Head of FX Strategy
Summary: The USD rally was capped and reversed yesterday as US yields retreated sharply from new highs, Fed officials weighed in against any tapering urgency, and risk sentiment stabilized. This sets up the USD high from early Monday as the key line in the sand, or tactical pivot for USD bears as we await more Fed guidance after a confusing couple of weeks, as well as the last days of the Trump presidency.
FX Trading focus:
USD: rally capped as yields peak and reverse lower
The USD rally/consolidation peaked out yesterday and reversed yesterday due to a number of developments, including three regional Fed presidents (Bullard, George, Rosengren, all non-voters) weighing in against any sense of urgency on sending any shift in the Fed’s guidance on asset purchases, the recovery from the dip in risk sentiment, and a US auction of 10-year treasuries that went off without drama and saw yields retreating after the recent spike. Note: plenty of Fed speakers up later today, especially the influential Vice Chair Richard Clarida, who will be out discussing the Fed's new policy framework late today.
The return of USD selling yesterday may signal the end of the consolidation phase of USD strength, though that phase didn’t feel particularly satisfactory in terms of washing out some of the weak hands before the resumption of the trend, as it was awfully shallow. And today’s Also wondering how quickly we can return to a positive narrative until we get to the other side of the Biden inauguration as one wild card is the risk of significant unrest across the US in demonstrations set for this weekend and possibly on Inauguration Day on the 20th as well. So, treading with light feet here – cognizant of strong background trend of USD weakness but not satisfied we are ready to rejoin the trend tactically.
Incoming: US CPI and China trade data
Data incoming today includes the US December CPI. The Fed uses the PCE series as its key input, but the official CPI comes out several weeks ahead – no drama expected here, though we did see quite a run-up in gasoline prices in December. The year-on-year comparisons get far more interesting starting in April due to basing effects of the collapse in everything last March/April. For December, expectations are running for a headline CPI of 1.3% year-on-year versus 1.2% in November and for core to stay at 1.6% year-on-year.
China’s December trade numbers are up tonight as well and expected to show a slightly moderating surplus after the record $75B number in November. Stimulus from the pandemic response has supercharged Chinese exports since mid-last year. But keep in mind that stimulus filters through to everything, including the commodity imports, in food, energy, metals, etc. that China requires to manufacture its value-added exports. The run-up in oil prices is a case in point and our commodities strategist Ole Hansen points out that the bitter cold of late has spiked natural gas import prices (LNG) so badly that diesel demand is soaring as an alternative. Over time, China’s oil imports have soared and its import volumes are some twice of what they were about six years ago, while LNG imports are at triple the levels of only five years ago. Watching the Chinese PPI in coming months will be an important gauge of inflation as well.
Chart: EURGBP
The most pronounced mover within G10 is sterling, where a new rally was kicked off yesterday by BoE Governor Bailey’s pushback against any guidance for a negative rates policy. Given the terrible current reality on the ground in the UK, with Covid-19 total lockdowns and concerns linked to post-Brexit red tap for customs declarations, not to mention the cloud of uncertainty still hanging over the financial services industry, it is hard to imagine what would prompt the BoE governor to signal negative rates. It is also a signal that sterling is very resilient and then some here. Besides the recent 1.3700+ top in GBPUSD, we are also watching the sub 0.8900 lows in EURGBP for a possible extension to the next areas of range support into 0.8300 eventually, although perhaps 0.8600 is a more reasonable target if this move lower sticks – we’ve had a couple of treacherous head-fakes recently.
The G-10 and CNH rundown
USD – trying to mount another comeback this morning after yesterday’s sharp retreat – only likely to succeed on a deeper bout of deleveraging/risk-off across asset classes and/or another sharp move higher in US long yields.
CNH – not a lot of differentiation here relative to other currencies, recently stronger than the euro but near the top of the range versus the Aussie.
EUR – EURUSD struggling for air this morning after yesterday’s sharp comeback – with a more satisfactory consolidation target after the recent run higher down into 1.2065 and maybe even the psychological support at 1.2000.
JPY – the JPY consolidated quickly with the backdown in yields yesterday, and USDJPY importantly stayed within the downward sloping channel – keeping that the regime unless a new rally takes out the pivot high, which could squeeze the pair significantly higher, given how well-defined the channel is.
GBP – sterling is on a roll – is this another head fake or are we set for a further solid surge. Yes, the BoE’s Bailey steering guidance away from negative rates helps, but the strength must also be based on real inbound investment flows as well. Watching the 1.3705 level in GBPUSD and 0.8865 area in EURGBP for whether this triggers more momentum.
CHF – paint is drying here, but there is an interesting resistance line now and arguably an upside down head and shoulders situation in USDCHF around the 0.8920 that bears watching if the USD strength returns
AUD – the Aussie pulled back sharply from the sell-off, but looks a bit extended broadly and have a hard time that this is all we are going to get out of a consolidation attempt. That being said, would need a push back down below 0.7700 and the 0.7666 pivot established Monday to argue for a more profound test of the up-trend.
CAD – the rush higher in oil driving CAD back up against the US dollar. The medium term momentum picture in USDCAD looking a bit tired here – may need to bounce around in the range back to 1.3000 before next steps.
NZD – the Aussie pulling ahead of the NZD and finally getting separation from the 200-day moving average. I like the longer term prospect of the pair higher, starting with a shift into the 1.10-1.1300 region.
SEK – all momentum has been knocked out of SEK in EURSEK, but the SEK bulls only getting into trouble there on a back-up above 10.12-15, although NOKSEK is banging on multi-month highs after a sharp correction on the strong recent surge in oil prices.
NOK – the NOK enjoying a fresh spring higher in oil, with the move below 10.50-40 in EURNOK theoretically opening for a test toward the massive 10.00 level eventually.
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.
