FX Update: Jackson Hole may not change the plot.
Head of FX Strategy, Saxo Bank Group
Summary: The USD has backed off a bit from cycle highs this week in anticipation of the Fed Chair Powell speech Friday, which may be unlikely to bring much new to the table, now that the market has adjusted to the Fed’s pushback against the market’s interpretation of the July FOMC meeting. Elsewhere, we note the possible relative current account focus across FX as the Australian dollar is strong in the crosses and NOK likewise.
FX Trading focus: Jackson Hole to not change the plot? Current account focus.
After a feint higher yesterday, the US dollar pushed back lower yesterday and tested to new lows for the week this morning before flashing a bit of resilience. EURUSD parity was criss-crossed a few times this morning after China played its part in helping the USD lower overnight with a surprisingly strong fixing for USDCNY after it hit a two-year high yesterday amidst reports from Reuters (citing unnamed sources) that dealers in China were warned from official sources against aggressively selling the yuan.
As I have noted in yesterday’s and today’s Saxo Market Call podcasts, the Jackson Hole speech from Fed Chair Powell is highly anticipated, but may not bring much new to the table, relative to expectations. There is some chance that the Powell speech focuses a bit more energy on quantitative tightening as an important factor from here rather than super-size rate hikes, which would be an interesting test for the bond market and whether longer treasury yields remain in the range established by the 3.50% high for the 10-year benchmark in mid-June, for example. The Fed is far from reaching its $95 billion/month pace of balance sheet tightening and its mortgage portfolio is unchanged over the last few months.
But largely, the market may be simply left to its devices and default to look at where the cycle is taking us: toward a looming catastrophe in Europe and the UK this winter and into next year if energy prices stay anywhere within sight of current levels. It’s important to realize that the loony prices for natural gas and power in Europe are based on small transactions for the few that are willing to trade forward contracts at these prices, all while longer term contracts only set higher in ratcheting fashion – some a few months back and others not until the months ahead. Industrial users can’t continue full-scale operations at prices 6-8 times their historic ranges.
In the US, a recession looms, but when? And before that recession is properly seeing the light of day, will the Fed have first turned the screws that much tighter on liquidity with far more forceful balance sheet reductions? It’s all important stuff as we have some compelling, unconfirmed setups in place for the USD peaking here (double top in broader USD indices and USDJPY, AUDUSD and USDCAD not needing much more USD weakness to suggest a reversal, etc.) but will need to get to the other side of Jackson Hole and then on to the US August jobs (and earnings!) report next Friday, the August CPI release on the 13th and the September FOMC decision on the 21st for a sense of whether this USD bull has legs.
On a completely different note, another focus increasingly in evidence across FX is the one on relative current accounts, as the Aussie, CHF, CAD and NOK have performed well of late, possibly mostly on the current account fortunes more than due to any central bank signaling. EURNOK has seen quite the round trip from 9.60 o 10.50 and back to 9.60. We discuss the AUDNZD outlook below. By this metric, the Swedish krona should be doing better than it has of late, although it has clawed back some of the recent losses from the single currency. Fair or not, the krona has historically been very sensitive to the economic outlook for the Eurozone and risk sentiment generally. One issue certainly of concern for Sweden is its cratering housing market, where prices have fallen around 9% from the cycle peak, with the Riksbank looking for the risk of a 16% decline. This could hobble credit and sentiment.
Interesting to watch AUDNZD here as it edges towards its highest levels in nearly five years and into the top of the range since all the way back in late 2013, when the pair was in a steep and steady descent from its prior range all the way north of 1.3500 (!). There is nothing in the relative yield spread perspective here to suggest the pair should jump into the old range above 1.12-1.13, but developments in relative current accounts over the last year do suggest upside pressure, as Australia’s complete portfolio of commodities has seen the country posting record surpluses this year while New Zealand’s trade deficits languish at new historic lows on the energy price crunch. On the lookout here for whether the pair can plow well back into that higher range if these current account dynamics extend – perhaps to at least 1.1500 but possibly even 1.2000 over the coming year.
Table: FX Board of G10 and CNH trend evolution and strength.
Note the NOK leading the pack once again as record gas prices weigh in Europe and Norway is set to earn more with every longer-term delivery contract renewal. AUD is an interesting one to watch for broader strength after already significant moves against EUR and GBP, for example.
Table: FX Board Trend Scoreboard for individual pairs.
Watching the challenge of the very long term AUDNZD range here, but also whether an AUDUSD upside reversal is in play (rally and close well north of 0.7000 begins to build the upside focus again). Elsewhere, NOK has been strong enough to challenge the greenback, even.
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