The FX Trader: USD at tipping point, JPY bulls on defensive.

What to know

USD at tipping point as EURUSD challenges back below 1.1800. I noted in my Tuesday update that the “big dollar has had a hard time falling”, something that very much remains the case. Late yesterday the FOMC minutes revealed that the FOMC is reluctant to guide for further rate reductions as the labour market shows signs of stabilisation, but most of the US dollar rally yesterday was in the bag before this news hit the market. From here, the “pain trade” is for continued USD strength as market sentiment has rarely been as bearish as at present. Recently the Bank of America survey reported its strongest bearish sentiment reading for the big dollar since 2014. Still, no USD charts have “broken” just yet. A break would require EURUSD to close and stick below the recent 1.1766 low point, for GBPUSD to do likewise below 1.3500. As for USDJPY, my operating assumption is that there is an intervention cap, possibly backed by both the US and Japan, at 160.00 in USDJPY, so the focus is more elsewhere for the US dollar.

Newly arrived JPY bulls feeling the pressure. Plenty of frustration for those, including myself, looking for the JPY to launch an extension of its recent comeback. Alas, profoundly strong global risk sentiment and a bounce-back in US treasury yields and the US dollar over the last few sessions seem to have halted the JPY comeback in its track. I still anticipate, as noted above, that we have a floor not far below the current level for the JPY, one that could extend to non-USDJPY crosses as well. I have pulled out EURJPY and GBPJPY as particularly mispriced in the long term for pairs to watch that take the US dollar out of the equation.

AUDNZD posts another post-2013 high... Australia employment data very often mean reverts strongly from month to month as the data collection agency there refrains from the egregious statistical massaging that has plagued trust in the official US data. Overnight, the January jobs data saw a rare strong second consecutive month of strong full-time employment, with the economy adding 50.5k jobs for the month after adding  an upward revised 56.8k full-time jobs in December, and the unemployment stayed steady at 4.1% rather than showing an expected rise to 4.2%, This jolted short Australian rates back higher as the market predictions of another RBA for the May meeting firmed once again. AUDUSD action was muted as the US dollar was also strong Thursday, but AUDNZD leaped to a new high since 2013 above 1.1800 as rate spreads posted their highest differential in favour of the Aussie since 2011.

ECB President Lagarde to leave early? Lagarde was always installed as a political figure at the ECB – the original intention of her 2019 appointment was to act as a political leader within the ECB with the single goal of harnessing the ECB to the EU’s centralization efforts (capital markets union and other efforts) as well as the climate- and anti-carbon agenda. Let’s recall the timing: she arrives in office on November 1, 2019, just a few months before the slide into the pandemic and all of the emergency measures and distractions this drove in the ensuing years, the mechanics of which were far outside of her wheelhouse of expertise. As an institution, the EU is poorly positioned for the new world of “national capitalist” agendas we find ourself in, so ECB policy has less focus than the overall picture of how the EU copes with the US and Chinese agendas and carves out its own destiny and whether it can even hold together effectively. The timing of Lagarde’s impending early exit, according to the FT, is to give French president Macron and German Chancellor Merz the opportunity to appoint her successor before French elections next year (her term was scheduled to end on October 31 of next year). There is no immediate market impact linked to her leaving, but the identity of her successor emerging could make waves, depending on the profile. The hawkish Dutch Klaas Knot is considered one of the top contenders.

Chart focus: EURUSD
EURUSD came under pressure again on Wednesday and probed back below the pivotal 1.1800 area, though the squeeze for USD bears won’t really threaten unless we get a solid close below the 1.1766 pivot low. Given the profoundly bearish USD sentiment, the risk lower could expand rapidly if we do see a retreat down through these pivotal levels.