FX Update: What is the best setup for USD bears? FX Update: What is the best setup for USD bears? FX Update: What is the best setup for USD bears?

FX Update: What is the best setup for USD bears?

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market seems to be in a holding pattern, with the US dollar easing lower as risk sentiment brightened yesterday and overnight, and the next event risk for the market is the US January CPI release up tomorrow. Today, we look at the easiest path lower for the US dollar, which would be nicely aided if the Bank of Japan proves the next major central bank to indicate a tightening bias.

FX Trading Focus: What would help the USD lower?

Note: I will host an FX Market Update webinar tomorrow at 1300 CET. Sign up here. In the webinar, I will try to provide perspective on what is moving the market and how the months ahead may shape up.

USD eases lower: what is the best setup for USD bears? The best setup for USD bears is more of what we got yesterday: risk sentiment that is able to continue stabilizing and little action in the treasury market with cooling energy prices. A strong US 10-year treasury auction today that keeps yields capped and a US January CPI number tomorrow that fails to trigger further rises in US rate expectations would also be a help. Although as I pointed out in yesterday’s update, it doesn’t seem the market gets much out of raised Fed expectations these days anyway after what we saw in the wake of the US jobs report shocker on Friday. As well, if the last “shoes to drop” on the need to tighten policy – the SNB and the Bank of Japan (more below in USDJPY chart discussion) do indeed drop, a further rise in US yields, even all along the US yield curve, may not necessarily support the US dollar as long as asset markets avoid a meltdown (i.e., reinforcing the point that increasingly, the last leg of USD support is ugly risk-off across markets).

European risk indicators of concern– on the surface, markets are putting on a show of stabilizing, but a couple of indicators are flashing red here for Europe and will have me reluctant to join wholeheartedly in looking for higher levels for the euro if their trajectory doesn’t moderate: first and foremost are the widening core-periphery yield spreads that immediately cropped up in the wake of the ECB meeting, particularly for Italy. The ECB and/or the EU’s political leadership needs to get ahead of this bad, old source of existential concern or there will be trouble once again that could echo the 2010-12 experience. The second is increasing strain showing up in corporate credit spreads, which have risen quickly to new cycle highs for all ratings of corporate debt in Europe, not yet to levels of major concern, but the trajectory bears watching.

Riksbank up tomorrow – I discussed tomorrow’s Riksbank at length in yesterday’s FX Update, and the SEK has firmed since yesterday, likely on the brighter tone in equity markets as SEK tends to be so risk-sensitive.

CEE currencies strong on backdrop of stronger euro and Poland’s central bank delivering another 50 basis points of tightening yesterday as expected, with an update later today that will provide further guidance from the bank’s governor Glapinski. The market seems happy to ignore the ongoing spat as Poland refuses to address the EU’s charges or pay the fines related to those charges as these are currently being deducted from fiscal transfers to Poland. The EURPLN rate is nearing the somewhat pivotal 4.50 area and the carry of over 300 basis points is quite rich.

An important decision lies dead ahead for the Bank of Japan if global yields continue to rise, as JGB’s have not avoided the pressure on sovereign debt globally, with the key 10-year JGB in recent days reaching within a few basis points of the Bank of Japan’s 0.25% yield cap under its yield-curve-control policy. We might expect a sudden and vicious JPY strengthening if the Bank of Japan shifts the goalposts or abandons the target entirely. Or, if it doubles down in its yield control commitment with a backdrop of rising yields elsewhere, the pressure on the situation would have to be absorbed by JPY weakening until the bank’s resolve is eventually broken. The JPY is so cheap already that it is difficult to understand why the Bank would be particularly afraid of its own shadow, but let’s see – the next Bank of Japan meeting is set for March 18. A BoJ member Nakamura actually spoke positively about the weak JPY overnight and said that rate hikes were not necessary unless wages were to rise.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The strong euro sticks out in an otherwise somewhat uninspiring set of readings as we await potential signs of stronger USD negative direction. Gold perking up may be one of those…

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
A bit short on new developments here, although AUD getting perky in more of the crosses and interested in what unfolds for SEK pairs through the end of this week. As well, watching USDJPY as noted above.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Mexico Jan. CPI
  • 1300 –Hungary Central Bank minutes
  • 1310 – Bank of England Chief Economist Huw Pill to speak
  • 1400 – Poland Central Bank Governor Glapinski News Conference
  • 1530 – EIA's Weekly Oil and Fuel Stock Report
  • 1700 – USDA's World Agriculture Supply & Demand Estimates
  • 1700 – Canada Bank of Canada Governor Macklem to speak
  • 1700 – US Fed’s Mester (Voter) to speak
  • 0000 – Australia Feb. Consumer Inflation Expectations
  • 0001 – UK Jan. RICS House Price Balance

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

Contact Saxo

Select region


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.