USD bear needs one more test

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The USD has turned sharply lower as the market decides to celebrate the anticipated string of Fed rate cuts. But let’s keep in mind that forceful Fed easing will require bad news on the US economy – something the market has certainly not celebrated in past cycles.


The US dollar finished last week on a low note, with EURUSD above 1.1350 for the first time since March and EM currencies and markets in a tizzy as global markets are celebrating the return of the Fed policy punchbowl. The difficult path for asset markets from here will be how they deal with a real slowdown in the US economy that suggests the Fed was already well behind the curve before launching its easing campaign (nearly guaranteed to start in July). 

So sure, the Fed is set to cut and could cut at a breathtaking clip on deepening signs of economic weakening, but the market’s celebration in risk sentiment terms could come to an abrupt halt. How the US dollar behaves during the next bout of risk-off behaviour is the test for how profound a USD weakening we can expect from here, but the sense now is that the USD is turning lower and may have peaked for the cycle. 

Reserve Bank of Australia Governor Lowe expressed some frustration overnight as he regretted that “everyone is easing”, making it difficult for the RBA to get any traction from its latest easing campaign as he sees the exchange rate providing a major portion of an easing policy’s impact.”…if everyone is easing, there is no exchange rate channel.” He also sounded rather hawkish in saying that “there are limits to what further easing can achieve.” and saying that is dangerous to attempt to out-dove other central banks. In general, his comments echo some of his historic comments expressing distaste for extremely low interest rates. Rather, he argued, the government should take advantage of low rates to invest in infrastructure and provide fiscal stimulus as a better way to stimulate the economy. Is this a hint that Lowe won’t want to take the policy rate below 1.00%? The market is looking for more, so stay tuned.

Well, not everyone is easing and finally the Norges Bank’s “lone hawk” status is paying off for NOK bulls, helped by a strong risk sentiment impulse in the wake of the FOMC meeting last week and a recent surge in crude oil prices. EURNOK has now broken down through the immediate range support, but still has work to do to achieve bear trend status. The divergence of the dovish Fed relative to the hawkish Norges Bank is finally gaining more attention as we discuss in the chart below. 

Trading interest

Looking for going long AUDUSD on dips with stops below 0.6870 and looking to add on a break above 0.7000.

Buying dips in EURUSD (stop placement difficult – sub-1.1300) for a try toward 1.1500.

Chart: USDNOK

The policy divergence between the Powell Fed and the Olsen Norges Bank is the strongest within the G10 and is finally getting traction in the USDNOK exchange rate. The pair is soon within reach of the 8.40 range lows for this year as the market sees the Fed set to deliver a series of rate cuts and the Norges Bank now expected to deliver another rate cut in September (explicitly spelled out by Olsen late last week)
Source: Saxo Bank
The G10 rundown

USD – the US dollar on its back foot and may be rolling over for the cycle - as discussed above, we await the behaviour of the greenback in the event we see a downdraft in risk sentiment on the theme of USD liquidity concerns (nowhere in evidence at present).

EUR – the euro trying to turn back higher now versus the US dollar – may underperform smaller currencies as long as this risk appetite melt-up extends. Watching the European Central Bank leadership contest closely and signals from EU commission leadership battle. A fiscal approach could do wonders for the euro. 

JPY – interesting to note long end yields picking up a bit here as it is very difficult to sustain a melt-up in equities and long end treasuries at the same time. This week is quarter end and could see significant portfolio adjustments that may not favour JPY if long yields continue to rise.

GBP – sterling struggling to maintain altitude versus the euro, but what further conclusions can we draw for now as we have to await the official transfer of power to take place and measure the mood in the next round of EU-UK negotiations to have anything to go on.

CHF – the franc looking a bit ambitious here with a backdrop of wild-eyed strength in risk appetite, yields ticking back up, and the market perhaps taking lame-duck Draghi too seriously.

AUD – the RBA comments are a risk to still-crowded AUD shorts, but AUDUSD needs to vault the key 0.7000 area to get something more profound going technically.

CAD – the surge in oil prices and last week’s hot CPI reading from Canada allowing USDCAD to explore the last bit of range to the downside. The next hurdle is the 1.3000 area.

NZD – if AUDNZD can’t rally on interest rate spread differentials, perhaps a glance over at current account fundamentals is worth a trader’s while. New Zealand’s current account deficit has deepened to -3.6% of GDP in Q1, with the last three quarters showing the largest deficits since 2013. Meanwhile, Australia’s current account has improved rapidly in recent quarters and is at -0.6% of GDP, the least negative balance in modern memory.

SEK – EURSEK looking heavy above the important 10.60 pivot area and should be able to take it out with the supportive backdrop here.

NOK – as indicated above, constructive on NOK in this environment and watching whether EURNOK can take out next pivot area below 9.60, though a few trendlines a bit above there.
 
 
Upcoming Economic Calendar Highlights (all times GMT)

0800 – Germany Jun. IFO Survey

1430 – US Jun. Dallas Fed Manufacturing Activity

2245 – New Zealand May Trade Balance

2350 – Japan Bank of Japan Meeting Minutes
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd 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 Combined 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.

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) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

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) Pty Ltd 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 & Combined Financial Services Guide & Product Disclosure Statement 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. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. 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.

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.