background image

FX Update: Market hoping for a goldilocks setup as energy spike reverses.

Forex 4 minutes to read
Picture of John Hardy
John J. Hardy

Global Head of Macro Strategy

Summary:  Markets are in a positive mood as the energy price spike has partially reversed, the US debt ceiling issue looks to have been punted down the road a couple of months, and as long term yields are orderly. Hard to believe that the market can have its cake and eat it too here, but the US dollar is on its back foot here on the combination of risk sentiment reviving while US longer dated US treasury yields remain below recent highs.


FX Trading focus: Market hoping for a goldilocks vibe.

The powerful reversal in energy prices after Russian president Vladimir Putin claimed yesterday that Russia is ready to supply the market with gas has dramatically improved sentiment in Europe and in generally risk-correlated FX, although you can’t see much of that improvement in the euro, where the dovish ECB holds back upside potential. Also supportive of risk sentiment is the US Senate apparently readying to punt the debt ceiling issue out to December, while treasury yields have remained orderly at the long end of the yield curve despite the general relief and the very strong Sep. US ADP private payrolls change yesterday, at +568k. That strong report may nudge expectations higher for the official Nonfarm payrolls change number tomorrow, which, together with the Average Hourly Earnings data is the next test for whether a kind of brief “Goldilocks” interlude can be achieved here in which yields remain tame at the long end of the curve and the energy crunch story fades for now, helping to relieve concerns of stagflationary outcomes.

I’m not a fan of the idea – but we just may have a window if the US jobs report is sufficiently boring. Surely a reasonably strong US jobs report surely sees a fresh pull higher in US yields? Let’s see, Powell spelled out at the press conference of the September FOMC meeting that the Fed doesn’t need a particularly strong report tomorrow to move forward with a QE taper, but if we get a very strong report, together with much higher than expected average hourly earnings, this could affect the pace of tapering and jolt this market.

The ECB is said to be studying how to continue doing QE beyond the telegraphed expiry date of March of next year to their PEPP program. Maybe it should consider funding some resilience in the EU’s energy supply system, although given Lagarde’s focus on the climate, linking the next round(s) of QE to the climate agenda wouldn’t be a huge surprise.

Chart: GBPUSD
Sterling is on the brink of key resistance in GBPUSD as the 1.3600+ area the was so important on the way down has been in play in recent sessions. Prime Minister Boris Johnson’s speech yesterday seemed to make a solid impression on BoE rate expectations as he talked up the Conservative “Build Back Better” and “Leveling up” platform. Just over the last few weeks, UK 2-year rates have outpaced EU rates by more than 20 basis points as rate hike anticipation from the BoE rises. The UK-EU spread is around 118 basis points today and at its widest level in more than two years (the high in this spread since way back in 2007 is a mere 138 basis points – we’re almost there). Against the US, the UK 2-year spread is also widening – with the UK-US rate spread rising a further 15 basis points in under a month to reach the current level near 35 basis points. I doubt sterling is responding as much to these developments as it is to the relief on the energy crunch/risk sentiment side of the equation, which seems to dominate the correlation with GBPUSD more so than yield spreads, even if the latter certainly don’t hurt and get more focus if risk sentiment continues to improve. Regardless – the 1.3600-50 area in GBPUSD and the 0.8450-0.8500 zone look pivotal for whether sterling can achieve a new lift-off in coming days and week or whether it is brushed back lower on the fears that have seen it underperforming the rate rise developments this year – including Brexit uncertainties, lower real rates, and capacity constraints in energy and transport and supply chain infrastructure. The huge correction in energy prices is especially a relief for the import-reliant UK.

07_10_2021_JJH_Update_01
Source: Saxo Group

Interesting to note RUB rising as gas prices are crushed – the market rates the overture from Putin to supply gas (clearly contingent on NordStream 2 pipeline becoming operational) far higher than the fact that oil and especially gas prices have cratered in the wake of his move yesterday. USDRUB trades below the September lows this morning and only has the June low-water market remaining as a range support down just above 71.5.

Poland surprises with a rate hike – 50 more bps in November? The inflationary pressure was apparently too much to bear for National Bank of Poland, which surprised the market yesterday with a rate hike of 40 basis points to take the policy rate to 0.50%. This came after the bank had signaled that it would wait for the November meeting and new forecasts on inflation before moving. It also came after the minutes of the prior meeting showed a motion to hike by 190 basis points to take the rate to 2.00% in one go was voted down and shortly after Governor Glapinski said earlier this week that policy normalization could be on hold until as long as 2023. Huh? Last Friday, the September CPI headline reading was a heady 5.8% year-on-year versus 5.3% in August and the NBP apparently decided it was simply time to act, perhaps to cover political risks as some have pointed out that just hours before the announcement, Poland’s prime minister said the inflation is “worrisome”. Guidance from the meeting was generally lacking on further hikes, though a reference to continuing the bank’s bond-buying program was removed.

Table: FX Board of G10 and CNH trend evolution and strength
Not much life in the Euro even with relief on the energy price front since yesterday. Sterling is doing what it can to remain interesting – needs another half percent or a bit more versus the USD and EUR to turn the tables. Elsewhere, CAD and NOK strength holding on reasonably well, but could be in for rough sailing if the energy reversal deepens.

07_10_2021_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Note AUDUSD vying to reverse to an upside move as it trades near local 0.7300 area resistance.

07_10_2021_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1300 – ECB Chief Economist Lane to speak
  • 1300 – ECB's Schnabel to speak
  • 1400 – Canada Sep. Ivey PMI
  • 1430 – DOE's Weekly Natural Gas Storage Change
  • 1545 – US Fed’s Mester (non-voter) to speak
  • 0030 – Australia RBA Financial Stability Review
  • 0145 – China Caixin Sep. Services PMI

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.