FX Update: Mounting forward concerns on US fiscal
Head of FX Strategy, Saxo Bank Group
Summary: The US dollar is not making any broader statement here as treasuries jump back and forth and EURUSD dances on the edge of critical resistance, mostly driven by recent Euro strength rather than anything USD-related. Fresh developments are adding to the risks for a reduced fiscal impulse from the US in coming months, with possibly negative implications for the US dollar.
FX Trading focus: Forward US fiscal concerns. Now or later for USD shorts? Sterling value?
EURUSD and USDJPY both teased key USD support levels yesterday and overnight, but the US dollar is not the chief story here, rather the surge in the Euro has been doing most of the heavy lifting in the case of EURUSD and the same for JPY in USDJPY’s recent correction. In fact, in recent sessions, it seems that the polar opposites in this market are the most negative yielders, which have seen significant support from the recent consolidation in bond yields, and commodity-based FX on the weak side as the pause in the reflationary commodity trade has weighed on sentiment there. The most interesting technical situations, in any case, are to be found in some of the commodity currencies, versus the USD, JPY and even EUR, as highlighted in this morning’s Saxo Market Call podcast. EURAUD has made a bid though the interesting 1.5600+ area resistance today – need to see the weekly close there and follow-up action last week. Some thoughts on USDCAD below. Meanwhile, the JPY rally attempt has been a choppy affair to say the least, with two way action since yesterday.
Also on the pod, I discussed a new development that is a strong concern for the forward potential for more fiscal outlays from the US, including Biden’s proposed infrastructure bill – and that is Democratic Senator Joe Manchin’s avowal yesterday to not support the elimination of the Senate filibuster nor any further reconciliation-based major spending until a more serious effort has been mounted to negotiate with Republicans. Manchin has based this position on seeing the January 6 Capitol Hill riots and has the reasonable point of view that it is unproductive to rule on pure party votes at every turn. More practically, the Senator is an unusually conservative Democrat that represents one of the most Trump/Republican leaning states and is up for election in November of next year. Senator Manchin really is a king-maker and can keep the entire fiscal potential of the Biden administration on hold as long as he sticks to his guns – which he will probably only do up to a point, certainly on infrastructure, where has been a loud proponent of generous spending. But until then, what does the second half of this year look like if we have descended into political gridlock with no real prospects for fresh powerful fiscal impulses? Possibly not good for the US dollar if this means yields calm further and the Fed revs up fresh dovish forward guidance. This Manchin story comes on top of the other concerns noted yesterday: the Biden administration intent to try to offset infrastructure spending with new taxes and the Yellen global minimum tax idea.
Broadly speaking, I am torn between waiting for another bout of consolidation in the popular reflationary trades (CAD, NZD, AUD and even NOK a bit lower) and only enter USD shorts only then or whether that time is already now, given that we have seen almost three weeks of indecision since the USD took its initial stand against these currencies. In terms of expressing a view through options in the US dollar, GBPUSD looks interesting here for longer term upside calls as a start, and maybe even tactically in spot on a strong close today above 1.3750 after teasing below tactical support. And EURGBP shorts are a far more interesting proposition here as well after the steep back-up, perhaps with a stop somewhere above 0.8750.
An example of the focus on commodity FX versus the G3, we have USDCAD at an interesting crossroads here ahead of the March jobs report from Canada. The March Ivey PMI just missed a record reading at a stunning 72.9, imitating the strength in the ISM surveys south of the border recently, even as Canada’s vaccination effort badly lags that of the US. But a bit of trend exhaustion and crude oil bogged down into a range has seen an interesting recent reversal in USDCAD after a poke all the way below 1.2400 in March. Arguably, we have a rather tilted, inverted head and shoulders formation with the sloping neckline coming in not far above 1.2600. If we are in for a bout of concern on the prospects for follow-on fiscal packages, the commodity dollars could be in for another round of consolidation lower before putting up a stand further down the line. A break of resistance here would likely shift the focus to the big 1.3000 area.
Table: FX Board of G-10+CNH trend evolution and strength
The USD is edging close to a flip to a negative reading, while the sterling melt-down has already taken it into negative territory. Keep in mind, however, that the longer GBP up-trend is still very much intact and we’ll be looking for signs of support coming in for key GBP crosses. Elsewhere, we watch whether the budding EUR and CHF and even SEK up-trends are merely a product of a consolidation in treasuries or something that can sustain beyond this week. US treasury auctions and a heavier macro calendar are on tap for next week.
Table: FX Board individual currency pair readings
Here are the readings for the individual major G10 FX pairs and key CNH and precious metals as well. Note the prevalence of “deep blue” ATR readings – which mean we are trading in the lowest 10% of ATR readings for the last 1000 trading days.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Mar. PPI
- 1230 – Canada Mar. Unemployment Rate and Employment Change
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
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)