FX Update: USD and JPY back higher after Biden-Trump scuffle
Head of FX Strategy
Summary: The USD and JPY weakened sharply yesterday, but firmed overnight slightly in the wake of the chaotic first US presidential debate, offering more interesting levels for late comers looking for another wave of strength in safe haven currencies as we wait out the last weeks of uncertainty heading into the US election on November 3rd.
Testing the waters again on tactical long USD and long JPY positions.
Yesterday saw the US dollar and Japanese yen selling off rather steeply with no notable trigger, leaving me wondering if end-of-month and -quarter rebalancing might be at play. Regardless, the move gave traders a better spot in risk/reward terms to test for a second wave of a three-wave correction on the long side on USD- and JPY- trades, especially those that look rather correlated like AUDUSD shorts and EURJPY shorts. After yesterday’s Germany CPI print of -0.2% year-on-year (versus 0.0% expected), the ECB will only continue to throw everything it can to provide further easing, and the second Covid-19 crackdowns have weakened the outlook for Europe, so we focus a bit on EURJPY in the chart below
There is a rather scary level of correlation across FX markets, as it is difficult to differentiate between recent developments in AUDUSD or spot gold or some JPY crosses like EURJPY shown below. We choose EURJPY somewhat at random because the euro still looks elevated relative to where the EU finds itself with Covid-19 and further recovery prospects from here, while the JPY could arguably do better if Asia continues to outperform or if risk sentiment weakens further. The key development in recent weeks was the drop below 124.50 which defined the low of the range for August and into early September and was a prior major high on the chart. This recent back-up consolidation has seen the price action approach that area again and provides reasonable entry levels for a re-entry on the short side, with stops north of 125.00 for trading targets toward 121.00 (note the 200-day moving average near there, or even 120.00.
Fallout from the US presidential debates
We wont spend too much time on a breakdown of these debates, which are endlessly covered elsewhere and were neither presidential, nor really a debate. The interesting development was the immediate USD surge and general risk sentiment weakening that unfolded just as the debates ended overnight. It is hard to feel that this was random noise and requires some explanation – I suspect that Biden’s stronger-than-feared performance is leaving many with the takeaway that the polls will remain solidly in favour of a Biden victory, though the bigger game changer is still whether Biden can take the Senate as well, as a Republican Senate would dig in to thwart nearly everything Biden would like to do on the domestic front, policy-wise.
The G-10 rundown
USD – a weak day yesterday, but more wood to chop (above 1.1800 in EURUSD and above 0.7200 or even 0.7250 in AUDUSD) before we can suggest a reversal back to a weak USD regime and we have argued that the USD could be generally adrift until we get this election out of the way.
EUR – implied volatility in EURUSD continues to drop and the pair could be stuck in the 1.1500-1.1800 range until we get to the other side of the US election. Hardly anything going on in Europe to excite a positive view.
JPY – it is hard to argue that USDJPY hasn’t reversed back higher and thoroughly put the risk of downside at bay for now, but another leg higher through 106.00 would help to seal the deal. Lack of volatility in global safe haven bonds dampening JPY volatility, although the month of September changed the narrative on the yen and suggested that it had run too far to the weak side since the spring. Could be more mean reversion to come (firmer JPY, even if USDJPY is directionless).
GBP – sterling teased to the edge of reversing higher versus the euro in particularly, but that rally has faltered yesterday despite no negative Brexit headlines – perhaps more solid indications of a breakthrough in negotiations needed to take sterling over the edge,. UK Breakeven developments have not held sterling back for weeks after the spike that ended September 9th.
CHF – the key EURCHF cross bobbing back and forth across 1.0800 – let’s have another look if the pair trades either above 1.0900 or below 1.0700 again. In the meantime, USDCHF focus on whether it can hold the 0.9175-0.9200 zone after the recent rally from the base.
AUD – the Aussie bounce showing a bit more beta to the USD sell-off since late last week, but much more needed, together with further support from the reflationary narrative to call a reversal back higher just yet. Still, the bounce has taken AUDUSD well off the downside pivot danger zone around 0.7000.
CAD – CAD weaker than some of its peers as oil prices stumbled badly yesterday and the resurgence in Covid-19 cases in Canada have surged back to levels during the worst period of the initial outbreak in the spring. Further progress higher above the 61.8% level (of last sell-off) at 1.3440 would begin to weaken the further and the next focus higher is likely the 200-day moving average, currently at 1.3528.
NZD – the bounce in the NZD less robust than AUD and the NZDUSD pair looks heavy for follow through lower to a sub-0.6400 200-day moving average test if the 0.6500 area is taken out.
SEK – EURSEK consolidating back to the round 10.50 area and will likely track the direction of risk sentiment inversely here with further risk of a squeeze higher if the EU outlook doesn’t brighten.
NOK – the consolidation in EURNOK after the bout of NOK weakness looking very shallow as yesterday’s oil rout saw oil-linked currencies on the defensive relative to developments elsewhere, Another wave lower in NOK a risk if the major crude oil benchmarks post new lows.
Upcoming Economic Calendar Highlights (all times GMT)
- 1215 – US Sep. ADP Private Payrolls Change
- 1230 – Canada Jul. GDP
- 1345 – US Sep. Chicago PMI
- 1430 – EIA's Weekly Crude and fuel stock report
- 1500 – US Fed’s Kashkari (Voter) to Speak
- 2350 – Japan Q3 Tankan Survey
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.