FX FX FX

FX Update: Euro waxes resilient as G3 horse-race steals focus.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The Friday squeeze in equity markets saw the US dollar roll over after its most recent bout of strength. As market stumbled a bit to open this week after weak Chinese data in the Asian session overnight, the more interesting relative race to watch is the relative moves between G3 currencies as the euro shows signs of putting up a bit of a fight, at least against the Swiss franc to start, but EURGBP also found support at important levels.


FX Trading focus: G3 horse race the focus as euro, JPY resilience creep into the picture

The consolidation in treasury markets last week as risk deleveraging intensified at least briefly changed the narrative in FX, as the JPY enjoyed a massive comeback on Thursday on the safe haven appeal of long bonds finally kicked in. The short squeeze in equities on Friday saw that development reversing sharply, but the potential for JPY strength remains in play if we have seen at least a cycle high in bond yields for now. Both Fed tightening expectations and the longer end of the US yield curve have peaked recently and a follow through in 10-year yields below 2.75% opens up the next layers of resistance down to 2.50%.

Today, after a brought bout of new JPY and USD strength overnight, the most interesting independent mover today is the euro, which finally found support against GBP at important levels in EURGBP (ahead of the 0.8450 area and 200-day moving average slightly lower that was a breakout zone on the way up) and against CHF, as EURCHF pulled back higher to threaten the 200-day moving average and the psychologically important 1.0500 level. The readily identifiable drivers for positive Euro outlook today are ECB governing council member Villeroy out warning that an eye must be kept on the euro, but also helping are the reversal of the most recent surge in Nat Gas prices, and for the longer term, Netherlands prime minister making a strong pro-EU comment

Chart: EURCHF
EURCHF jumped back higher today, likely in part on the ECB’s Villeroy warning on the euro, but the pair needs to punch higher through the psychologically key 1.0500 area and the 200-day moving average to suggest a further revaluation higher is afoot (the 1.0600 looks even more prominent, but we need to recall that the massive cycle low in early 2020 was also near 1.0500). Certainly, the ECB warning does point to limits in the ECB’s willingness to sit on its hands and could prompt the central bank to indicate a willingness to shift into a higher gear in its tightening regime.  There has certainly been a strong regime change in CHF of late, as USDCHF smashed through the range high in late April and has been testing well above parity lately, even with US treasuries in consolidation mode.

Source: Saxo Group

Data focus this week is on the US housing market indicators and the Apr. Retail Sales report up tomorrow. It took only three months for the US mortgage rate to go from the unprecedented range lows (relative to pre-pandemic levels) as late as the beginning of January to a more than 10-year high by late March, and we have headed another 50 basis points higher since then. This is the largest rate shock by a mile on this very important financial condition. The first places to look for signs that the housing market is rolling over are in the volume of transactions and a slowing in new builds. The NAHB Survey of new home buying interest has rolled over but it is still at extremely high levels (higher than during housing bubble peak of 2005), while New Home Sales peaked in early 2021 and Building Permits are still at cycle highs – a mixed picture but overall, significant loss of momentum. The headline expectations for Retail Sales look strong, but we have to remember the multi-decade highs in inflation here, meaning real growth in retail sales requires very strong numbers indeed. Given very ugly sentiment numbers (see below), would expected downside risks in real retail sales lie ahead.

Friday saw a very weak US May preliminary University of Michigan sentiment reading at 63.6 for the “current economic conditions” half of the overall survey, a dramatic new cycle low and far below the 69.6 expected. Only three other readings in the 2008-09 cycle were lower still (record low in November of 2008). The overall index also made new lows for the cycle at 59.1. The longer term inflation expectations in the survey were stable at 3.0%. The last few days have seen new record high prices for gasoline in the US, which could affect the final UMich survey for the month and then inflation expectations bear watching for that survey and next month as an input for Fed policy.

Table: FX Board of G10 and CNH trend evolution and strength.
The Euro rally in broader terms has eased, but still positive, while interesting to note the divergence of JPY and CHF as the JPY retains some of the strength from the momentum introduced last week. What is gold indicating other than the cross-the-board challenge of recent USD strength?

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The EURGBP and EURCHF pairs put in a rally today that keeps the positive trend for those two pairs alive – watching for follow through (or not) in coming days for the trend status there.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US May Empire Manufacturing 
  • 1255 – US Fed’s Williams (voter) speaking 
  • 1300 – Canada Apr. Existing Home Sales 
  • 1415 – UK Bank of England Governor Bailey and other MPC members to speak 
  • 0130 – Australia RBA meeting minutes 

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.