FX Update: EUR mulls EU recovery package. USDCNH focus intensifying.
Head of FX Strategy
Summary: EURUSD trades around 1.1000 with little fresh buying pressure at the moment as the market mulls the odds on whether the attempt by the EU to extend its powers into taxation will fly with member states. Elsewhere, US-China tensions simmer as China moved to officially pass the Hong Kong security law and the Trump administration declared Hong Kong no longer autonomous.
We continue to watch the USDCNY and USDCNH levels after both exchange rates almost precisely touched their all-time highs yesterday before pulling back slightly. The pull-back has deepened a bit further this morning, even after the National Party Congress in China officially approved the new security law for Hong Kong and after Pompeo declared yesterday that “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground.” This brings the concern that the US will seek to change the terms of Hong Kong’s special trading status. That move would be a momentous one and the damage from any shift in the special relationship would go both ways as many US firms have set up shop in Hong Kong as their gateway to engaging with not only the local economy but also mainland China.
Just ahead of screen-time, we get the news item that the US will look to expel any Chinese students in the US linked to Chinese military schools.
Chart: USDCNH vs. the CNY basket
While the focus is on the immediate implications of any move above 7.18-7.20 in the USDCNH and whether this triggers unease across markets, if China allows its exchange rate to only grind slowly lower here rather than move quickly, the move may not drive wider unease. The US-China trade deal has a section on currency manipulation, but the wording is relatively loose, and China can point to its broader renminbi basket, which is still relatively mid-range (this index is only updated weekly – CNY a bit lower relative to last Friday’s close). So, the point is – momentum is more important than whether USDCNH, for example, slips quietly to 7.25 over the course of a couple of weeks in an environment where the USD is firming elsewhere.
The euro is trying to sustain a rally after a few wobbles yesterday as it crossed back and forth over the 1.1000 level in EURUSD and above the important 1.0650 in EURCHF in the wake of EU Commission president Von der Leyen presenting the EU’s recovery package plan. The chief innovation here – which was already introduced by the Merkel-Macro agreement – is the €500 billion euro in grants (€500B) with Von der Leyen calling for an additional €250B in loans – all of which will be funded from the EU budget, with grants to be allocated according to need, not according to the size of the economy.
For perspective, the €82B to be allocated to Italy represents around 4.5% of GDP, with Spain receiving around 6% of GDP, and Greece over 12% (!), while France would only receive about 1.5% of GDP and Germany even less. The tough part will be the negotiation period to come and whether all member states will agree to the EU’s expanded taxation powers (levies on “digital giants” (think US tech giants), a tax on plastic, and revenue from EU emissions trading.) As our Steen Jakobsen put it on today’s Saxo Market Call podcast, this is yet another tone deaf EU power grab attempt that would arguably need an unlikely treaty change and in short order.
As for the total package size of “€2.4 trillion”, keep in mind that this includes the normal EU 7-year budget for 2021-2027, which was €1.1 trillion for the 2014-2020 budget. So, besides the immediate recovery package proposal of 750 billion, let’s call it around €600 billion extra – a drop in the bucket over a 7-year period relative to the size of the economy. In short, the market looks impressed, particularly EURCHF here as it looks toward 1.0700, but the enthusiasm may fade in coming months and EURUSD put options are cheap in the event existential concerns return on an inability to wring agreement from the EU stakeholders in the weeks and months to come.
The G-10 rundown
USD – the US dollar will not cry uncle as the cross above EURUSD 1.1000 has not generated volatility, USDJPY has hung in there, and the USDCNY focus makes discussion of USD weakness a bit moot. The broader USD has broken lower – but where is the follow on momentum? Watching the weekly initial jobless claims today and from here on out with mounting interest – we are still at over three times the worst reading ever before this crisis even if we surprise positively with a 2.0M reading today.
EUR – trying to sustain the rally and doing so in the case of EURCH for now, while EURUSD is ambivalent around 1.1000, with 1.1200 the next clear chart point for that pair if the market can sustain enthusiasm for the EU outlook. Vulnerable to headlines if member states push back against the commissions recovery plan.
JPY – the JPY is doing all it can to escape attention – will have a hard time doing so if volatility returns with a vengeance, but the market not even holding its breath with USDCNY at key levels. USDJPY 1-month implied volatility edging toward 5.00% again – where’s the pulse?
GBP – sterling looking a bit lost in the shuffle here – does a more united EU make for a tougher stance on the shape of post-Brexit transition period trade deal terms? EURGBP chart point at 0.9000 the local focus.
CHF – EURCHF the barometer for the market’s enthusiasm for EU recovery hopes and outlook – theoretical room to at least 1.0800 as next major chart point – downside pivot zone at 1.0650-25.
AUD - should nominally prove the most sensitive to any China concerns, but hardly a ripple of concern for AUD so far, which has so far merely rebounded off a major chart point around 0.6670 in the case of AUDUSD.
CAD – would like to short CAD somewhere, but need a bounce back above 1.3850 in USDCAD for any stronger reason to do so.
NZD – the 0.6200 area in NZDUSD a major chart resistance point as we watch whether USDCNY or other can derail this strong comeback since March for the now non-yield Antipodeans – soon to be negative yielding in all likelihood in NZD’s case. Getting increasingly contrarian to any further NZD strength.
SEK – Sweden’s retail sales down a mere 1.5% year-on-year in May, a remarkable number, but EURSEK going nowhere as recovery hopes and supportive backdrop for EUR not registering much on SEK – perhaps in part as Riksbank asset purchases crowd out foreign buyers of Swedish paper.
NOK – crude oil on the defensive and the grind lower in EURNOK has slowed – but likely to continue as long as relative complacency and recovery hopes persist. Yesterday’s lows were on the 100-day moving average.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Weekly Initial and Continuing Jobless Claims
- 1230 – US Apr. Durable Goods Orders
- 1430 – US Weekly Natural Gas Storage Change
- 1430 – US Weekly DoE Crude Oil and Product Inventories
- 1500 – US Fed’s Williams (Voter) to Speak
- 1900 – US Fed’s Harker (Voter) to Speak
- 2300 – South Korea Apr. Industrial Production
- 2330 – Japan Apr. Jobless Rate/Retail Sales