FX Update: EURUSD heavy on big support, RBNZ hawkish as it holds.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The EURUSD continues to press down on the big 1.1700 area ahead of the FOMC minutes this evening, which are a possible trigger for the lowest levels of the year. Elsewhere, a modest pick-up in US yields is seeing a bit of consolidation in the JPY strength that marked the beginning of the week, while NZD largely remains on its backfoot after the RBNZ passed on hiking due to the new Covid cases in New Zealand, even as it brought a rather hawkish policy forecast.


FX Trading focus: EURUSD heavy, RBNZ hawkish, but holds.

A brief update today as we await FOMC minutes tonight as the likely trigger if EURUSD is going to break down to its next downside objectives on USD strength. A more pointed indication that many share the view on the Fed that tapering should begin sooner rather than later (bolstered by the back-up in the Fed’s repo facility to well above a trillion dollars now) could help trigger an extension of the USD rally, a rally that is seeing resistance giving away in places (AUDUSD and possibly NZDUSD after a hesitant attempt overnight) while EURUSD has toyed with the lows just above 1.1700 today and looks primed to at least test lower tonight. The next objectives are 1.1600, near the lows in September and October of last year, and then the 1.1500 area, which was a pivotal level pre- and post-pandemic outbreak.

A further angle on tonight’s FOMC minutes is whether a USD reaction takes US yields higher at the longer end of the curve as well and thus involves USDJPY in a broader bout of USD strength than we have seen otherwise in recent days. For trading USD strength, many will feel justified in focusing on EURUSD in particular, but also AUDUSD and NZDUSD. Note as well that GBPUSD has now dropped back below its 200-day moving average and really only has the 1.3572 lows from July to support it ahead of the huge 1.3500 level. Wanna-taper, but non-voting Bullard is out speaking before the FOMC minutes.

Chart: EURUSD weekly
A fairly straightforward situation here as EURUSD weighs heavily on the 1.1700 area lows of the year ahead of the FOMC minutes, with catalyst for the euro very tough to identify save for the political situation heading into the late September German election. It’s up to USD direction then to establish the next move, with 1.1600 the easily identifiable next objective if the FOMC minutes and/or weak risk sentiment could prompt further USD strength. Below that, 1.1500 was an important resistance on the way up from the post pandemic outbreak lows. The 61.8% retracement of the entire 2020 low to 2021 high rally comes in at 1.1290.

Source: Saxo Group

RBNZ posts hawkish policy forecast even as it holds

The RBNZ failed to hike overnight as I suspected might be the case and explicitly linked its pass on moving rates to the Covid outbreak discovered just the day before the meeting. And it is a proper “outbreak” rather than the single case, as at least 10 cases have now been confirmed as of this writing. Other details emerging show how quickly the virus can spread and the fact that it has been genetically linked to strains in Australia suggest that the virus somehow made it through New Zealand’s quarantine perimeter. The coming days to couple of weeks will tell us whether New Zealand is able to bite the risk of a wider outbreak in the bud and the kiwi will trade with heavy exposure to headlines.

If the outbreaks takes on the scale of something like the Australian situation, we should expect a tightening of rate spreads expectations between the RBA and RBNZ and a much weaker kiwi. At this meeting, the RBNZ upgraded its monetary policy forecast (in its more than 50-page monetary policy statement) making it clear that it is ready to hike quickly if this Covid situation is kept under control. There was an interesting comment about housing possibly offering a counter to upside risks for the economy as well. Note that RBNZ Governor Orr will testify before a parliamentary select committee tonight.

Australia Q2 wage growth comes in weaker than expected and this will likely help to keep the RBA on the sidelines for longer, as it has specifically linked the timing of rate hikes (currently not expected by the RBA until 2024)with pressures from wage growth in a tightening labor market. In Q2, wages rose +0.4% QoQ and +1.7% year-on-year vs. +0.6%/+1.9% expected, respectively. 

UK activity number – to fade in September? A great England-based friend of mine noted that UK activity numbers are likely to look better for July and August than they should due to the difficulty of taking holidays on the continent from the UK (Italy requiring, for example, a 5-day quarantine for travelers arriving from the UK). Where outbound travelers outnumber inbound travelers traditionally.

Table: FX Board of G10 and CNH trend evolution and strength
No direction changes here, with USD strength picking up and AUD and especially NZD weakness deepening in the trend readings.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
The USD strength is spreading sufficiently to have USDCHF trying to flip to the positive today – could be a significant move there on the back of the FOMC minutes if the message moves long US treasury yields higher. Also note that EURNOK is flipping back higher, though the chart suggest a leg higher above 10.50 and weak oil prices are likely needed to threaten another significant squeeze to the upside. Note that the Norges Bank meets tomorrow (expected to hike at the September 23 meeting).

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Jul. Housing Starts
  • 1230 – Canada Jul. CPI
  • 1430 – EIA's Weekly Inventory Report
  • 1600 – US Fed’s Bullard (non-Voter) to speak
  • 1800 – US FOMC Minutes
  • 2110 – New Zealand RBNZ Governor Orr before parliament select committee on Monetary Policy Statement
  • 0130 – Australia Jul. Employment Change

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 and a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or 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.