FX Update: The USD is breaking down again

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US dollar is breaking down through important levels to start the week after recent very strong US data failed to take the currency higher as US treasuries looked through the data. Perhaps helping the greenback lower at the margin has been a revival of risk sentiment in Asia. Medium term uncertainties abound, but USD bears may have a spell of clear sailing for a few weeks or longer.


FX Trading focus: USD is breaking down

The US dollar is breaking down again as we work deeper into the European session today, a development that comes after a week of very strong US data failing to excite renewed selling of US treasuries (and therefore higher yields), which was always the key support for the US dollar in its run higher since basing at the very beginning of this year. A very strong session for Chinese equities in Asia overnight after an ugly period of weak sentiment has also likely provided a bit of extra energy into the mix for renewed USD bears, as Chinese regulators have weighed in on what the market has perceive as support for the troubled Huarong Asset Management Company.

So EURUSD has pulled above 1.2000, the G10 smalls are outperforming as EURNOK has broken below 10.00 again even without a new cycle high in crude oil, although last week’s smart rally helped. As long as the US treasury threat remains neutralized, we could be set for a significant move lower here in the US dollar, at least a test of the lows. Forward concerns remain, of course – for example how the quickly the stimulus sugar rush fades, whether a credit cycle continues to fail to ignite in the US (note WSJ article: Americans Are Spending, Not Borrowing. That’s a Problem for Banks ($) ). And of course, there is also the pandemic itself, where the global 7-day average case count just rose to its highest ever, with the case count exploding particularly in India, where a new “double mutant” version of the virus has been reported.

So if today’s break lower in the USD is sustained, I am sympathetic with a solid leg lower, to perhaps 1.2300 in EURUSD and a test above 0.8000 in AUDUSD. But to get higher for these pairs and lower for the USD, we may need a better sense that China is shifting on its attitude on stimulus.

Chart: EURUSD
EURUSD has spilled over 1.2000 again as the big round number failed to offer much resistance. This opens up the full extent to the 1.2350 area top, assuming the market remains on a relatively hopeful footing here, as the market prices back in reflationary outcomes and a relative improvement in the outlook for the rest of the world ex-US, after the market so loudly ignored super-strength US data in recent weeks, particularly last week. We could even be set for a challenge of the early 2018 highs above 1.2500, a scenario that might require a bit more support from China in the form of signs that it is easing up on its tighter policy stance.

Source: Saxo Group

Odds and ends

RUB risks – despite the very weak US dollar today, the USDRUB exchange rate was actually trading slightly higher on geopolitical risks linked to jailed regime critic Navalny, who is said to be in very poor health and even dying, with the US warning of “consequences” should he die.

Central bank meetings this week – the China PBOC will announce its policy rate tonight (no change expected), the Bank of Canada will meet Wednesday, the ECB Thursday and the Russian central bank on Friday (another rate hike expected there). Of these, signals from the PBOC bear the closest watching. Yields in China at the short end of the yield curve have edged a bit lower, but no change is expected.

German CSU/CDU leadership battle – it seems inevitable that the CSU’s Söder will emerge as the eventual candidate for the Chancellorship in elections this September over the unpopular CDU leader Laschet, but clarity is still needed and the national polls bear watching after the Greens have closed to within a few percent of the CSU/CDU bloc. The EU still rests on an unstable foundation and a coalition with a strong Green representation is the most intriguing outcome for the potential for tighter EU integration.

Table: FX Board of G-10+CNH trend evolution and strength
The US dollar down-trend signal has strengthened on this latest dip and is the most pronounced trending signal on the FX board, just as the US dollar has also shown the largest shift in momentum over the last five trading session. Note that the G10 smalls are the strongest group of currencies, with the exception of CAD, which often shows sensitivity/beta to the US dollar.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Here, we note that the strongest moves in USD pairs are in USDNOK and USDSEK, the former quite interesting as both 1.2000 and EURNOK 10.00 have been breached today. Note new signals in recent days in AUD and NZD pairs as those two currencies surged last week.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1215 – Canada Mar. Housing Starts
  • 2000 – Canada Government to release 2021 Budget
  • 0130 – China Rate Decision
  • 0130 – Australia RBA Minutes

Disclaimer

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.

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
Australia

Contact Saxo

Select region

Australia
Australia

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 and Product Disclosure Statement 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.

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.