FX Update: USD finally pokes back higher as we await US data FX Update: USD finally pokes back higher as we await US data FX Update: USD finally pokes back higher as we await US data

FX Update: USD finally pokes back higher as we await US data

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  We are finally getting a follow up dose of USD strength after the currency spent all of last week consolidating back to the weak side in the wake of the sharp surge from the FOMC meeting of the prior week. The ability of the US dollar to even hold up reasonably well is interesting, given that the market continues to express solid conviction in the transitory inflation narrative. A huge jobs report Friday could challenge that development, even if we all know the wait for a verdict on the outlook extends out well over the horizon.


FX Trading focus: USD firms again, especially against the Aussie

US treasury yields pushed back lower yesterday and the megacaps among US equities celebrated a US judge tossing out two antitrust suits against Facebook yesterday. In general, the shape of Fed expectations that has developed in the wake of the FOMC meeting suggests that the market is recognizing the risk that the Fed will bring forward the start of a tapering of QE purchases and eventual rate hikes, but that the Fed’s “terminal policy rate” will likely prove lower than was expected just a couple of months ago. It all points to a fairly complacent view that an inflationary spiral is unlikely.

The G10 smalls and sterling were the biggest losers on the day this morning versus the USD and a JPY also on the rise, although SEK is trying to pull back against the euro as of this writing despite the fuss over the failed government and uncertainty on the composition of whatever new coalition emerges as parties have four attempts to put together a new coalition of whatever stripes before an election must be called. A similar episode followed the late 2018 Swedish election, but there was no notable Swedish volatility during the drawn out process that ended in the current weak government that has now failed. And given how evenly divided the political blocs are in Sweden according to the polls, the potential for new policy drama is low, although at the margin this uncertainty could keep the Riksbank on the dovish side, although it is doubtful. A Riksbank meeting is up on Thursday, by the way.

The Aussie has been one of the weakest currencies this week due to the struggles with the Delta Covid variant outbreak causing widespread new lockdowns that could theoretically have the RBA choosing the more dovish option of shifting the 0.1% yield cap policy forward to the Nov ’24 bond from the current April ’24 target. While AUD is lower, yield shifts at the front end of the Australian yield curve don’t suggest . I wonder whether background concerns on the trajectory of China and Australia’s trade relationship with that very important country for Australia’s exports may be weighing more in the background than anything else. Regardless, AUDUSD has retraced about half of the way back to the lows of last Monday, as we analyze in the chart below.

The Friday US June jobs and earnings data are the tactical pivot for whether the USD can find the energy for a follow up move higher as some of the complacency noted above on the outlook is eroded. Alternatively, we could end up with another multi-week bout of doldrums. Some minor interest as well, as indicated in this morning’s Saxo Market Call podcast, in the quarter-end up tomorrow and whether US Treasury yield volatility picks up.

Chart: AUDUSD
The AUDUSD chart is similar to a number of other charts of USD pairs in that we have seen a significant USD rally that has yet to either follow through or find itself rejected. Additionally, for this pair we have an unresolved head-and-shoulders-like situation in which the neckline was completed after an extremely wide right shoulder formed in recent weeks. But we have not yet properly breached the neckline. Looking lower, another major prior price point not much further to the downside is the prior major high near 0.7415. If the current complacency about the Fed outlook is shattered by US data or other developments intrude to send risk appetite and/or commodities on a further steep retreat, we could be set for a more major consolidation lower in AUDUSD after the pair has gone absolutely nowhere for more than half a year, possibly one that extends all the way to 0.7000.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength
Note in the broad trend readings for each currency that the JPY has managed to pull itself back into positive territory while the G10 smalls ex CAD are all on the defensive.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
We discussed SEK pairs yesterday, but the most important of these, EURSEK, is still in limbo after failing to stick a lower close yesterday.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Germany Jun. Flash CPI
  • 1300 – US Apr. S&P CoreLogic Home Price Index
  • 1340 – ECB President Lagarde to speak
  • 1400 – US Jun. Consumer Confidence
  • 2350 – Japan May Industrial Production
  • 0100 – China Jun. Manufacturing and Non-manufacturing PMI
Disclaimer

Saxo Capital Markets (Australia) Limited 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 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

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) Limited 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, Product Disclosure Statement and Target Market Determination 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. 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. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

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.