FX Update: This market keeps running out in the sand.

FX Update: This market keeps running out in the sand.

Forex 5 minutes to read
John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  Friday brought a sharp reversal of the US dollar strength from Thursday as the US May payrolls data was seen as likely to lower the odds that the Fed will deviate from its current patient stance on trying to see through strong labour market and inflation data in the near term. The last biggest test on that front will the US May CPI release on Thursday. For now, treasury yields jerking lower supported everything from the AUD to JPY against a suddenly weaker greenback, even if directional moves seem to have a half life of mere hours.


FX Trading focus: This market keeps running out in the sand

There is a Danish expression that roughly translates as “to run out in the sand” that is an extremely efficient way to describe some initiative or movement running out of energy or forward motion, resulting in nothing or a failure. I’m told by my Danish colleague that it is a metaphor of the sand in an hourglass running out, marking an inflection point or time of judgment. A shame, because in the literal translation into my native English-speaking mind this saying painted a rather more literal and compelling image of an effort getting bogged down and reabsorbed back into the undifferentiated chaos around it, like a fading sandcastle or a stream of water that dissolves into the sand. Oh well, either way you use the metaphor, this market keeps running out in the sand, making it impossible to trust the latest effort to get something going in one direction or even to judge the implication of sharp reversals.

The latest new development is, of course, the weaker-than-expected US May Nonfarm payrolls print on Friday, which at 559k vs. nearly 700k expected (and really, the “lean” was for a print far north of that) was a kind of “Goldilocks” data point, sufficiently strong to indicate a still robust recovery in the US labour market, especially together with other evidence, but sufficiently weak to allay the fears generated by other data points last week that the Fed will have to sharply alter course. The narrative on the back of the data is that this is “just right” to keep treasury yields rangebound and risk sentiment high and the USD weaker. But as we discussed on this morning’s Saxo Market Call podcast, we’re uncomfortable with the narrative here (so the best thing for markets will be a weaker than expected US economy as it keeps us on the safest-of-all outcome of relying on the eternal stimulus gravy train?) This pump and dump of the US dollar on Thursday-Friday could just prove the latest thing to “run out into the sand”, although if risk appetite remains firm here and Fed expectations neutral through whatever surprise the May CPI release on Friday, there may be enough space for the USD to extend lower ahead of the important June FOMC next Wednesday.

In any case, the move lower in yields and rise in risk sentiment on Friday saw odd co-movements like both the AUD and JPY rallying sharply, the former on risk correlation, the latter on the US treasury rally. SEK was also firmer as discussed below.

Chart: EURSEK
EURSEK is one currency pair currently trying to get something more notable going in directional terms as the very bottled up price action of the last several weeks was broken on the release of the US Nonfarm payrolls change data on Friday, likely on the logic that lower US treasury yields are better for the very low yielding, and likely to stay that way, Swedish krona. But SEK should be a more pro-cyclical currency and, while the move looks legit so far, and in any case demands our attention as the absolutely massive 10.00 level approaches, we’re more comfortable with SEK strength in the context of strong risk appetite and hopes for the EU economic outlook turning higher as the Swedish economy is leveraged to the strength of its export sector. At least it has been traditionally. A SEK rally based on simply looking less attractive via yields dropping elsewhere? That’s not the basis for a potent move in my view. Still, watch the behaviour around the 10.00 level, one that last traded in early 2018.

Source: Bloomberg

AUDNZD back in the old range. Elsewhere, in smaller developments in the crosses, it has been interesting to watch the AUDNZD comeback after the pair sold off on the RBNZ’s comments at its most recent meeting eyeing mid-next year as a possible window for raising rates – a NZD move that, you got it, ran out in the sand. The big move and capitulation below the old 1.0710 range lows was done the following day and we are now back in the old range, trading near 1.0750 today. One reason is likely that, the RBNZ’s forecast notwithstanding, the market is still not differentiating the forward rate path for the RBA vs. the RBNZ relative to where it was before the RBNZ meeting, which saw a brief, one-off reaction at the front end of the yield curve in NZ that, well, ran out into the sand.

RUB sentiment riding high – key risks ahead – Russia may have a new reason to keep its currency firm and that is rising food prices after a UN global food price index showed a 40% increase year-on-year. Russia is moving to limit exports of foodstuffs and this Friday’s rate decision sees a split consensus, with some looking for a quarter-point rate hike while others are looking for fifty basis points. The latter is more likely if the focus is on food prices and cost of living baskets, which it may be more than supporting growth. In any case, USDRUB is trading down against a key range support at 72.70 and this could prove a volatile couple of weeks, with Biden and Putin also meeting next week on top of the signals from the rate move.

Table: FX Board of G-10+CNH trend evolution and strength
Yes, I will pick a new metaphor tomorrow, but general trends in G10 FX continue to “run out into the sand”, with the only reading greater than an absolute magnitude of 2 the JPY with its -2.1, although its momentum is sharply against that trend over the last week. NOK is trying to piece something together in momentum terms and it and perhaps SEK are interesting watch for signs of further development.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Generally very low readings here, no surprise to see, but do note the EURNOK turning to an outright negative trend on a close near 10.05 today (CHFNOK and USDNOK also in play today), and AUDNZD is having a look at ending the old downtrend by flipping positive today if it closes near 1.0750.

Source: Bloomberg and Saxo Group

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