FX Update: USD drops to new lows ahead of FOMC minutes.

Forex 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  The USD dropped to new lows for the cycle against the majority of the rest of G10 currencies, with USDCAD and GBPUSD leading the way, while the move was more sluggish elsewhere. US stimulus may prove smaller than previously expected, but markets look complacent on that issue as we eye incoming signals from the Fed, starting with FOMC minutes tonight.


Not that markets are expressing and concern, but the next round of US stimulus may prove smaller than expected, if we are to believe Bloomberg sources in an article outlining the risk that a stimulus deal may only be struck on terms that both sides can agree on until the other side of the election. This could mean a deal as small as $500 billion versus the original $1 trillion Republican plan and far larger $3.5 trillion Democratic plan. At the same time, many companies are pushing back against Trump’s payroll tax deferral idea as unworkable and many states have not yet even signed up for the $300/week new Federal unemployment benefit that replaced the $600 payments through end of July.

The USD was pushed lower still yesterday, led by a solid pull higher in GBPUSD (more on that below) and USDCAD falling steadily as it explores the last bits of the range ahead of the pivotal 1.3000 area. Some enthusiasm for CAD could be on Prime Minister Trudeau promising a strong stimulus plan with this new Finance Minister Freeland when Parliament resumes business on September 23 after a proroguing to end the current session. But surely an oil breakout higher is a first necessity to see USDCAD challenge the 1.3000 level. Today’s US energy inventory data may spark oil volatility.

Looking ahead to the FOMC minutes tonight for any sense of urgency in the Fed’s observations on the need for further stimulus, or any disc. As outlined yesterday, the more important signals ahead from the Fed will arrive with the Fed’s comprehensive policy review results (allowing inflation to run above target without responding and yield curve control already flagged) as well as any hints from the Kansas City Fed’s symposium late next week. Assuming the Fed is not set to begin injecting money straight into the economy (by transforming its balance sheet liabilities into legal tender, for example, something that would likely require a change of mandate) the market reaction could prove somewhat muted. The real power to move markets in a yield curve control regime would come from a fiscal impulse that forces inflation higher and real rates lower, with the currency taking the punishment – that was the “relative negative real rates plus current account considerations” argument I forwarded back in April when trying to figure out what the post-COVID-19 environment might mean for currencies. I called it “the coming brave new world of FX trading”:

In markets, if you put your interventionist thumb down on one asset class – here sovereign bonds and policy rates for the entire curve – then another asset class will have to become the speculative vehicle to absorb the implications, for example, of what one might call the “relative financial repression game”. In this game, the key inputs for the FX trader are relative current accounts, which should loom larger in a world where capital markets are less dynamic and more manipulated than ever, and the severity of financial repression, i.e., to what degree the money printing in a given country is taking inflation beyond the policy rate – the relative ugliness of the negative real yield. In this game, FX could risk becoming the preferred instrument to trade and keep volatility quite high with every policy move and inflation release. At least, I would like to think so – imagine the depressing outlook for sovereign traders from here – stuck with capped yields and terminally manipulated markets. Even corporate bond fundamentalists must be throwing up their hands in disgust after recent interventions. 

It's too early to say to what degree this brave new world is taking shape, but it could be behind the persistent relative weakness in the JPY (shrinking current account surplus over last couple of years - currently around 3% of GDP) versus CHF (rebound in current account surplus to above 11% by end of last year) and the AUD rise versus both NZD and CAD (both current account deficit countries versus Australia having moved into surplus), etc..

On that note, then, inflation and current account data will merit close attention once the COVID-19 disruptions fade.

Chart: GBPUSD
GBPUSD popped above local resistance and traded at a new high for 2020. It’s rather ironic that sterling rose sharply in the wake of a strong CPI release (1.8% year-on-year at the core, the highest in nearly a year and far beyond expectations), as higher inflation with ongoing low rates should theoretically weigh on a currency, but others touted the number as a sign of pent-up demand. Elsewhere, there was certainly nothing in the Brexit talks to encourage a bid into sterling as the EU is pushing back against UK proposals for UK-based truckers’ access to the single market. Time is running out and promising headlines are needed for sterling to maintain course. For now, the technical break above the 1.3200 area here is in focus and it arguably needs to hold above 1.3150 to stay viable. The weak US dollar is doing most of the lifting here. The next level higher is the massive 1.3500 area, the high since back in early 2018 when the USD was in a rut.

Source: Saxo Group

The G-10 rundown
USD – the greenback has been pushed to new lows – have to wonder if risk appetite begins to contemplate the risk to assets from a Biden presidency and whether this feeds USD resilience at some point. Also watching Fed signals for risks in the negative direction for the dollar.

EUR – the EURUSD has crossed to new highs, with the round figure-loving pair now eyeing 1.2000 and a rather crowded speculative long.

JPY – USDJPY bounced just ahead of 105.00 – needs to find support there or USDJPY risks joining other USD pairs as a way to express USD weakness.

GBP – sterling uptick fading already in EURGBP terms with a muddy technical situation there, while the GBPUSD move is more clean-cut and “either-or”. Need Brexit talk breakthroughs for GBPUSD to be anything but an expression of USD direction.

CHF – the EURCHF pair locked in the range as USDCHF scratches to new lows and the round 0.9000 level. SNB sight deposits to grow apace.

AUD – AUDUSD managed to post a new high for the cycle yesterday, but generally low volatility is seeing the weak USD trend proceeding in grinding fashion. The next major chart point for AUDUSD is up at the psychological 0.7500 area, but really the ceiling stretches all the way to 0.8000+. Would expect the RBA to get very uncomfortable and loud well ahead of that level if this move higher continues.

CAD – one of the more reliable trenders in this USD run has been USDCAD, with 1.3000 now in sight, but perhaps tough to come by without crude oil breaking new ground higher.

NZD – the kiwi fought back yesterday after AUDNZD crossed well above 1.1000. The consolidation doesn’t threaten the trend until perhaps 1.0800

SEK – the krona perhaps not liking the COVID-19 news flow and risk sentiment has gone sideways in Europe on the strong Euro as well, keeping EURSEK at upper end of local range – watching for a squeeze risk if the pair trades above 10.35 as the trend lower has lost momentum and this looks a crowded trade.

NOK – the action in crude oil failing to encourage NOK bulls, but volatility in NOK could pick up on any strong reaction in energy markets to today’s weekly US inventory and demand figures. Crude oil has been eerily quiet of late.

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)

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 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.