Head of FX Strategy
The USD rally remains in good form after the April PCE inflation numbers rose as anticipated, with the core inflation number running at a +1.9% year-on-year level, the highest since 2012. US short yields remain at the highs of the cycle, with the 2-year benchmark touching 2.50% in recent sessions, though the longer end of the curve has retreated from the highs for the cycle. We’re creeping towards new pivotal levels in some of the major USD pairs, namely the 1.2000 area in EURUSD and the 200-day moving average just above that level and likewise, the 110 area in USDJPY and the 200-day moving average just above that level. The Dollar Index has already had a go at rallying above its 200-day moving average, which provided the resistance for the USD rally on Friday, it seems.
Yesterday saw Israeli prime minister Benjamin Netanyahu claiming in a briefing that Israel had acquired an extensive trove of documents proving that Iran had lied about its nuclear programme and whether weapon design was a part of that programme, as well claiming that Iran continued to pursue that programme after the nuclear deal was signed in late 2015. This clearly looks like an effort to sway US President Trump’s decision on the status of the nuclear deal, which will be announced on May 12, presenting the risk of all manner of geopolitical implications. Yesterday, the Israeli announcement saw a rally in crude oil prices and the Russian ruble was heavily offered again, with USDRUB closing near its lowest daily close for the cycle.
The Reserve Bank of Australia meeting overnight was nothing to write home about, with the bank sounding upbeat as usual in expecting a slowly strengthening economy that would grow above 3% for both this year and next. Still, the statement noted concerns on the overhang of private debt that could weigh on consumption. The recent slowdown in employment gains was also noted, as was the low wage growth. The next anticipated move is still seen as so far over the horizon that the RBA meetings are a mere formality.
Today, the UK and US report their latest manufacturing surveys as we await a not highly anticipated Federal Open Market Committee meeting tomorrow. More important, perhaps, are the next round of resistance levels in key USD pairs.
Chart: EURUSD
The euro-heavy Dollar Index has already been testing the 200-day moving average, but EURUSD hasn’t quite reached this milestone just yet, which also comes in near the psychologically and historically important 1.2000 area, with EURUSD showing a tendency to get sticky around big round figures. There is a nominal Fibonacci retracement level around 1.1936 (61.8% of the latest rally wave), but the general 1.2000 level looks like the real pivot for whether we are set for a test of 1.1500–1.1600 or whether the bulls can make a stand.
Source: Saxo Bank
The G-10 rundown
USD – The rally is in very good shape here and has plenty of speculative positioning the wrong way around for further fuel as long as the FOMC tomorrow, average hourly earnings data on Friday, or key tech levels (like 1.2000 in EURUSD and 110.00 in USDJPY) don’t throw up any roadblocks.
EUR – the weight of EURUSD selling affecting the euro less than we would have though likely, but EURJPY has also suffered a recent bearish reversal without much confirmation and new highs in EURGBP were rejected yesterday. If 1.2000 falls in EURUSD, broad euro weakness may become more prominent.
JPY – the JPY is trading rather neutrally to the rest of the market, getting some relief as long bond yields have dipped again. The only lifeline for the yen may be a return of weak risk appetite. Meanwhile, the last hope for the USDJPY bears looks like the 110.00 area.
GBP – sterling is recovering a bit as the structurally critical 1.3700-50 area has swung into view in GBPUSD and as a weak euro ought to support sterling indirectly via pressure on EURGBP.
CHF – the 1.2000 level in EURCHF appears impenetrable at the moment – could the Swiss National Bank look to unwind some of its portfolio of euro assets at this level? Regardless, the strong USD is taking USDCHF to interesting levels again as parity and the range resistance above approach.
AUD – we are negative on the Aussie, but strong mining stocks are not making an easy case at the moment – watching the AUDUSD area at 0.7500 and whether this holds for now.
