Head of FX Strategy
Summary: USDJPY reversed viciously back higher as the market sweeps the US-Iran confrontation off the agenda for now and celebrates the latest strong US economic data prints, with complacency and risk appetite dialed back higher to 11 ahead of the December jobs data from the US tomorrow.
The market consensus aligns with our view on the US-Iran conflict, that the risk of overt confrontation seems minimal, even if the longer term risks of asymmetric warfare are unknown and simply can’t distract the raging bulls anyway that swoop in to scoop up equities on the slightest dip. Earlier this week, we saw a somewhat stronger than expected ISM Non-manufacturing survey and yesterday it was a blow out December ADP payrolls number and strong upward revision of the November data – even if this survey, as I pointed out in a chart yesterday on Twitter (even if I surmised that the ADP may be quicker to pick up developments in the jobs market – oops), correlates poorly with the NFP series.
With the conviction that the Powell Fed is willing to allow the economy to “run hot” before reacting on the policy front and newfound conviction that the US economy will skirt recession – and perhaps that a resilient economy and parabolic go-go stock market will do more to ensure a Trump re-election, the US dollar is ramping higher against much of the even lower yielding and less economically dynamic G10 while the market’s reach for yield saw EM putting in another strong day yesterday. It seems EM has become a pure play on risk appetite, ignoring for now the historic dislike of a stronger US dollar (although the rising CNY is another boost for EM and USDCNY explored new lows for the recent cycle yesterday).
While we have an open mind on the status of the US dollar and increasing evidence on the charts now that the US dollar is not set to turn lower here, we are increasingly concerned that this market environment – for however long it extends – will see a disorderly demise when we do reach a real inflection point, even if we have not inkling of the potential height of the current moonshot.
Chart: USDCAD
With the USD pivoting stronger versus several other G10 currencies here, we zoom in on USDCAD today as the pair has recently traded below the pivotal 1.3000 level after CAD was the strongest G10 currency in 2019 and today features a “fireside chat” with Bank of Canada Governor Poloz, who must be eyeing the currency situation with a bit of alarm. While it is possible that Poloz maintains a relatively sanguine view of the outlook from here, we note that Canadian data is registering much weaker than expected data and as we have noted before it is hard to believe that Canada wants to maintain the G10’s highest policy rate. A shot across the bow from Poloz today and we could see USDCAD pulling sharply back into the range, with a sharp move back to perhaps 1.3150 a forceful rejection of the recent downside sequence and suggestive that the higher range is to hold for now. If Poloz is reluctant to send any message, we may have to wait for the December jobs data from both the US and Canada tomorrow to provide an additional catalyst.
The G-10 rundown
USD – since the beginning of the year the US dollar has been both strong during a risk off bout after the US-Iran issue and now with risk on and positive US macro data – not sure where the USD negative scenario is hiding here – we can’t find it.
EUR – the EURUSD has broken down and will have a hard time getting up if the narrative doesn’t change to a focus on EU fiscal stimulus or some other positive EU catalyst.
JPY – USDJPY was the big mover yesterday intraday and has emphatically reversed higher and will likely go much higher still if the US 10-year benchmark yield pulls to 2.00% and above, as that level coincides with testing the cycle highs short of 110.00.
GBP – sterling going nowhere as we await for signals from the budget and from the EU side on the eventual shape of a trade deal post-Brexit. As well, the go-go trade for sterling trades late last year was GBPUSD, which has now faltered badly under the weight of USD strength.
CHF – EURCHF easing off the downside pressure after sub-1.0800 traded briefly, but the divergence in CHF and JPY is notable in the crosses as CHF fails to respond to the jump in risk appetite and bond yields.
AUD – the Aussies has now fully reversed lower versus the USD, but how much downside energy can AUDUSD develop into the US-China trade deal signing and a heavily short speculative market?
CAD – an interesting test for USDCAD over the next couple of sessions as we discuss above.
NZD – a solid bounce in AUDNZD from yesterday’s lows and NZDUSD continues its stumble – thinking that downside risks outweigh upside risks in NZD crosses on valuation and the risk of the RBNZ eventually weighing in.
SEK – the vigorous resumption of the rally boosts the krona – but at these levels we prefer a stronger fundamental catalyst to believe in a more notable SEK rally (fiscal or better EU numbers/EU fiscal, etc.).
NOK – EURNOK downside momentum is dead as NOK fails to join the enthusiasm for riskier currencies, where traders seem to prefer EM longs relative to traditional risk-correlated G10 smalls.
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