Chief Macro Strategist
Summary: The mounting Covid-19 toll and perhaps concerns of a the rising uncertainty on whether the Democrats can achieve a full Blue Wave outcome have risk sentiment on edge. US long yields have backed down aggressively and this has helped the JPY rise to the top of the pack, with big levels swinging into view in EURJPY and AUDJPY in particular. We are six days from the US election.
Please note: I am penning a series of daily articles on the US Election countdown, with the first article out yesterday focusing on the current state of polling, what huge early voting in Texas could mean, and how the initial vote results coming in on Election Night could prove confusing. Today’s article will look at US Election outcome probabilities and how the US dollar may react to these, given current market positioning and the narrative.
Today’s FX Trading focus:
Major technical breakout underway in JPY
Since the market wipeout in the spring linked to the Covid-19 deleveraging, USDJPY twice teased the 105.00 level before this latest attempt lower, and this one has so far stuck for more consecutive days below 105.00 (on a daily closing basis) than any episode back to 2016, so we can call this a major break underway until proven otherwise. This morning, we are seeing broader signs of the usual positive USD- and JPY correlation in the crosses swinging into motion as the commodity dollars are finally waking up and smelling the “risk off” – same for EM as noted below. Helping the JPY higher is the drop in long yields (with market assessment on the prospects of a Democratic Blue Wave next Tuesday weakening, it is important to note that a Republican retention of the US Senate could prove a disastrous setback for the reflationary narrative and crush US long yields on the anticipation of a long delay in the negative real rates story – a Republican Senate retention would likely be very supportive for the JPY – but more of this in my US Election countdown piece out later today.)
Chart: EURJPY
We have covered the breakdown in USDJPY recently, but now other JPY crosses are possibly joining in the fun, with EURJPY poking into the key 122.50 area that could open up for at least the 100-day moving average into the low 121.00’s, but even toward 120.00. AUDJPY is another pair to watch around the 74.00 area. The relative impact of Covid-19 is a particularly compelling angle on the weakening relative outlook for Europe here.
USDCAD and Bank of Canada
An interesting article from Bloomberg this morning discusses the Bank of Canada’s government bond purchases and how it has been forced to go hunting for securities to buy around the very recently issued bonds as its purchase rate is challenging to maintain. This has gotten the BoC in hot water with the PM Trudeau’ political opposition, which doesn’t want the bank to be effectively providing the support for the government’s fiscal agenda. This is a signal of the unavoidable politicization of central banks once the policy rates reach zero and fiscal is the only real game in town – and must be supported by the central bank acting as auxiliary. Central banks are effectively independent no more. As well, CAD is on offer this morning as the general weight of Covid-19 news weighs on market sentiment and perhaps as that news and Libya’s oil production expansion are weighing on oil prices. USDCAD is suddenly back close to the upside trigger area around 1.3250. If sentiment and oil prices remain weak and if the Bank of Canada proves the expected non-event, USDCAD could pop back toward the 1.3400+ highs quickly in coming sessions – perhaps even testing toward the 1.3540+ 200-day moving average.
EM notes
The Turkish lira situation getting somewhat dire, as USDTRY rips above 8.25 this morning and the war in Azerbaijan over the Armenian enclave there turns hot again. The backdrop now far less friendly in terms of global risk sentiment – train wreck risk has notched higher. Have been scratching my head at the ZAR resilience, but weak sentiment is finally beginning to wear on ZAR – after touching the key post-srping low in USDZAR, the pair is sharply higher this morning. And USDRUB is up sharply after a Kremlin aide said the Russian Central Bank needs to continue cutting rates as long as inflation is south of 4% as the government has already done “massive fiscal”.
The G-10 rundown
USD – the US dollar perking up here. Not entirely sure if this has to do with simple weak risk sentiment and the fact that the epicentre of Covid-19 concern is in Europe, but there is an argument for a weak US dollar if the Senate fails to go to the Dems – a split Congress would mean
EUR – the long shadow of Covid-19 continues to hang over the outlook – ECB may feel forced to bring forward its announced QE programme expansion at the meeting tomorrow or raise the rate of purchases as a signal that it is doing all it can.
JPY – the yen the centre of attention as long as USDJPY trades below 105.00 on the risk that the range to 100.00 is opening up and trading ranges in higher beta JPY crosses could be set to spike suddenly. A further reversal in long US treasury yields could continue to pump fuel into this broad JPY rally.
CHF – time is too precious these days to spend it on the franc. CHF a nonfactor within 1.06-1.09 range in EURCHF.
GBP – our thesis on a Brexit talk breakthrough is increasingly that this may prove a damp squib, given the Covid-19 backdrop and the UK’s external deficits. The Irish foreign minister seems to suggest a deal possible in up to two weeks’ time, although today could gives us a status check as the EU’s Barnier theoretically set to wrap up his stay in London today (we were told at beginning of this week.)
AUD – note entirely sure why it took the Aussie so long to finally back down this morning as the CNY has been consolidating sharply for days, risk sentiment is worse than wobbly. Australia’s CPI did beat by 0.1% in Q3 overnight. Watching for AUD volatility to possibly pick up suddenly if AUDJPY dumps through what should be a technical trigger level for order flow below 74.00.
CAD – as noted above, CAD likely passive to developments in oil markets and risk sentiment on the
NZD – the kiwi has been on a blistering run lately and is finally pushing back lower as AUDNZD has interacted with the 200-day moving average. NZDUSD looks a tactical sell as long as market sentiment continues to wobbly, but needs to work all the way back toward the 0.6500 area for a more structural downside threat on the chart.
SEK – EURSEK managed to work all the way below 10.30 this morning, a remarkable performance giving the SEK-hostile backdrop of mounting Covid-19 concerns for Europe and weak risk sentiment. This morning finally proved to much and we may have just put in a local support level for EURSEK this morning.
NOK – the 200-day moving average in EURNOK appears made of rubber – and nothing to like for the krone in today’s weak risk sentiment drag and weak oil prices. Another approach of 11.00 may not survive if the situation deteriorates further.
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