CAD – the USDCAD rally is pausing a bit for breath as oil prices have posted a solid rally of late – but support may come in quickly if the USD rally remains intact as the key structural chart point remains the 1.3000 area to the upside.
NZD – the AUDNZD rally remains intact but needs a new catalyst – perhaps tonight’s NZ employment and earnings data supply will be the latest spark for additional flows. The 0.7000 area in NZDUSD looks like the last gasp support zone for any bullish holdouts.
SEK – EURSEK is extending and extending in one of the most persistent trends as USDSEK has powered through the big 8.50 area last week. It’s the kind of technical action that may end in a blow-off move at some point soon.
NOK – strong oil prices seem to be the only leg of the stool keeping NOK from new lows at the moment. Next catalyst of note will be Thursday’s Norges Bank meeting.
Upcoming Economic Calendar Highlights (all times GMT)
08:30 – UK Mar. mortgage approvals
08:30 – UK Apr. manufacturing PMI
09:50 – Australia RBA’s Lowe to speak
12:30 – Canada Feb. GDP
14:00 – US Apr. ISM manufacturing
17:00 – New Zealand Apr. QV house prices
18:30 – Canada Bank of Canada’s Poloz to speak
22:45 – New Zealand Q1 unemployment rate/employment change/earnings
The G-10 rundown
USD – The rally is in very good shape here and has plenty of speculative positioning the wrong way around for further fuel as long as the FOMC tomorrow, average hourly earnings data on Friday, or key tech levels (like 1.2000 in EURUSD and 110.00 in USDJPY) don’t throw up any roadblocks.
EUR – the weight of EURUSD selling affecting the euro less than we would have though likely, but EURJPY has also suffered a recent bearish reversal without much confirmation and new highs in EURGBP were rejected yesterday. If 1.2000 falls in EURUSD, broad euro weakness may become more prominent.
JPY – the JPY is trading rather neutrally to the rest of the market, getting some relief as long bond yields have dipped again. The only lifeline for the yen may be a return of weak risk appetite. Meanwhile, the last hope for the USDJPY bears looks like the 110.00 area.
GBP – sterling is recovering a bit as the structurally critical 1.3700-50 area has swung into view in GBPUSD and as a weak euro ought to support sterling indirectly via pressure on EURGBP.
CHF – the 1.2000 level in EURCHF appears impenetrable at the moment – could the Swiss National Bank look to unwind some of its portfolio of euro assets at this level? Regardless, the strong USD is taking USDCHF to interesting levels again as parity and the range resistance above approach.
AUD – we are negative on the Aussie, but strong mining stocks are not making an easy case at the moment – watching the AUDUSD area at 0.7500 and whether this holds for now.
CAD – the USDCAD rally is pausing a bit for breath as oil prices have posted a solid rally of late – but support may come in quickly if the USD rally remains intact as the key structural chart point remains the 1.3000 area to the upside.
NZD – the AUDNZD rally remains intact but needs a new catalyst – perhaps tonight’s NZ employment and earnings data supply will be the latest spark for additional flows. The 0.7000 area in NZDUSD looks like the last gasp support zone for any bullish holdouts.
SEK – EURSEK is extending and extending in one of the most persistent trends as USDSEK has powered through the big 8.50 area last week. It’s the kind of technical action that may end in a blow-off move at some point soon.
NOK – strong oil prices seem to be the only leg of the stool keeping NOK from new lows at the moment. Next catalyst of note will be Thursday’s Norges Bank meeting.
Upcoming Economic Calendar Highlights (all times GMT)
• 08:30 – UK Mar. mortgage approvals
• 08:30 – UK Apr. manufacturing PMI
• 09:50 – Australia RBA’s Lowe to speak
• 12:30 – Canada Feb. GDP
• 14:00 – US Apr. ISM manufacturing
• 17:00 – New Zealand Apr. QV house prices
• 18:30 – Canada Bank of Canada’s Poloz to speak
• 22:45 – New Zealand Q1 unemployment rate/employment change/earnings
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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.
