Head of FX Strategy
Summary: The EURUSD continues to press down on the big 1.1700 area ahead of the FOMC minutes this evening, which are a possible trigger for the lowest levels of the year. Elsewhere, a modest pick-up in US yields is seeing a bit of consolidation in the JPY strength that marked the beginning of the week, while NZD largely remains on its backfoot after the RBNZ passed on hiking due to the new Covid cases in New Zealand, even as it brought a rather hawkish policy forecast.
FX Trading focus: EURUSD heavy, RBNZ hawkish, but holds.
A brief update today as we await FOMC minutes tonight as the likely trigger if EURUSD is going to break down to its next downside objectives on USD strength. A more pointed indication that many share the view on the Fed that tapering should begin sooner rather than later (bolstered by the back-up in the Fed’s repo facility to well above a trillion dollars now) could help trigger an extension of the USD rally, a rally that is seeing resistance giving away in places (AUDUSD and possibly NZDUSD after a hesitant attempt overnight) while EURUSD has toyed with the lows just above 1.1700 today and looks primed to at least test lower tonight. The next objectives are 1.1600, near the lows in September and October of last year, and then the 1.1500 area, which was a pivotal level pre- and post-pandemic outbreak.
A further angle on tonight’s FOMC minutes is whether a USD reaction takes US yields higher at the longer end of the curve as well and thus involves USDJPY in a broader bout of USD strength than we have seen otherwise in recent days. For trading USD strength, many will feel justified in focusing on EURUSD in particular, but also AUDUSD and NZDUSD. Note as well that GBPUSD has now dropped back below its 200-day moving average and really only has the 1.3572 lows from July to support it ahead of the huge 1.3500 level. Wanna-taper, but non-voting Bullard is out speaking before the FOMC minutes.
Chart: EURUSD weekly
A fairly straightforward situation here as EURUSD weighs heavily on the 1.1700 area lows of the year ahead of the FOMC minutes, with catalyst for the euro very tough to identify save for the political situation heading into the late September German election. It’s up to USD direction then to establish the next move, with 1.1600 the easily identifiable next objective if the FOMC minutes and/or weak risk sentiment could prompt further USD strength. Below that, 1.1500 was an important resistance on the way up from the post pandemic outbreak lows. The 61.8% retracement of the entire 2020 low to 2021 high rally comes in at 1.1290.
RBNZ posts hawkish policy forecast even as it holds
The RBNZ failed to hike overnight as I suspected might be the case and explicitly linked its pass on moving rates to the Covid outbreak discovered just the day before the meeting. And it is a proper “outbreak” rather than the single case, as at least 10 cases have now been confirmed as of this writing. Other details emerging show how quickly the virus can spread and the fact that it has been genetically linked to strains in Australia suggest that the virus somehow made it through New Zealand’s quarantine perimeter. The coming days to couple of weeks will tell us whether New Zealand is able to bite the risk of a wider outbreak in the bud and the kiwi will trade with heavy exposure to headlines.
If the outbreaks takes on the scale of something like the Australian situation, we should expect a tightening of rate spreads expectations between the RBA and RBNZ and a much weaker kiwi. At this meeting, the RBNZ upgraded its monetary policy forecast (in its more than 50-page monetary policy statement) making it clear that it is ready to hike quickly if this Covid situation is kept under control. There was an interesting comment about housing possibly offering a counter to upside risks for the economy as well. Note that RBNZ Governor Orr will testify before a parliamentary select committee tonight.
Australia Q2 wage growth comes in weaker than expected and this will likely help to keep the RBA on the sidelines for longer, as it has specifically linked the timing of rate hikes (currently not expected by the RBA until 2024)with pressures from wage growth in a tightening labor market. In Q2, wages rose +0.4% QoQ and +1.7% year-on-year vs. +0.6%/+1.9% expected, respectively.
UK activity number – to fade in September? A great England-based friend of mine noted that UK activity numbers are likely to look better for July and August than they should due to the difficulty of taking holidays on the continent from the UK (Italy requiring, for example, a 5-day quarantine for travelers arriving from the UK). Where outbound travelers outnumber inbound travelers traditionally.
Table: FX Board of G10 and CNH trend evolution and strength
No direction changes here, with USD strength picking up and AUD and especially NZD weakness deepening in the trend readings.
Table: FX Board Trend Scoreboard for individual pairs
The USD strength is spreading sufficiently to have USDCHF trying to flip to the positive today – could be a significant move there on the back of the FOMC minutes if the message moves long US treasury yields higher. Also note that EURNOK is flipping back higher, though the chart suggest a leg higher above 10.50 and weak oil prices are likely needed to threaten another significant squeeze to the upside. Note that the Norges Bank meets tomorrow (expected to hike at the September 23 meeting).
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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.
