FX Update: USD pulls back from new lows. TRY tailspin.

This morning saw another run lower in the US dollar in very early trading in Europe, only to see that move wiped away quickly, perhaps in part on the 3% and more acceleration higher in USDTRY as the Turkish lira comes under additional heavy pressure after the authorities there have apparently surrendered in their fight at the 7.00 level, which gave way yesterday. After the crazy spike in overnight implied yields earlier this week suggesting a fight against TRY shorts, rates have normalized even as the price action has picked up to the downside. No headlines or statements accompanied the move, which simply looks like a surrender. EM selling picked up elsewhere today, suggesting some contagion risk here, but perhaps only ZAR showing a noteworthy move to local lows against the greenback (although challenging all time lows versus the euro today).

Yesterday’s July ISM Services index (yes, it has been renamed from ISM Non-manufacturing) looked positive at 58.1, but the Employment sub-component dropped deeper into contraction, registering 42.1, a worrying sign for the job market in the US. As we discussed on this morning’s Saxo Market Call podcast, its worth reminding ourselves that employment recovery lags economic recovery in every cycle and the ISM Services Employment sub-index didn’t move consistently above 50 until well after 2010. Today’s initial jobless claims and continuing claims numbers offer the latest update on the state of the US jobs market.

For the US, the reaction to the virus resurgence has clearly slowed hiring as also seen in the July ADP payrolls data printing a mere +167k, even if June numbers were revised some 2M higher. More concerning still for the coming quarter and more, even as we await new stimulus, is the second round risks once the first push of lending programmes aimed to keep businesses and jobs on life support until the other side of the virus expire. Airlines will have to lay-off thousands and Wells Fargo, one of the largest main street banks in the US, is looking at headcount reductions as well. With these factors in mind, it is important to see how the degree to which new stimulus measures maintain the attempt at keeping businesses in business as opposed to merely keeping people fed and in their houses.

Chart: AUDUSD
A similar set-up for AUDUSD as for the dollar index more broadly and EURUSD, in that we saw new marginal highs for the cycle unable to stick and setting up a “bearish momentum divergence” potential tactically on a weak close today. Momentum divergence is easy to come by when prices have trended aggressively and then when a short consolidation is followed by a new attempt at the highs. Any signal here is small fry and merely tactical compared to the implications of a deeper sell-off that takes the price action back below the 0.7000-50 area, and we are some way off that level and would likely need a spike reversal in precious metals/iron ore/risk appetite and the inflation narrative for this to materialize. Driving the AUD strength for weeks now, and really since the May time frame is that reflationary narrative and aggressive move higher in Chinese iron ore prices, which notched further heady gains overnight and are only a few percent below multi-year highs, with the share price of Australia’s mining giant BHP Billiton notching a huge surge overnight as well to new highs that take it to less than 5% from its all pre-virus meltdown highs from January.