are finally waking up a bit to the stronger US dollar and put in a bad session yesterday. An interesting test for broader EM sentiment today as Mexico’s Central Bank meets and is expected to cut rates 25 basis points to 7.75%. These cuts can only continue as long as EM has the luxury of supportive conditions – which were about as good as they will ever get before the last few days.

Today we have a rather light economic calendar as we have a look at how markets deal with the pivot to quarter end and the run into likely accelerating USD liquidity issues into year end, US earnings season starting mid-October and the next chapter of Brexit and US-China trade talks. A pickup in volatility in October seems almost inescapable.

EURUSD saw a new low daily close for the cycle near 1.0950 and looks ready to test toward the 1.0800 level next if the seemingly unstoppable force of the rising USD liquidity issues are not countered forcefully enough by the Federal Reserve.

Source: Saxo Bank

The G-10 rundown

USD – the USD strengthening appears an unstoppable force until the Fed gets ahead of the liquidity situation or the Trump administration picks up where the Fed can’t and intervenes.

EUR – the ECB’s Lautenschläger (of Germany) quit in protest against QE, apparently not wanting to serve under Lagarde as her last date will be Draghi’s last date. Does she fear that ECB policy only risks getting more unconventional and political under Lagarde?

JPY – the JPY not cutting much of a profile as risk appetite recovered and bond yields bounced – was passive in the face of a stronger US dollar yesterday as the US and Japan signed a partial trade deal overnight that does not yet put to rest fears that Trump eventually slaps auto tariffs on Japanese imports.

GBP – sterling on its backfoot as it should be given the intense uncertainty of how the Brexit situation unfolds, with each passing day bringing more damage to the UK economy via a weak credit impulse.

CHF – the franc backing down a bit as yields have poked back higher.

AUD – Aussie short rates look heavy in recent days and the August Job Vacancies data overnight the worst in years. AUDUSD could be set for test of lows here if nothing counters the strong USD pressure.

CAD – USDCAD stuck in one of its narrowest ranges ever and market feels asleep at the wheel here – asymmetric downside risk on any combination of weaker US and/or CA data, oil prices continuing lower, or weakening risk sentiment. Technically, USDCAD needs to clear 1.3300+ resistance again.

NZD – the RBNZ keeps policy expectations modest as Governor Orr spoke against the likelihood of unconventional easing overnight – may drive a bit more consolidation in NZD crosses but doesn’t change our strategic outlook for AUDNZD.

SEK and NOK – searching for a pulse here. Need a sense that EU prospects are bottoming out and fiscal on the way to boost the Scandies. A shift to weaker risk sentiment would be a challenge for both currencies.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – Final US Q2 GDP Revision
  • 1230 – US Weekly Initial Jobless Claims
  • 1330 – ECB’s Draghi to Speak
  • 1400 – US Aug. Pending Home Sales
  • 1430 – US Weekly Natural Gas Storage
  • 1500 – US Sep. Kansas City Fed Manufacturing
  • 1700 – US Treasury 7-year auction
  • 1800 – Mexico Central Bank Rate Announcement

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.