FX Update: USD poking at first supports as yields ease lower

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  US yields are back lower in the wake of a tepid CPI report for February and a reasonably orderly 10-year US Treasury auction, and risk sentiment and commodity prices blasted higher in Asia, sending the US dollar and commodity FX higher. The first major test for the USD rally here is in EURUSD, where the pair is poking into a key resistance zone ahead of the ECB meeting later today.


FX Trading focus: EURUSD hitting pivotal resistance zone ahead of ECB meeting
The passage of the massive $1.9 trillion US stimulus in the House will see the bill passed to President Biden for signing, likely on Friday. This will supercharge the new era of fiscal dominance in the US – with all of the concerns of the inflationary implications (long term caveat – that outlays continue to accelerate and a mechanism is found to avoid force-feeding new treasury issuance into the market – an eventual necessity for proper MMT to carry the day). Meanwhile, frustrating the implications of this important development, the treasury market was orderly and US yields have retreated after a reasonable US 10-year Treasury Auction (though on this morning’s Saxo Market Call podcast, we discussed that the failure of sharply higher yields relative to previous auction to bring in a heavier bid from foreign bidders suggests some ongoing demand weakness, even if the bid-to-cover was reasonable). The Feb. CPI only inched 0.1% higher month-on-month, vs. 0.2% expected.

Chart: EURUSD
Fairly straightforward stakes here for EURUSD, which has bounced from the recent 1.1836 lows to the key zone between 1.1950, the area of the prior low and the psychologically key 1.2000 level. The pair needs to avoid a close above 1.2000 if the recent break lower is to retain meaning (arguably, the pair needs to see other side of next Wednesday’s FOMC meeting before we can rely on technical developments before then.)

Source: Saxo Group

Yesterday, I went through the challenges for the ECB to do much to aid the economy with monetary policy, which can’t move the needle at these levels of accommodation. The EU will remain the last major economic bloc to accomplish the transition to fiscal dominance because of the unstable multiple sovereign/single currency and central bank foundations. Still, the ECB could do enough to keep the euro weak if it panics and signals a desire to keep long EU yields capped today or in the near futures. This likely only serves as a notable catalyst for downside pressure on the euro, if US and other yields resume their recent rise to new highs for the cycle. Regardless, after an “orderly” US treasury auction yesterday and yields tamed for the moment, EURUSD is consolidating back into the key zone of resistance that must cap if the bears are to rule the day – the 1.1950-1.2000 shown in the chart below. With yields at the longer end of the curve in Europe also quite orderly, the ECB may be tempted to skip signaling any intent to do much higher. Lagarde and company would do well to rattle the EU commission’s and member governments’ cages on the need to expand fiscal stimulus.

Graphic: FX Board of G10 trends and momentum
USD momentum flagging badly here (biggest two-day negative shift in momentum), and gold momentum reversing as well as we await next week’s FOMC meeting, likely the chief arbiter of near term USD direction, together with US Treasury yields, with EURUSD already in a pivotal technical area today as noted below. Note as well the ongoing weakness in CHF (slowing downtrend, however, ) and JPY (not slowing) as well as NOK showing still positive momentum and the strongest rally reading.

Source: Bloomberg and Saxo Group

NOK as EURNOK nears a critical threshold at 10.00.
Yesterday, I noted NOKSEK as an interesting pair to track for further upside potential on the EU’s sluggish vaccine roll-out and restricted fiscal impulse relative to elsewhere, while NOK is enjoying a high-flying resurgence in oil prices. EURNOK is certainly worth adding to the list of NOK crosses to watch as the pair nears the critical 10.00 level, a notable psychological one and actual chart point on many occasions in recent years. The Norges Bank is expected to be one of the world’s first among DM’s to hike rates and a rapid normalization of economic activity globally that boosts the oil price higher from here could send EURNOK well south of 10.00, to perhaps 9.50 later this year if oil trades to 75 or higher. NOK 2-year swap rates have risen some 30 bps since the beginning of the year to just shy of 90 bps.

Bank of Japan want to have and eat some cake
The Bank of Japan is in an increasingly awkward position as global yields rise – somewhat similar to the case for Europe. The rise in yields recently pulled the 10-year JGB to 18 bps, slightly above its highest levels since implementing a yield-curve-control (YCC) policy back in 2016. Let’s recall the reason that the BoJ originally implemented that YCC policy: it was an effort to ensure that long yields didn’t go to low – not too high, the opposite concern the bank has now. According to a Bloomberg article discussing those in the know on the Bank of Japan policy review, the bank is hopeful that it can have some cake and perhaps eat a little bit of it too by somehow engineering more dynamism in bond trading at the longer tend while ensuring that yield moves will have to remain constricted. Good luck. The one thing for certain is that the JPY has been supremely weak and getting weaker on the commodity reflation and rising global yields focus and the Bank’s final announcement on March 19 could have major implications if the bank decides to keep yields capped (and yields elsewhere then resume their rise). Mixed signals from Governor Kuroda and Deputy Governor Amamiya have rattled longer maturity JGBs – the bank needs to send a clearer message.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1245 – ECB Meeting
  • 1330 - ECB President Lagarde Press Conference
  • 1330 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1830 – Canada Bank of Canada’s Schembri to speak
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.

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 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. 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.