FX Update: This market keeps running out in the sand.

FX Trading focus: This market keeps running out in the sand

There is a Danish expression that roughly translates as “to run out in the sand” that is an extremely efficient way to describe some initiative or movement running out of energy or forward motion, resulting in nothing or a failure. I’m told by my Danish colleague that it is a metaphor of the sand in an hourglass running out, marking an inflection point or time of judgment. A shame, because in the literal translation into my native English-speaking mind this saying painted a rather more literal and compelling image of an effort getting bogged down and reabsorbed back into the undifferentiated chaos around it, like a fading sandcastle or a stream of water that dissolves into the sand. Oh well, either way you use the metaphor, this market keeps running out in the sand, making it impossible to trust the latest effort to get something going in one direction or even to judge the implication of sharp reversals.

The latest new development is, of course, the weaker-than-expected US May Nonfarm payrolls print on Friday, which at 559k vs. nearly 700k expected (and really, the “lean” was for a print far north of that) was a kind of “Goldilocks” data point, sufficiently strong to indicate a still robust recovery in the US labour market, especially together with other evidence, but sufficiently weak to allay the fears generated by other data points last week that the Fed will have to sharply alter course. The narrative on the back of the data is that this is “just right” to keep treasury yields rangebound and risk sentiment high and the USD weaker. But as we discussed on this morning’s Saxo Market Call podcast, we’re uncomfortable with the narrative here (so the best thing for markets will be a weaker than expected US economy as it keeps us on the safest-of-all outcome of relying on the eternal stimulus gravy train?) This pump and dump of the US dollar on Thursday-Friday could just prove the latest thing to “run out into the sand”, although if risk appetite remains firm here and Fed expectations neutral through whatever surprise the May CPI release on Friday, there may be enough space for the USD to extend lower ahead of the important June FOMC next Wednesday.

In any case, the move lower in yields and rise in risk sentiment on Friday saw odd co-movements like both the AUD and JPY rallying sharply, the former on risk correlation, the latter on the US treasury rally. SEK was also firmer as discussed below.

Chart: EURSEK
EURSEK is one currency pair currently trying to get something more notable going in directional terms as the very bottled up price action of the last several weeks was broken on the release of the US Nonfarm payrolls change data on Friday, likely on the logic that lower US treasury yields are better for the very low yielding, and likely to stay that way, Swedish krona. But SEK should be a more pro-cyclical currency and, while the move looks legit so far, and in any case demands our attention as the absolutely massive 10.00 level approaches, we’re more comfortable with SEK strength in the context of strong risk appetite and hopes for the EU economic outlook turning higher as the Swedish economy is leveraged to the strength of its export sector. At least it has been traditionally. A SEK rally based on simply looking less attractive via yields dropping elsewhere? That’s not the basis for a potent move in my view. Still, watch the behaviour around the 10.00 level, one that last traded in early 2018.