FX Update: Blue Wave Lite crushes USD, but watching US yields

FX Update: Blue Wave Lite crushes USD, but watching US yields

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  The two Senate run-off races in Georgia are set to go to the Democrats, giving the incoming Biden administration control of the US Congress by the slimmest of margins. This has strongly rejuvenated the reflationary trade, driven by a weaker US dollar. Most importantly, US long yields have broken resistance, which eventually could become a hurdle for USD bears.


FX Trading focus:

Blue Wave Lite: clear sailing for USD bears now, but watching US yields
Although we may have to suffer through a recount episode due to the slim margins of victory, it appears certain that both of the two Senate seats up for grabs in the Georgia run-off elections are set to fall for the Democrats. This will give the incoming Biden administration marginal control of the Senate with a 50-50 tie, and VP Harris can cast the tie-breaking vote.

The market interpretation of the outcome is largely as expected – reflationary and USD bearish. The idea is that a slim Democratic majority is enough to allow the stimulus gravy train to roll and in bigger size than would have been the case in a divided Congress. We will likely see the larger stimulus checks very soon after Biden’s inauguration as a first step, for example. The path to more generous infrastructure spending is also likely easier as well – although I was already convinced that bipartisan attitudes toward spending had already seen a huge shift relative to the past cycle.

Further out, given the slim control of Congress, it is very difficult to see significant tax code adjustments on the agenda at all and certainly not this year, which will be all about getting to the other side of the pandemic. Next year could be another matter, but a full reversal of Trump’s corporate tax cuts is never going to be on the agenda. Likewise, green initiatives face a tough path .

While the reflationary reaction is all straightforward stuff, the  most important development on the back of this election development is the break higher in US yields, with the US 10-year treasury benchmark yield trading north of 100 basis points for the first time since pre-pandemic and the 30-year likewise above 1.75%. The big level for the latter is actually quite close as the pre-pandemic range low was around 2%, while for the 10-year it is almost 50 bps higher in the 1.50% area. Eventually, a further rise in US yields  would start to undermine the  USD bear move unless the Fed starts to hint at capping yields or if other countries’ yield curves start to play ball in the same direction.

Chart: AUDUSD
AUDUSD and NZDUSD  have been leaders in this USD bear run in recent weeks, with both posting new tops for the cycle yesterday and certainly in fitting both with the reflationary trade driven by a weaker US dollar and higher commodity prices, but also by the strength in the Asian countries relative to Europe and the US on avoiding as bad a second wave of Covid-19. The next major chart resistance for AUDUSD if this move holds does not arrive until into the 0.8100 area. The latest acceleration has actually seen the AUDUSD break above the upper bound of its trend channel. Interesting to see if the move lower in the US dollar can continue at the present pace if a) the risk sentiment dip turns into a wider route of some scale on this US election outcome and more  importantly b) if US yields at the long end of the curve continue to rise aggressively. The latter would eventually slow the pace of USD declines unless the Fed rolls out the cavalry and hints that yields will be capped at some point.

Source: Saxo Group

The G-10 and CNH rundown

USD – weaker on the Blue Wave Lite scenario driving more aggressive US fiscal and hence US external deficits. The more US long yields rise, however, the more resistance comes in unless the Fed steps in with fresh guidance. A 77.5 reading in the Dec. ISM Manufacturing prices paid enhances the interesting in coming inflation releases.

CNH – China moving against Hong Kong opposition overnight, seeming to make a number of strong moves during the lame duck period of the US political cycle. The onshore rate is flat relative to the move of two days ago – so we can see how USDCNH is always its own “market”.

EUR – the EURUSD pulling to new highs and could be set for a run to 1.2500+  - but new fiscal in Europe and something resembling good news on the economic growth front would be helpful at some point.

JPY – the yen is a bit more of a reluctant fellow traveler in strengthening versus the USD when long US yields rise – still, USDJPY managed its lowest daily close yesterday aside from one day during the pandemic crisis last spring. The next obvious chart area there is 100.00.

GBP – sterling is sidelined by the ugliness of Covid and the drag of Brexit uncertainty – with the latest move in EURGBP back into the higher range. The structural setup for the UK is so similar to that for the US, but with such a different starting level. The UK race to vaccinate relative to the extra contagious Covid-19 strain on the loose there is what to watch over the next two months.

AUD – the AUDUSD actually accelerating beyond its trend channel on this latest move, as AUD draws on support from the reflationary narrative, its exposure to rising iron ore and other commodity prices and a stronger Asian economy, with only the recent trade spat with China on Australia’s stance on a number of issues the lone sour note in the background. Oh, that and private debt levels – but that’s not where we are in the cycle.

CAD – the Saudi move to independently cut yesterday indicative of the resolve to get the supply/demand balance for oil back in place and the surge takes CAD higher, if more slowly than other commodity dollar peers. The next major USDCAD level looming into view soon as 1.2500 approaches.

NZD – the kiwi keeping pace with the AUD as AUDNZD has traded back and forth across the 200-day moving average for weeks now. Still see the chart as having put in a low as long as we stay north of perhaps 1.0600 and prefer AUD as long as the reflationary trade is on.

SEK – the krona enjoying a surge in strength here after a squeeze earlier this week and EURSEK should test 10.00 soon if we avoid a consolidation in risk sentiment and can see the light at the end of the Covid-19 tunnel in coming weeks.

NOK – the krone in a very good place with this latest surge in oil prices and EURNOK testing new post-pandemic wipeout lows – next area into 10.30, but really the huge 10.00 level eventually.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1300 – Germany Dec. CPI
  • 1315 – US Dec. ADP Employment Change
  • 1400 – UK BoE Governor Bailey to Speak
  • 1445 – US Final Dec. Services PMI (Markit)
  • 1500 – US Nov. Factory Orders
  • 1530 – US Weekly DoE Crude Oil/Product Inventories
  • 1900 – US FOMC Meeting Minutes
  • 2350 – Japan Nov. Labor Cash Earnings
  • 0030 – Australia Nov. Building Approvals
  • 0030 – Australia Nov. Trade Balance

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.