FX Update: Markets more in synch, but still plenty of confusion. FX Update: Markets more in synch, but still plenty of confusion. FX Update: Markets more in synch, but still plenty of confusion.

FX Update: Markets more in synch, but still plenty of confusion.

John Hardy

Head of FX Strategy

Summary:  Yesterday’s confusing mishmash of developments has yielded to inter-market movements overnight and today that fit with previous correlations as weakening yields help drive a bounce in risk sentiment and a weakening of the US dollar after yesterday’s choppy session for the currency. Aussie has jumped aggressively on hopes that China will lift an Australia coal import ban. Important questions for this market in the days and weeks ahead make interpreting current moves a treacherous exercise.

Today'sSaxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: Markets are largely back in synch, but too many questions unanswered to trust the significance of current movements.

The move in the US dollar yesterday was a mess to decipher by the end of the day, as the early strength was not supported by any of the usual coincident indicators (risk off, primarily), although I did note a number of drivers for the EURUSD consolidation lower, especially the heavy long speculative positioning, and weak inflation data from Germany (followed up by weaker than expected French inflation print this morning) as much of the recent EUR strength was driven by the loud hawkish shift at the December 15 ECB meeting. Later in the day yesterday, we saw much of the move reversing and then a lot of chopping back and forth before USD weakness emerged once again this morning. A key driver of improved sentiment and USD weakness may have been a string of policy signals out of China overnight, including indications of strong support for the struggling property sector and the Aussie-boosting story that China is considering at least a partial lifting of the ban on Australia coal imports. But as John Authers writes in his column today, there are so many uncertainties on the path for China here. There is also the overarching risk that these Chinese policy moves suggest that the situation on the ground in there is even worse than we think and are a sign of weakness, not impending strength. We won’t have a decent feel for China’s activity level trajectory until at least March. And if we are supposed to be celebrating a Chinese growth comeback, shouldn’t copper and oil have both jumped, not both sold off sharply?

The first real test for market sentiment comes with the data this Friday. Do we see weak data and does that weak data mean even lower yields and a strong risk-on response on the anticipation of the Fed backing down even sooner than previously expected? Or does the market finally begin to fret recessionary dynamics, like compressing profit margin, credit stress, etc… Let’s recall that equity markets normally bottom when the recession is unfolding and the policymakers are rushing to bring enough accommodation to bring the market support, not when net tightening is still in motion. Recessionary dynamics and a bear market in equities, together with the usual credit stress (nowhere in evidence currently) could help support the US dollar until the Fed is in full liquidity provision mode and signaling incoming QE.

The flip-side case would be stronger than expected US data, which may not be much more straightforward, as it means that the market will have to second guess its forward policy assumptions, but it probably means concerns of the Fed staying higher for longer and firmer US dollar.

By the way – do continue to track the unprecedented difficulty by the GOP to appoint a new Speaker of the House in the US House of Representatives. A tiny, but blocking minority because of the overall small Republican majority (as no Dems are supporting the vote, nearly all of the Republicans must agree on a speaker is making the situation interesting after three votes failed to get Kevin McCarthy elected yesterday. A new attempt is today. If a compromise candidate moves in the direction of a more confrontational Republican that satisfies the Trumpist hard core that is blocking McCarthy, it raises the risk of debt ceiling shenanigans.

The Aussie jumped across the board overnight on a Bloomberg story discussing possible plans for China to partially lift bans on Australian coal imports, setting AUDNZD sharply higher and reversing the AUDUSD sell-off from the prior day. It’s great news for the currency, but as noted above, a broader positive response across the commodity complex, including in metals and energy, would have provided a firmer supportive back-drop. It is still early days for understanding whether these policy shifts will be sufficient to boost the outlook Down Under. Australian yields are shrugging off this move as well. Technically, however, a close today near the current levels looks strong, as it takes out the 200-day moving average, if not the prior pivot high just ahead of 0.6900. The big upside level remains the pivotal 0.7000 area, which has implications stretching back years. The last attempt to retake this area last summer failed. Some compelling risk-reward for a two-week put if this is a false dawn.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The JPY still riding high as yields drop, but over the last 24 hours and since Japan’s first business day of this year overnight, the JPY is one of the weakest currencies. The Aussie is vying for relevance, but note the lack of broader support from the usual coincident indicators noted above. Gold is flying out of the gates to start the year, but very choppy action intraday, both yesterday and today.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Too early to comment here after a choppy couple of sessions to start the year. Things likely start to become clearer after this Friday’s US data and into next week.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1500 – US Dec. ISM Manufacturing
  • 1500 – US Nov. JOLTS Jobs openings
  • 1900 – US FOMC Minutes
  • 2130 – API's Weekly Crude and Fuel Inventory Report
  • 0145 – China Dec. Caixin Services PMI

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