Head of FX Strategy
The last couple of Asian sessions before today’s had generated considerable unease in global markets, but overnight, Asian markets took a breather from the recent heavy selling impulse after a wildly positive US session driven by a massive ramp in Apple stock after positive earnings announcement that took the stock’s market cap above $1 trillion.
(Update: after writing the above and most of the rest of today’s article, Chinese stocks plunged suddenly by about a percentage point to a new low closing level for the cycle.)
The USD is also firm as we look around for drivers, the most prominent among which at the moment may be the ongoing rise in USDCNY, which is drawing nearer the 7.00 level that could represent a game-changer for the market’s complacency if breached.
Emerging markets did not take kindly to the combination of a stronger USD and stronger JPY and the negative spiral for TRY continues as well.
The market is itching to get a peek at China’s FX reserves next Tuesday after the recent fall in the CNY, which got under way in earnest only in mid- to late June if we look at the CNY basket. In the 2015-16 experience, the falling CNY was accompanied by large draws on reserves as capital flight was a major driver and China had to mobilise its reserves to slow the yuan’s depreciation.
Is that the same case this time around? If so, it would look less nefarious from the US’ perspective than if China accumulated reserves to drive a weaker CNY.
Today is US payrolls and average hourly earnings day, but it feels from past experiences that the bar is very high for surprises from average hourly earnings, which have gone nowhere in recent months. A miss to the downside, given the evidence of still strong economic activity elsewhere (Atlanta GDPNow for Q3 suggesting 5% annualised growth) might be brushed off as a statistical anomaly. An upside surprise might prompt more trading interest. The payrolls data, meanwhile, are largely uninteresting barring enormous surprises.
Next week’s US economic calendar has the Friday July CPI data as the only data point of real interest. But the US Treasury auction will also look to auction a decent chunk of new Treasuries, with auctions of three-, 10-, and 30-year debt Tuesday through Thursday.
According to the Wall Street Journal, the US Treasury's borrowing needs will be a staggering 63% higher for the rest of this year relative to 2017.
Chart: EURUSD
EURUSD finally showing signs of momentum development and yesterday’s session saw the break of the line of consolidation – though a real break lower requires a takeout of the 1.1500 level.
The G-10 rundown
USD – the USD riding high here as we keep an eye on the 7.00 level in USDCNY and the range lows in EURUSD and elsewhere. The US data needs to surprise strongly either way to serve as a catalyst – more easy to do so on the earnings data.
EUR – don’t look now, but Italian yields are rising aggressively with no known specific driver for the action – though seems likely it could have something to do with sending a message to Italy’s leaders ahead of the upcoming budget meetings. EURUSD is running out of downside range as we discuss above.
JPY – firm in the crosses as the market’s double take on the recent BoJ decision suggests that it was supportive after all. JPY strength looks most potent in the crosses – have a look at NZDJPY and GBPJPY for example, and EURJPY approaching the interesting 129.00 area.
GBP – more signs of a softer stance from the EU side in Brexit. The reaction to yesterday’s hawkish BoE shows that the market doesn’t care about a marginal upgrade to the rate outlook and is far more concerned with the Brexit outcome. The next key is whether the May/Macron meeting can produce a softening change of tone from the French president as well.
CHF – EURCHF remains soft, likely on the widening of the Italian yield spreads. A showdown over the Italian budget and further spread widening could drive further weakness there.
AUD – AUDUSD similar to EURUSD in running out of downside range toward 0.7300 – a weaker CNY and ongoing worries about China’s economic trajectory could drive further downside in coming weeks.
CAD – bulls hanging on to their USDCAD longs as long as recent lows stay in place but CAD quite firm in the crosses as the BoC outlook has managed to keep pace with the Fed’s in recent weeks.
NZD – the kiwi weakening a notch faster than the Aussie as rates at the short end of the NZ yield curve notch new lows for the year after the recent very weak earnings data – more vulnerability to the downside on the dovish RBNZ guidance.
NOK and SEK – nothing going here and seem generally vulnerable in the weak EUR backdrop. Next Friday sees the release of the latest CPI figures for both Norway and Sweden.
Upcoming Economic Calendar Highlights
• 0800 – Norway Jul. Unemployment Rate
• 0830 – UK Jul. Services PMI
• 0900 – Eurozone Jun. Retail Sales
• 1230 – Canada Jun. International Merchandise Trade
• 1230 – US Jul. Change in Nonfarm Payrolls
• 1230 – US Jul. Average Hourly Earnings Change
• 1400 – US Jul. ISM Non-manufacturing
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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.
