FX Update: USD breaking higher, if in somewhat slow motion

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The US dollar pulled to new highs for the cycle, but the move has seen only the most modest of pick-ups in market energy after recent record lows in options implied volatility measures. Interesting to see the degree to which Democrats take up the opportunity to get political in questioning why the Powell Fed is exploding its balance sheet again.


Trading interest

  • Maintaining EURUSD and GBPUSD shorts targeting 1.0900 and 1.2750, respectively, with stops above 1.1000 and 1.2950, repectively
  • Shorting NZDUSD for test of the sub-0.6300 lows.
  • Long USDMXN targeting over 19.00 with stops below 18.60.

Developments
The US dollar closed last week on a new high note for the cycle in the wake of a strong January jobs report, as the official NFP change number was above 200k and the unemployment trate only ticked up slightly on the positive change in the participation rate. (Shhh, the market doesn’t want to talk about the negative 500k revisions to the Apr 2018 to March 2019 payrolls numbers and the fact that a significant percentage of every report is conjure from thin air….). 

US Fed Chair Powell’s semiannual testimony is set for Tuesday before a House committee and Wednesday before a Senate committee. The prepared remarks on the economy and the Fed’s policy mix was released with little fanfare on Friday and the more interesting spin this week will be whether Fed policy is becoming politicized after the Fed’s turnaround in 2019 on interest rates and its aggressive re-inflation of its balance sheet has clearly engineered the tremendous run-up in equity prices and Donald Trump’s non-stop anticipated victory jigs. Democratic senators have already officially inquired into the Fed’s repo operations head of Powell’s testimony.

The Russian central bank went ahead and cut rates again as most expected and was happy to continue to signal an easing bias, apparently feeling that support to the Russian economy – under increasing strain as oil prices have collapsed on coronavirus fears – rather than worrying about the ruble level, which dipped hard on Friday in response and is a bit firmer this morning as USDRUB mulls whether to break the 200-day moving average.

An interesting week ahead for the kiwi as the RBNZ is set to announce the official cash rate on Wednesday with apparently universal expectations that Orr and company stand pat at the 1.00% policy rate. I see room for either a rate cut or the expression of a bias to cut on the ongoing coronavirus concerns. NZ Prime Minister Ardern was out overnight fretting the risk to NZ GDP from the virus outbreak and Orr has a history of liking to surprise the market. In any case, surprises only look possible in the dovish direction.

Chart: AUDUSD
AUDUSD closed at a new low for the cycle and touched its lowest level in more than a decade on Friday as the market tilted into the weekend with a cautious stance on ongoing coronavirus concerns. Given that commodities markets have born the brunt of the negative fallout from the situation, it’s no surprise to see the AUD struggling down at these levels against a firming US dollar. Prices for key Australian commodities like iron ore have stabilized over the last few days, but it is clear that the sense of ongoing disruption needs to improve markedly to suggest that this is a false break lower.

Source: Saxo Group

The G-10 rundown

USD – continues to grind stronger – watching this week for Powell testimony before Congress and whether this creates any ripples.

EUR – EURUSD running out of room ahead of the cycle lows and we have strong concerns on the EU economy. Germany reported -8.7% year-on-year for Industrial Production in December on Friday, before any impact from the coronavirus, and Italy reported Industrial Production at -4.3% year-on-year for December.

JPY – the yen sluggish within the range here and only has a chance to raise eyebrows on a clean risk-off sweep (lower equities, lower safe haven bond yields).

GBP – sterling struggling as the EU has taken a tough line on trade deal negotiations and we still have another month’s wait for the UK budget, with the hope from sterling bulls that the confidence bounceback in the wake of the December election will show legs.

CHF – the EURCHF pair is dead in the water – looks bearish that such a steady run lower has shown such shallow consolidation. Defaulting to the view that CHF is lower beta to risk-on/risk-off behavior than JPY.

AUD – watching the commodity space and coronavirus fallout as the main factor here. Looks like the RBA wants to retain all further policy easing for damage control rather than as a prophylactic.

CAD – USDCAD pushing into the last shreds of the local range above 1.3330 on Friday, but has a bit more work to do to make a larger break – starting with the 1.3500-6 zone.

NZD – again, downside risks on a dovish tilt from the RBNZ this week, which could prove a wakeup moment in NZD crosses, especially now that NZDUSD broke badly lower yesterday.

SEK – a smart technical reversal in EURSEK s the attach through the 10.60-65 area has been rebuffed . But we need more traction on the EU and Swedish economic and fiscal policy outlooks to argue for a bigger SEK rally.

NOK – NOK trying to find its feet this morning after a blowout CPI number (leaping to 2.9% year-on-year for the core in January from 1.8% prior) as the country’s inflation levels are very sensitive to currency effects. But without a bigger boost to crude oil and durable removal of coronavirus concerns, NOK may be stuck in neutral or worse.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1315 – Canada Jan. Housing Starts
  • 1330 – Canada Dec. Building Permits
  • 2015 – US Fed’s Harker (Voter) to Speak
  • 0030 – Australia Jan. NAB Business Survey

 

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd 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 Combined 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) Pty Ltd.
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
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) Pty Ltd 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. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. 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.