Head of FX Strategy
Not long after EURUSD was probing toward the 1.1500 pivot level yesterday and other USD pairs has reached new local extremes of USD strength, a powerful bout of USD selling washed over the market, with every observer, including yours truly, trying to determine the source of the selling. The most likely answer is simply “flow”, but we can string together a couple of ideas that might have prompted the USD selling yesterday.
The first of these is that Norges Bank and the Bank of England both signalled a more hawkish than anticipated stance, with the latter the bigger surprise and triggering a large reversal in GBPUSD from new local lows. The Bank of England voted 6-3 to keep rates unchanged, with the influential Chief Economist Haldane voting for a hike this time around. As well, the Bank was positive on the economy and indicated that it is now set to begin reducing its balance sheet as soon as the policy rate reaches 1.5% (previously this was 2.0%). Despite the European Central Bank's rather dovish performance last week, the BoE meeting outcome, particularly its more hawkish guidance on unwinding of its QE purchases, enhances the narrative that the era of easy monetary policy is ending not only in the US, but elsewhere, reviving the “convergence” narrative that drove much of the USD weakening last year.
Another reason the market may fear taking the USD strength to new extremes is the risk that the strong US dollar gains negative attention from the US side in the ongoing trade war risk. It would be natural, at any random point in time, for Trump to tweet criticism of ECB and/or Bank of Japan policy, which is chiefly aimed at keeping the currency weak. Note the excellent Albert Edwards piece out yesterday arguing that the market is not focusing enough on the risks of trade tensions between the US and Europe and how central bank policy could be a bone of contention.
Given that this USD reversal arrived just as the USD had crossed above a key threshold, this may prove to have been a key reversal for the greenback from a regime of strength back to weakness. Today we look for where the USD closes the day and the week, offering further clues on whether we have just seen a key reversal. If risk appetite weakens, we would prefer to focus on USDJPY downside potential, but GBPUSD also looks compelling after yesterday’s bullish reversal if it can remain above 1.3200. This morning’s flash June PMIs out of Europe are also an interesting test of the relative US/EU economic strength narrative, after so many weak data points out of Europe.
Chart: Dollar Index
The 95.0+ resistance level from late 2017 and last month was breached just before a significant wave of USD selling washed over the market. The sell-off is still modest relative to the magnitude of the recent ECB-inspired rally (the dollar index is quite EUR-heavy at 58%), but the momentum picture shows some divergence and will quickly turn back lower if the USD doesn’t immediately turn back higher here.
The G-10 rundown
USD – the USD remains the chief focus after yesterday’s high energy reversal in most USD pairs. To fully reverse momentum in EURUSD from last week’s ECB reaction, for example, the pair needs to rally all the way through 1.1700-50.
EUR – today’s flash PMI’s an interesting test of the quality of this euro bounce, which has thrown the bulls a lifeline if we can stay above yesterday’s lows.
JPY – USDJPY has gyrated over the last couple of session with multiple direction shifts linked to similar shifts in direction in risk appetite and US bond yields. Yesterday’s rejection of the rally resulted in a modestly bearish candlestick on the close, but momentum has already turned lower. The Ichimoku cloud is not far away to the downside.
GBP – sterling rallying on the BoE decision, and GBPUSD may have just seen a key reversal if it maintain the rally impulse here and remains above 1.3200. EURGBP remains a riddle for now, possibly requiring a Brexit breakthrough to shake the pair out of the range.
CHF – A deal on Greek debt and funds to extend the governments funding beyond the end of the bailout deal suggest a stronger commitment to the EU and keep EURCHF out of trouble for now to the downside – next temperature test is next week’s EU summit and how Merkel deals with the CSU mutiny on migration.
AUD – the Aussie getting a boost versus the USD more on the latter’s weakness. The key resistance zone for AUDUSD looks like 0.7450/0.7500. Would suspect the AUD underperforms if we have a risk-negative USD sell-off.
CAD – key data today that are some of the final inputs for the July 11 BoC rate decision, where the market is leaning increasingly for a hike. USDCAD is a long way from a reversal, but we’re open minded if the tide is turning elsewhere.
NZD – the technical situation locally in NZDUSD is rather similar mirror image of the dollar index, so USD bears have a better hook here than elsewhere on the rejection of yesterday’s new cycle lows.
SEK – will the Riksbank play ball with the theme of leaving behind the era of central bank policy excess? Few signs thus far, but significant upside potential for SEK if the Riksbank finally. For now, SEK bulls will look for 10.35 to hold in EURSEK and hope that USDSEK is executing a triple top ahead of the big 9.00 level.
NOK – Norges Bank offering a boost for NOK as the bank points specifically to high odds for a September hike, providing a mild boost to the rate outlook. Key couple of sessions ahead for oil as OPEC and NOPEC meet today and tomorrow.
Upcoming Economic Calendar Highlights (all times GMT)
0700 – 0800: Eurozone Flash Jun. PMI
1230 – Canada Apr. Retail Sales
1230 – Canada May CPI
1345 – US Flash Markit PMIs