FX Update: Commodity currencies play catch-up

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The EURUSD has retraced nearly all the way back to 1.2000 and neutralized the downside risk and more powerful momentum has now arrived in commodity-linked FX since yesterday against the big dollar, whether in G10 or in EM, the Russian ruble loudly excepted on new US sanctions incoming. More strong US data expected today, but the reaction to the CPI data earlier this week suggests that the market has already priced strong near-term numbers.


FX Trading focus: Commodity FX plays catchup, rising European yields, US data

The USD is lower again after yesterday’s action, though the action is switching to the more traditionally pro-cyclical currencies, as the G10 smalls and most EM currencies are playing some catchup in rallying against the big dollar. A huge jump in crude oil prices yesterday on a large US supplies draw has helped the commodity space and strong iron ore prices provided some offsetting support overnight for the AUD, which otherwise dipped at one point on a weak March jobs report showing that more than 100% of the net job growth on the month was in part-time positions.

As we noted on this morning’s Saxo Market Call podcast, the global Covid picture is still a concern and the global daily case count is actually not that far below its highest ever as a new wave is exploding in many populous EM’s including India, Turkey and the Philippines. But in Europe, markets seem to be looking beyond the vaccine stumbles as production and availability of the Pfizer-BioNTech vaccine looks set to expand dramatically from here. Certainly, SEK is enjoying a strong run recently on the euro’s recovery, as is its wont. EU yields are picking up as well, with the German 10-year Bund yield pulling back toward the key -25 bps yield in recent sessions. Looking at an article discussing the German Green party’s draft platform (warning: get your Google translate ready if you don’t read German) for the late September election, it is tough to over-emphasize how dramatic a development for the EU it would be to see this party in a ruling coalition, particularly if it has the Chancellorship. On everything from a more pro-EU stance and its opposition to the traditional German principle of fiscal “debt brake” austerity to the geopolitical implications for Russia (anti-NordStream2) and China (human rights concerns). The German polls are certainly on the move.

The core March US Retail Sales number today is expected to show an absurd month-on-month reading of 6%+ as the latest and largest of the US stimulus checks hit in the latter part of March. The recent past has shown how quickly the stimulus effect fades, so the market may look through this data, unless the jump is particularly high and suggests that some of the pent-up savings from the generous stimulus of 2020 and this year are being unleashed. Probably too early for that or for the market to jump to conclusions and the reaction to the hot CPI number earlier this week suggests that the bar is high for reacting to positive US data.

Chart: AUDUSD
The AUDUSD chart and many other USD charts have shown a fairly decisive leg of USD weakness, with commodity FX playing a good deal of catchup with other currencies over the last two sessions. The pair need now merely hold the 0.7650-75 area taken out on the way up to keep the sights on the 0.8000+ top and more. One development that might spoil the party for fresh bullish positions would be a renewed rise in US treasury yields. Iron ore futures in China were AUD-supportive overnight with a fresh surge, and tonight we have Chinese GDP and other data out.

Source: Saxo Group

Odds and ends

US to announce new sanctions against Russia. Anticipation of new sanctions against Russian individuals and entities and against US based investment in Russian sovereign-linked assets saw the ruble sharply weaker this morning. The Biden administration is assessing the sanctions on accusations of interference in the US elections and hacking of US company SolarWinds. The move arrives after earlier this week, the Biden administration seemed to be making friendly overtures on the prospects of a summit with Russian president Putin. Effectively, the whiplash has the net result that we are trading about unchanged from a week ago.

Turkey keeps rate unchanged at 19% as expected and the lira weakened slightly after a modest run of strength into today’s meeting. Not a surprise to see the reference to further rate-tightening removed from the prior statement, but also interesting to see the new statement indicating that the rate will be kept above the inflation rate, nominally TRY supportive in theory, but we have had a run of stabilization into this meeting, we know that the net reserve situation in Turkey is in bad shape, that the central bank will cut as soon as it thinks it sees daylight to do so, and Turkey is suffering an ugly new wave of Covid. I lean for USDTRY testing toward the highs of the cycle near 8.50.

Table: FX Board of G-10+CNH trend evolution and strength
Volatilities are dropping, but the USD is trending lower now until or unless the latest breakdown is reversed. Note that sterling has dug itself into something of a hole as well (suspect some or most of this this an unwinding of the quick vaccination premium). Also interesting to note that Gold has yet to come alive – real inflation in which global real rates under-perform any global rise in nominal yields needed to revive that story.

Source: Bloomberg and Saxo Group

Table: The individual FX Board trend readings
Note a couple of tings here, including the AUDUSD now trending positive after crossing over to positive yesterday – making it crucial for the bulls that the pair holds this break as noted in the chart above. Also note how few trends feature much “age” (number of days a pair has been in its current positive or negative trend state) and that a growing number of currencies are showing weakening intraday volatility (light blue and especially deep blue shading in the latest ATR reading) suggesting a market that is losing energy.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – Canada Feb. Manufacturing Sales
  • 1230 – US Apr. Empire Manufacturing
  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1230 – US Mar. Retail Sales
  • 1230 – US Apr. Philadelphia Fed Survey
  • 1400 – US Apr. NAHB Housing Market Index
  • 1430 – DOE’s Weekly Natural Gas Storage Change
  • 1800 – US Fed’s Daly (Voter) to speak
  • 0200 – China Q1 GDP
  • 0200 – China Mar. Industrial Production
  • 0200 – China Mar. Retail Sales

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