FX Update: USD weakens broadly, but are the drivers sustainable? FX Update: USD weakens broadly, but are the drivers sustainable? FX Update: USD weakens broadly, but are the drivers sustainable?

FX Update: USD weakens broadly, but are the drivers sustainable?

Forex
John J. Hardy

Chief Macro Strategist

Summary:  A sharp US dollar sell-off has developed, one that materialized suddenly overnight and was extended by comments from Bank of Japan Governor Kuroda that inspired a steep plunge in USDJPY after its recent aggravated extension higher. The ECB meeting yesterday brought more hawkish than expected guidance, theoretically helping the EURUSD back-up well above parity, though the timing of the bulk of the rally in Asian hours offers cause for head-scratching.


FX Trading focus: What is the quality of this USD sell-off…and JPY rally?

The USD move overnight looked suspicious as it came just after midnight GMT – perhaps led by a run on stop orders above yesterday’s post-ECB meeting high around 1.0030? Hmm – the move was broad-based, so not entirely convinced. China set its yuan reference rate sharply higher than expected about an hour later, and then the BoJ Kuroda comments discussed below came on board. The move in EURUSD happening in Asian hours rather in the context of the ECB meeting having already sharply boosted EU yields earlier in the day yesterday has me scratching my head and wondering at the quality of this USD move lower – and wanting to reserve judgment on what is going on here at least until the end of today’s/this week’s action and possibly until we see how the market treats the EU’s power price cap plan after the summit on the matter in Brussels today and then next Tuesday’s US August CPI release.

It is no major surprise that some stern words from Bank of Japan Governor Kuroda were able to inspire a sharp consolidation lower in USDJPY after its wild extension higher recently that seemed a bit excessive relative to the support from coincident fundamental indicators like global long sovereign yields/spreads. After meeting Prime Minister Kishida overnight, Kuroda said that “sudden moves in foreign exchange rates increase uncertainty for firms and are undesirable.” And “ a two to three yen move against the dollar in a single day is very sudden.” A couple of figures on a comment are easy, more would require a more notable retreat in global yields and commodity prices and perhaps real intervention.

By the way, an FT article with the provocative title “Can Japan feed itself” makes clear that food prices have been capped by the Japanese supermarket industry for some time now at the retail level and are set for a significant reset on October 1. This will mean a leap in the official CPI numbers from the month of October. At the same time, PM Kishida is readying a new raft of packages aimed at supporting lower income households cost-of-living challenges. There is a chicken and egg problem here with price controls and preventing cost-of-living increases on the one hand and the Bank of Japan theoretically waiting for the Godot of wages beginning to rise to signal that inflation is becoming more embedded. With cost-of-living support, the wage earner is less likely to demand a raise…. Something is going to have to give, but it’s hard to believe that a stern few phrases from Kuroda will do the trick, although this could be the beginning of a far more choppy JPY trajectory from here, as from these levels or lower in the JPY, the Ministry of Finance may be willing to throw billions of intervention into the mix in an attempt to halt further JPY declines.

Chart: USDJPY
BoJ comments overnight have triggered a significant slide in USDJPY, if one not yet as large as the two-day rally
that sent the pair soaring all the way to the cusp of 145.00 two days ago. A retreat and close anywhere close to 140.00 today would create an interesting shooting star formation for the weekly candlestick, although really the pair needs to wipe out a great proportion of the move from the pivot low in early August at 130.40 to suggest a more profound reversal is afoot here. Meanwhile, a close today in the 142-143 range suggests that little harm has been done, even tactically, to the USDJPY up-trend.

Source: Saxo Group

The ECB meeting brought far firmer guidance from the central bank than expected, as German 2-year yields traded some 30 basis points higher today relative to the close the day before the meeting – to a new cycle high north of 1.40% before that move faded sharply today back toward 1.30%. The 75-basis point hike was the largest in the ECB’s history and is expected to be repeated at the late October meeting after the guidance that another move of that size can’t be ruled out in yesterday’s presser. But Europe needs sustained relief on the energy/power price front for a more sustainable rally. Curiously, the market waking up to EURUSD trading well north of parity this morning had nothing to do timing-wise with the ECB as it unfolded overnight. Yesterday, the market seemed unsure with what to do with the euro in the immediate aftermath of the decision and guidance. For EURUSD, a close above 1.0100, which was teased today, is needed to set the focus toward the next area into 1.0350, while a close back below parity today would suggest that the overnight pump was merely linked to poor liquidity, order flow and the Bank of Japan verbal intervention mentioned above.

An election is set this weekend for Sweden, with the currency market not particularly holding its breath in anticipation. EURSEK has corrected sharply lower in fitting with the strong risk sentiment of the moment, but has a lot of work to do to set the focus back lower, at least a move below 10.50.

As I am writing this, the Bank of England has announced that it is moving back its next meeting from next week to the following week, likely due to Queen Elizabeth’s death and the mourning period, but this will give the Bank the luxury of having a look at the FOMC meeting the day before and whether it needs to stiffen its message or even hike more than it anticipated if sterling is struggling to new lows going into the meeting.

Table: FX Board of G10 and CNH trend evolution and strength.
The USD momentum has shifted sharply lower over the last couple of days, but reserving judgment at least until the daily/weekly close today. Elsewhere, look at CHF continuing to power on despite the ECB hawkish guidance yesterday.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
It’s looking like cross-over day again for EURCHF after the ECB failed to sustain the recent rally despite the mark-up of EU yields. USDCHF has also rolled over and is threatening a turn lower, although looking at the chart, there is a lot of choppy range to work with yet.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1230 – Canada Aug. Net Change in Employment / Unemployment Rate
  • 1600 – US Fed’s Waller (Voter) to speak
  • 1600 – US Fed’s George (Voter) to speak

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.