FX Update: Still waiting for that USD pivot. FX Update: Still waiting for that USD pivot. FX Update: Still waiting for that USD pivot.

FX Update: Still waiting for that USD pivot.

Forex
John Hardy

Head of FX Strategy

Summary:  Friday saw a huge additional boost in risk sentiment into end-of-month and end-of-quarter as the May PCE inflation report was read as benign. This reversed out the prior day’s US dollar rally, though USD direction likely needs to see the macro data through the Friday US jobs report before revealing its intentions. The next focus is the RBA meeting on Tuesday, with market split on the likelihood of another hike.


FX Trading focus:

  • USD direction remains in limbo after Thursday rally reversed on Friday.
  • Australia’s RBA: decision less interesting than commodities and other factors

Friday saw a leap higher in risk sentiment into the end-of-month and quarter, which may have driven some of the dynamic as the US dollar reversed most of the strength from Thursday that was generated off the back of a strong US jobless claims number. While the May PCE inflation number was read as benign by risk sentiment (the month-on-month coming in at 0.3% and year-on-year at 4.6%, a touch below the 4.7% expected), US 2-year yields finished relatively unchanged from levels prior to the data release and even extended higher to within several basis points of 5.00% today. We only saw two daily closes above 5.00% before the Silicon Valley Bank collapse touched off the banking turmoil and cratering of yields that has slowly rebuilt back to these levels from the May lows.

The rise in the short end of yield curves comes as the long end remains relatively anchored (although tantalizing near important resistance ahead of 4.00% in the case of the US 10-year Treasury benchmark yield.). With the “higher for longer” Fed getting priced in, this pushes back the timing of the Fed’s eventual rate cuts and has the yield curve achieving a new modern record inversion of -109 basis points for the 2-10. As long as the market persists with its view of eventual disinflation and no profit- or credit crunch concerns from an incoming recession, the USD will have a hard time finding notable support, though it’s performance relative to broader risk sentiment is surprisingly resilient. A USD rally requires either fear and loathing or the Fed back on the warpath because inflation is reaccelerating. With the Fed thoroughly in reactive-, and not forward guidance, incoming data releases could trigger notable short-term volatility. Still, there is little chance to sustain a bigger move if US treasury yields aren’t jarred more significantly out of ranges or the overall narrative shifts.

This first week of July brings the usual busy data calendar from the US, with the ISM Manufacturing survey for June up today and expected to show a marginal improvement after a subdued 46.9 reading in May. The preliminary June US S&P Global Manufacturing PMI just missed printing the worst level since the pandemic with an initial reading of 46.3. Later in the week, after a Tuesday US holiday, the US reports the June ISM Services survey on Thursday after May’s worst showed . The S&P Global Services PMI on the other hand registered its strongest reading in over a year in April at 55.0 and the initial June reading only dipped slightly to 54.1. Finally, Friday brings the June US labor market data, especially the Nonfarm Payrolls Change number after a strong surge in payrolls of +339k reported in May, while the Unemployment Rate is expected to dip back lower to 3.6% after an odd surge to 3.7% in May. Average Weekly Earnings/Hours are also in focus as these have both been on a declining trend since early 2022.

RBA preview
The Reserve Bank of Australia is set to make its rate announcement late in Tuesday’s Asian session, with the market and observers divided on the prospects for another hike after two consecutive surprise hikes from Governor Lowe and company. The market is pricing relatively low odds for the RBA to hike tonight, pricing higher, 50/50 odds of a move at the August meeting, while analysts surveyed by Bloomberg were evenly divided on the prospects for a hike tonight. The minutes from the prior meeting were somewhat dovish relative to prior meetings, and the AUD rally deflated rapidly, likely as key metals prices remain rangebound and the Chinese renminbi has suffered a long drawdown that coincides with the continued bleak outlook in China. Tonight, the RBA will have to surprise someone with the decision itself, but we are unlikely to see the bank driving notable forward expectations shifts. Those would require a notable change in the backdrop linked to commodities and China’s outlook. The next important Australian inflation report is the quarterly one for Q2 that will be released on July 26.A dovish hike seems more logical than another pause followed by a restarting of tightening in August, which is the market’s favoured outcome, but the RBA has shown a willingness to keep the market guessing and the monthly frequency of the RBA meetings allows more flexibility. Either way – like most other central banks, the RBA is reactive to incoming data and won’t guide beyond the next meeting.

Chart: AUDUSD
The AUDUSD has backed out much of the prior impressive rally that was driven in part by the RBA’s two consecutive hawkish surprises at the last two meetings. With the price action completely embedded back in the prior range, the resistance is now 0.6700-50, with the bigger downside resistance level below 0.6500 the next focus if the outlook for China remains downbeat. Note the triangulation that has been ongoing for the better part the last year.

Source: Saxo

Table: FX Board of G10 and CNH trend evolution and strength.
The JPY remains weak as US yields trade near important levels (5.00% for the US 2-year and the 10-year teasing the range highs late last week), while the US dollar’s relatively flat performance is impressive, given the complacent backdrop/strong risk sentiment. AUD faces a test on tonight’s RBA meeting. But outside of CNH and JPY, trend readings are feeble and a bit stale, needing a refresh or new developments.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Two key NOK pairs make for compelling watching here - EURNOK and USDNOK and whether they complete what could be eventual head-and-shoulder patterns. A crude oil rally likely needed there. After Friday’s back-off in the US dollar – several key USD charts are in limbo, including EURUSD and GBPUSD.

Source: Bloomberg and Saxo Group
Upcoming Economic Calendar Highlights (all times GMT)
  • 1400 – US Jun. ISM Manufacturing
  • 0430 – Australia RBA Cash Target Announcement
  • US Holiday tomorrow

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

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
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.