FX Update: USD teases support tipping point ahead of data. FX Update: USD teases support tipping point ahead of data. FX Update: USD teases support tipping point ahead of data.

FX Update: USD teases support tipping point ahead of data.

Forex
John Hardy

Head of FX Strategy

Summary:  The US dollar rallied briefly overnight on the fallout from civil unrest across China, but tilted lower again during the European session even as risk sentiment remained wobbly, with the euro posting the most remarkable round trip from weakness overnight to new multi-month highs versus the USD by lunch-time in Europe today. Commodity currencies meanwhile, particularly NOK and CAD, are suffering as crude oil prices have plunged to the lowest since January.


FX Trading focus: US dollar teases tipping points in USDJPY, EURUSD on weekend developments in China. Commodity currencies weaken.

The US dollar jumped higher on the open on the news of widespread civil unrest in China in opposition to Covid policy there. This is the standard playbook for “risk off”. But since then, we have seen a lot of churning by European lunchtime today. At first, the Japanese yen was stronger still as both US long yields and energy prices dropped sharply overnight, but the JPY then weakened sharply in the crosses and pulled off the new lows posted intraday in USDJPY. Elsewhere, the euro went from weakness to pronounced strength, as discussed below in the EURCAD chart, even managing a marginal new high against the US dollar before the EURUSD pair eased back from the cusp of 1.0500. The most straightforward story on the news out of China was the weakening of oil-linked currencies CAD and NOK, and even more so the commodity- and China-linked Aussie. Of course, the renminbi was also sharply lower, if rather volatile, as USDCNH jumped above 7.2000.

The news of civil unrest in China is a sudden and considerable reaction to what was supposed to be the focus this week: the strength of the important incoming US data this week. If developments escalate further in China and point not only to the risk of further delay in Chinese demand coming back online, but also to new supply-side disruptions, this could prove a game changer. Imagine fresh inflationary risks driven by supply-side constraints that are entirely un-addressable by central banks. We’ll have to give the story some time to mature, but in the meantime, this issue pulling on our attention at the margin could reduce the reaction potential around US data releases this week.

Chart: EURCAD
Having a look at EURCAD today to emphasize the huge divergence in these two currencies in recent weeks. CAD is limping on oil prices rushing lower still after last week’s plunge after the news out of China over the weekend, with major oil grades trading at new lows today not seen since all the way back in January. The euro has enjoyed the tailwind of falling oil prices, the sense of emergency around gas prices this winter fading (however fragile the longer term outlook) and on the ECB getting more serious on signaling further rate tightening. Some of today’s boost in the euro may have come on ECB’s Klas Knot (widely considered at the hawkish extreme among ECB members) arguing that “To bring inflation back to target we will need a protracted period of time at which at least growth is below potential because otherwise we will never get the disinflation going.” Still, short EU rates were only a couple of basis points higher from Friday’s close. Can the pair go higher still? I suspect the answer to that is joined to the question of whether EURUSD can run higher still. So far, we have only seen a healthy correction after a tremendous slide in the euro, further euro- upside beyond another percent or two may get more difficult from here if a) US data remains persistently resilient and especially inflationary and b) if the developments in China begin to impact supply side constraints once again.

Source: Saxo Group

Not a surprise to see that sterling has struggled to rally on a day like today, with a backdrop of downbeat risk sentiment, but we also got some very weak data the CBI’s reported Retail Sales for this month, even if it is a volatile data series. EURGBP has surged off range lows below 0.8600, while GBPUSD has been choppy today as the 200-day moving average continues to fall toward the current price action, with that average now below 1.2180. It twice served as resistance for GBPUSD in this secular bear move since the 2021 highs, once in October 2021 and then again in January.

Bank of Japan governor Kuroda testified before Parliament overnight and expressed the view that upward pressure on wages would strengthen gradually, as wages are seen as the most important variable for whether inflation is becoming more entrenched, thus requiring a change to the current policy mix. This coincided with USDJPY challenging support overnight and even hitting a new multi-month low near 137.50 today before the price action bounced on US yields stabilizing and recouping their loss on the day.

Table: FX Board of G10 and CNH trend evolution and strength.
CNH is the weakest of the lot here – but that can quickly change depending on the approach that authorities take to the future of zero Covid policy. CAD is the weakest elsewhere on soft sentiment, soft oil prices and the soft US dollar.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
USDCNH has jumped higher, flipping the trend reading well into positive now, even if the USD is trending negative everywhere else, if barely so in USDCAD! Interesting to see how the market absorbs incoming US data this week now that the USD has been taken to the technical tipping point in some of the most important crosses (EURUSD 1.0500 area, USDJPY sub-138.00 area).

Source: Bloomberg and Saxo Group

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/en-ch/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/en-ch/legal/saxo-select/saxoselect-disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
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.