FX Update: USD finally pokes back higher as we await US data

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  We are finally getting a follow up dose of USD strength after the currency spent all of last week consolidating back to the weak side in the wake of the sharp surge from the FOMC meeting of the prior week. The ability of the US dollar to even hold up reasonably well is interesting, given that the market continues to express solid conviction in the transitory inflation narrative. A huge jobs report Friday could challenge that development, even if we all know the wait for a verdict on the outlook extends out well over the horizon.


FX Trading focus: USD firms again, especially against the Aussie

US treasury yields pushed back lower yesterday and the megacaps among US equities celebrated a US judge tossing out two antitrust suits against Facebook yesterday. In general, the shape of Fed expectations that has developed in the wake of the FOMC meeting suggests that the market is recognizing the risk that the Fed will bring forward the start of a tapering of QE purchases and eventual rate hikes, but that the Fed’s “terminal policy rate” will likely prove lower than was expected just a couple of months ago. It all points to a fairly complacent view that an inflationary spiral is unlikely.

The G10 smalls and sterling were the biggest losers on the day this morning versus the USD and a JPY also on the rise, although SEK is trying to pull back against the euro as of this writing despite the fuss over the failed government and uncertainty on the composition of whatever new coalition emerges as parties have four attempts to put together a new coalition of whatever stripes before an election must be called. A similar episode followed the late 2018 Swedish election, but there was no notable Swedish volatility during the drawn out process that ended in the current weak government that has now failed. And given how evenly divided the political blocs are in Sweden according to the polls, the potential for new policy drama is low, although at the margin this uncertainty could keep the Riksbank on the dovish side, although it is doubtful. A Riksbank meeting is up on Thursday, by the way.

The Aussie has been one of the weakest currencies this week due to the struggles with the Delta Covid variant outbreak causing widespread new lockdowns that could theoretically have the RBA choosing the more dovish option of shifting the 0.1% yield cap policy forward to the Nov ’24 bond from the current April ’24 target. While AUD is lower, yield shifts at the front end of the Australian yield curve don’t suggest . I wonder whether background concerns on the trajectory of China and Australia’s trade relationship with that very important country for Australia’s exports may be weighing more in the background than anything else. Regardless, AUDUSD has retraced about half of the way back to the lows of last Monday, as we analyze in the chart below.

The Friday US June jobs and earnings data are the tactical pivot for whether the USD can find the energy for a follow up move higher as some of the complacency noted above on the outlook is eroded. Alternatively, we could end up with another multi-week bout of doldrums. Some minor interest as well, as indicated in this morning’s Saxo Market Call podcast, in the quarter-end up tomorrow and whether US Treasury yield volatility picks up.

Chart: AUDUSD
The AUDUSD chart is similar to a number of other charts of USD pairs in that we have seen a significant USD rally that has yet to either follow through or find itself rejected. Additionally, for this pair we have an unresolved head-and-shoulders-like situation in which the neckline was completed after an extremely wide right shoulder formed in recent weeks. But we have not yet properly breached the neckline. Looking lower, another major prior price point not much further to the downside is the prior major high near 0.7415. If the current complacency about the Fed outlook is shattered by US data or other developments intrude to send risk appetite and/or commodities on a further steep retreat, we could be set for a more major consolidation lower in AUDUSD after the pair has gone absolutely nowhere for more than half a year, possibly one that extends all the way to 0.7000.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength
Note in the broad trend readings for each currency that the JPY has managed to pull itself back into positive territory while the G10 smalls ex CAD are all on the defensive.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
We discussed SEK pairs yesterday, but the most important of these, EURSEK, is still in limbo after failing to stick a lower close yesterday.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Germany Jun. Flash CPI
  • 1300 – US Apr. S&P CoreLogic Home Price Index
  • 1340 – ECB President Lagarde to speak
  • 1400 – US Jun. Consumer Confidence
  • 2350 – Japan May Industrial Production
  • 0100 – China Jun. Manufacturing and Non-manufacturing PMI

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
Zürich
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.