FX Update: EURJPY overextended if EU outlook sours again.

FX Update: EURJPY overextended if EU outlook sours again.

Forex 4 minutes to read
John J. Hardy

Global Head of Macro Strategy

Summary:  The rise in yields after a weak T-bond auction yesterday has largely been erased in pre-New York trading today as risk sentiment soured in Europe, possibly on COVID-19 news flow combined with weak employment data. The euro is under modest pressure and EURJPY looks a bit over-extended to the upside if we are set for a bout of concern on the EU growth outlook.


Yesterday saw bond yields edging higher still after a weak US 30-year T-bond auction that saw the lowest bid-to-cover ratio (2.14) since 2019, but the move lower from the closing price on Wednesday was already almost entirely erased by late morning in Europe this morning, so volatility around the move has been fairly muted – USDJPY had a go at 107.00 but has eased back lower and  most other FX pairs are boxed into narrow trading ranges. One exception to that in JPY crosses is EURJPY, where we wonder if the pair is overextended to the upside, given fresh COVID-19 breakout fears across much of Europe and the very weak Q2 employment numbers, which registered a -2.9% drop year-on-year, the worst ever, despite EU countries’ furlough and other programmes aimed at keeping workers nominally employed.

The Aussie could hardly muster a reaction overnight to RBA Governor Lowe indicating to a parliamentary committee that the latest outbreak is hampering the recovery and that he would like for the Aussie to be lower. Clearly, the RBA will have to up its game if it wans to keep a lid on the Aussie when iron ore prices are within 10% of their highest price stretching back to 2013 (when the CNY was some 10% stronger, by the way). The market is rightfully taking the RBNZ at its word on currency as it has a history of intervention and touted its “active preparation” for a negative rate policy. This has helped keep AUDNZD well clear of the recent 1.0865 break that could be opening up for a major move higher to 1.12-1.13. New Zealand’s renewed struggle with a COVID-19 outbreak after no new cases for months is another factor weighing on the NZD.

As for US yields, we continue to watch closely as a critical market input, but recognize that a challenge of perhaps 100 basis points in the US 10-year yield benchmark (currently 70 bps), for example, may be needed to set the market on edge.

US weekly claims data was rather positive yesterday, with the initial claims registering a chunky >300k drop to 865k and the continuing claims posting a 600k drop to below 15.5M. Today we have a look at US Retail Sales data, which gets increasingly interesting from here with the attenuation of the generosity of the CARES act payments after the end of July. The stimulus thrown at the economy during the lockdown was so generous that Retail Sales almost managed to bounce back to a new all-time high in June despite a cratering economy in Q2.

EM focus
Action in EM is a bit more engaging than what we are seeing in G-10 currencies, as USDTRY edges above the highest close for the cycle and the lira has now devalued some 5% beyond the perceived 7.00 level in USDTRY. The Turkish central bank will meet to set rates next Thursday and the government there has already pulled back from some of its credit stimulus excesses in recognition of the curency’s plight. Much more – and likely a series of rate hikes so despised by the country’s leadership – is needed to stabilize the currency. Elsewhere in EM, MXN is actually stronger against the USD after the expected 50-bps rate cut to 4.50% yesterday. The central bank’s statement positioned any further cuts on developments in inflation, which has rebounded back above 3.0%, so we’re likely close to or have just seen the last cut for the cycle. For Russia and the ruble (RUB), meanwhile, we are eyeing the situation in Belarus, where there are widespread protests against the election results – also with the participation of factory workers.  Russian involvement if the Belarusian government comes under pressure could bring with it the risk of sanctions and a therewith a threat to the ruble.

Chart: USDCAD
CAD and NOK have moved rather aggressively higher over the last week, clearly in part on crude oil prices trading near recent highs and perhaps as well on hopes that an imminent vaccine will encourage a demand rebound for energy that could meet some degree of supply shock in the months ahead after some production and especially investment has been shut down due to the collapse in prices over the COVID-19 crisis. USDCAD took out the major 1.3350-00 area on the way down, a bearish development. The bears are in good shape with a bit of fresh momentum over the prior two sessions helping avoid a “triple divergence”, but the outlook lower could hinge on new highs in oil prices and equities that haven’t been forthcoming today – quite the contrary. Stay tuned – the bulls still need a strong comeback above 1.3300-50 and then some to signal any trend reversal potential, while bears will continue to eye the next major hurdle at 1.3000 if risk sentiment and oil prices avoid any sizable consolidation.

Source: Saxo Group

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses 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.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore has not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
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.