Head of FX Strategy
Summary: FX remains passive to the swings in risk appetite, as the USD and JPY continue to serve as the flipside of the direction in global animal spirits. Global flash PMIs out overnight and this morning offer a mixed picture of the state of the global economy, rather worrisome given that most countries are well into opening up. Interesting RBNZ meeting up tonight.
Yesterday saw a viciously strong US equity market rally, one marked by many of the divergences that have characterized the comeback since March, with high concentration and strength in the top names and the big tech Nasdaq 100 index closing at a new high for the cycle while the broader market is still rangebound. Some of the good cheer may be down to hopes for a new round of stimulus in the US, with US President Trump speaking in favour of new measures and specifically, a second stimulus check (the first one was for up to $300 billion) and new In FX, a day like yesterday leads to kneejerk USD and especially JPY weakness as US yields ticked higher. In general, FX trades passively to developments elsewhere.
As I am writing this update, the euro zone flash June PMIs are rolling in, with the “strong” French readings for both Manufacturing and Services eliciting a positive surge in the euro and risk appetite generally. But just want to make the perhaps curmudgeonly reminder that these are diffusion indices and simply compare conditions with how they were previously, so is it really a surprise that France has improved in June in both manufacturing and services from still near total lockdown conditions in May? I am actually surprised that the numbers aren’t better still and surprised at the degree of divergence. Germany’s June numbers out this morning are both well below 50. Overnight, Australia’s preliminary June services reading was above 50, while Japan’s numbers looked surprisingly sluggish at 42.3 for the flash June services PMI and an even weaker 37.8 for Manufacturing. And diffusion indices only give us a direction and a strength, not actual production numbers, where we will need another quarter or more to establish the shape of the recovery. In the meantime, the Covid19 news is not encouraging, but total lockdowns are unlikely to prove a policy option.
The RBNZ meets tonight, and we watch for guidance after the aggressively dovish mid-May meeting that seemed to have the RBNZ laying the groundwork for negative rates. A more wait-and-see message might be on the table, given the scale of the rebound in confidence and the country’s successful approach on the coronavirus. AUDNZD is mid-range ahead of the meeting and the best proxy for relative strength.
Elsewhere we watch ZAR over tomorrow’s supplementary budget announcement as South Africa’s budget deficit is seen slipping toward 14% of GDP this year, and where Finance Minister Mboweni is warning about dire consequences and the risk of default and IMF support down the road a la Argentina if structural reforms and a tougher stance on SOE’s are required to change the nation’s debt trajectory. The ZAR has recovered more than 10% from its weakest levels at least in part because the Fed opened a swap line with South Africa and credit spreads tightened, but the currency is more than 20% weaker against the US dollar relative to where it started the year.
Chart: EURUSD
The EURUSD is on the move again after finding support in the “ideal” zone below 1.1200. The first resistance here is perhaps something like the 61.8% Fibonacci of the late sell-off coming in around 1.1325, but really all eyes on the cycle top and clear resistance line around 1.1400 that halted the recent advance. To blast through these levels and move on to 1.1500 and higher we likely need continued strength in global asset markets. Bears are without a hook here unless all of today’s gains are unwound by today’s close or soon thereafter.
The G-10 rundown
USD – the US dollar on its back foot on the surge in animal spirits and that correlation will likely continue
EUR – the flash June PMI’s generally beat expectations handily, with the caveats I discuss above. The ECB liquidity blast could hold back the pace of euro gains.
JPY – together with the US dollar serves as the flip-side of equity market strength and only thrives when carry trades and risk appetite are under pressure. Big line in the sand in EURJPY at 200-day MA after the recent correction.
GBP – sterling pulling back after getting a kick over the brink as GBPUSD has a look at 1.2500 and EURGBP edges back toward the 0.9000 break point (sterling closer to making a statement there if the pair closes back below 0.9000). Formal Brexit negotiations set to resume next week.
AUD – the AUDUSD has been in limbo for weeks now and needs to either vault back below 0.7000 or crumble below 0.6800 to make an impression. The Aussie strength rests on the reflationary macro theme expressed in commodities markets as we discussed in today’s Saxo Market Call.
CAD – The Bank of Canada’s new Governor Macklem not making much of an impression on CAD yesterday as fretted the economic outlook in his first appearance yesterday and said that yield curve control (YCC) is a policy option. USDCAD edging toward the 20—day moving average again, which comes in near 1.3480.
NZD – RBNZ up tonight – if Orr and company remain as resolutely dovish as in the mid-May meeting could offer fresh pressure on the kiwi, which has been stuck sideways versus the Aussie and the USD.
SEK – the EURSEK rally ran out of steam after teasing above resistance and we are back a bit lower, with room back toward 10.40 as long as risk appetite remains stable or improving.
NOK – the krone finding plenty of support in the background from oil and risk appetite, with the 200-day moving average the key hurdle for NOK on the EURNOK chart to indicate the currency is achieving a full recovery from the coronavirus outbreak.
Upcoming Economic Calendar Highlights (all times GMT)
2024: The wasted year
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.
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.
