FX Update: Passive FX as CB's stagger towards tightening pause.

Forex
John J. Hardy

Chief Macro Strategist

Summary:  Yesterday largely saw classic risk-on developments across G10, with the USD on its back foot and AUD leading the charge ahead of that country’s Q4 CPI data tonight, with New Zealand also reporting CPI data. EURSEK is also trying to tilt lower as the normally risk-sensitive SEK is finally picking up a bid on the strong resurgence in sentiment as US corporate earnings season kicks off in earnest today. The market mood has soured a bit today in Europe and US data and leading indicators are patchy at best.


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

FX Trading focus: Classic risk-on, risk-off patterns across FX with uncomfortable backdrop. Bank of Canada up tomorrow. Sterling wobbling again.

Yesterday saw a further squeeze higher in risk sentiment on no notable news flow, a move that saw the usual suspects of market regimes past, as the US dollar was weaker, while the smaller G10 currencies like AUD and SEK charged higher, AUDUSD challenging the recent pivot highs above the significant 0.7000 level and EURSEK pushing down on range support and needing more to the downside to reverse its persistent uptrend there. Most of the market action, outside a meandering JPY, had a classic, highly correlated and passive risk-on, risk-off vibe as we await incoming data and incoming news.

This morning, we got the flash January. Given the enormous relief on the gas and power front in Europe after absurdly mild winter weather in December helped crush prices lower, the modest improvement in the surveys perhaps undershoots relative to the recent news flow on Europe and the scale of ECB hawkishness (both Eurozone PMI surprising modestly on the upside, but not shooting the lights out with 48.8 on Manufacturing and 50.7 on Services). The euro took a stab at 1.0900 but couldn’t sustain and the price action is awfully sluggish after hitting current price levels in the 1.0860’s eight trading days ago. Yesterday I pointed out that it may be difficult for EUR to find upside on the USD due to forward rate expectations for the ECB relative to the Fed, given that the 2-year yield, two years forward has risen as high as -15 basis points.

The UK PMI’s were a different matter, with the Services survey coming in at 48.0 vs. 49.5 in December and vs. 49.9 expected, a sour data point possibly suggesting a retrenchment in consumer behaviour after the holiday season. Sterling has traded to the soft side today, with GBPUSD down close to 1.2300 after 1.2400 earlier in the session and EURGBP rallying back into the range above 0.8800.

Data later today from the US is third-tier stuff as we await Thursday’s GDP print and Friday’s PCE inflation data (with inflation off the menu as a concern for now, it’s rather where we are in the recession cycle that grabs market focus). The greenback is more likely to get energy from the equity market keying off important earnings reports as the earnings season kicks in with full force today and through next week. GE has already been out spooking the market a bit with its forward guidance, with earnings guidance for the coming year significantly below analysts’ estimates.

The Bank of Canada is the next central bank meeting up tomorrow, but as I discuss below, surprises will likely be hard to find unless Macklem indicates that the BoC is ready to abandon the tightening ship already now rather than hiking the 25 basis points the strong majority expect at this meeting, or as most assume is the most dovish case, at the March meeting. We are at BoC peak rates, essentially, leaving CAD’s fate up to the direction of oil prices and risk sentiment from here.

Chart: USDCAD
USDCAD has traded somewhat heavy in the range here ahead of tomorrow’s Bank of Canada meeting, which looks entirely unlikely to deliver any hawkish surprise, and with a well-flagged deceleration to a 25-basis point move expected tomorrow, followed by a significant pause to assess the impact of the blistering pace of tightening last year. CAD bulls will likely have to hope for a further melt-up in risk sentiment and sustained rise above 85, if not 90 dollars/barrel in crude oil (WTI) to find significant further upside versus the US dollar. Levels to watch include the local lows in the low 1.3300’s followed by the 200-day moving average rising toward the mid-November low of 1.3226, but currently nearer 1.3200.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Few shifts of note since yesterday, but the Aussie’s rise has become significantly more pronounced as it gets a leg up more broadly, and SEK is attempting a revival, with some interesting levels approaching in key pairs, as noted below. Note that Australia reports Q4 CPI tonight, with the market looking for one or two more 25 basis point hikes from the RBA from here (Feb. 7 meeting priced at 50-50 for a move) and it feels like Philip Lowe and company would appreciate any excuse to do less rather than more.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
SEK working into some interesting with this latest rally, as a major pivot low in USDSEK approaches near 10.15, while EURSEK has poked below local multi-week lows just below 11.10, but needs to take out at least 11.00 to suggest a more significant reversal.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1300 – Hungary Central Bank Rate Decision
  • 1330 – Philadelphia Fed Non-manufacturing Survey
  • 1445 – US Jan. Flash Manufacturing and Services PMI
  • 1500 – US Jan. Richmond Fed Business Conditions
  • 1800 – US Treasury auctions 2-year notes
  • 2145 – New Zealand Q4 CPI
  • 0030 – Australia Q4 CPI

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

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