ECB to beat Fed to taper? RBA dovish twist sets up AUD for new downside.

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  EURUSD remains near the top of the range, possibly on the anticipation that the ECB is set to beat the Fed to the announcement of an asset purchase taper. Meanwhile, long US treasury yields are nearing an important trigger level that could trigger more volatility than we have seen in some time in currencies, while the RBA tapered after all, but provided dovish guidance that has the currency under fresh pressure after its recent short squeeze.


FX Trading focus: ECB to beat Fed to the punch. Rising yields a critical focus. RBA manages dovish twist.

EU sovereign bonds are under significant pressure today, adding to the weakness that was already under way since the end of August. A recent spate of more hawkish ECB jawboning and the spreading consensus that the ECB will have to adjust its staff projections and likely announce a tapering of asset purchases at the meeting this week (something that was really baked into the guidance anyway with the promises of “front-loading” purchases earlier this year) is driving the novel idea that the ECB could actually beat the Fed to the punch in announcing a taper of asset purchases. A sufficiently clear announcement and reading-between-the-lines in the new ECB projections for inflation could see a solid extension higher for the euro, even if Lagarde tries to soften the blow at the press conference.

The recent move higher in EU yields is far more directionally pronounced than the slight rise in US treasury yields, which have yet to break local range highs, although the consequences of, for example, the US 10-year treasury yield breaking above the clearly etched 1.38% level on the chart (double-top) could prove a crucial trigger across markets, with pressure on EU bonds helping in turn the notable pressure on US treasuries since the Friday lows. Any chance for a pickup in volatility this week is likely to come from sovereign reaction to the ECB meeting up on Thursday and possibly the 10-year US treasury auction already up tomorrow. As noted in this morning’s Quick Take as wel

And in the background, we also have the upcoming German election driving a new attitude on the potential for a more profound policy shift in Europe. A centre-left outcome is a gamechanger, we would argue for fiscal stimulus and a new direction commitment from Germany to the EU. A new poll today from Forsa for the German RTL television station shows the CDU/CSU coalition polling sub-20% for the first time, with the SPD at 25%.

Chart: USDJPY
We’ve covered EURUSD too much of late, even if the stakes are still high this week for EURUSD after the recent push on the 1.1909 resistance level and as we await the ECB and whether the US treasury yield level mentioned above falls. On that note, USDJPY could prove even more sensitive than EURUSD to new impulsive action from both EU sovereign yields and US treasuries, also as the price action in the pair has become impossibly compressed. As ever, if US yields are on the move, FX trader should consider the. And it’s worth noting that the JPY has failed to push back against the US dollar much since the April consolidation when US yields dropped sharply. Since then, lower yields have not helped the JPY here, while higher yields may drive more upside. Given that we will have an election soon in Japan, one that is anticipated to bring new stimulus and possibly new BoJ stimulus to cover it, a shift higher in US yields could drive another move higher here as well, so we’ll watch the 111.64 top if the 110.80 pivot high falls in coming days on a breakout higher in US yields.

Source: Saxo Group

RBA does taper, but guides dovish: The AUD is weaker in the wake of the RBA meeting overnight as the bank did go ahead and taper asset purchases as they guided they would in August, but extended. The outlook and uncertainty on the delta variant risks was more downbeat than I expected, and the extension of the guidance to February is quite dovish and raises the risks of a more extended bout of weakness in the AUD crosses unless the commodities sector catches fire again. A pair like AUDNZD could even push another leg lower toward 1.0250 or lower, although I still see a major low in the pair arriving some time between now and the beginning of 2022.

UK political turmoil in the making on Johnson walking back on tax commitments. The UK Conservative party is in significant turmoil as Boris Johnson looks set to renege on commitments to not raise taxes in announcing today a likely increase in the national insurance, a payroll tax, of 1% for wage earners and 1% for employers, a regressive tax that will raise hackles among party members and possibly among the voters that made the switch in, for example, northern England in favour of the pro-Brexit conservatives. An embarrassing backing away from the “triple lock” pension adjustment scheme also appears in the works, a policy that promised pensions would rise the by the highest of wages, inflation or 2.5%. Interesting to note EURGBP edging higher again, some of which may be the developments in EU yields and in anticipation of the German election (more solidarity in EU equals more out-in-the-cold for the UK, etc.).

Table: FX Board of G10 and CNH trend evolution and strength
Today, worth noting the EUR poking slightly more determinedly in positive territory as the smaller currencies fade a bit, although it feels like the decisive factor through the end of this week are the developments noted above, particularly whether the ECB and US Treasury market action ratchet volatility higher, which could put risk sentiment under pressure and support the EUR and USD and not as much the CHF and JPY this time if that pressure is coming from higher safe haven bond yields.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
A big move lower in the gold/silver ratio is one of the more interesting recent developments, possibly signaling a new trend if yields, and especially real yields, are set to move higher. Will be worth watching JPY crosses on the same account for further downside pressure on the JPY. EURSEK is in a new downtrend, but also note that it is pushing down on its 200-day moving average near 10.15.

Source: Bloomberg and Saxo Group

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/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.

©   since 1992