Head of FX Strategy
Summary: The US dollar has broken down to new lows against four of the G10 currencies after soft PPI data yesterday. EURUSD has posted a new 12-month high and getting the most attention, while USDJPY remains stuck in the range and the Antipodeans and Scandies have yet to confirm the greenback’s breakdown. Extension of the move lower will require a delicate balance of avoiding volatility in rates and “just right” economic data.
Our Q2 Outlook, titled The Fragmentation Game is now out.
Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team
FX Trading focus: USD rolls over to new lows as benign data for the inflation outlook keeps sentiment supported. The broad euro strength getting stretched.
The “just right” US data for a disinflation out yesterday helped keep US treasury yields neutral and allow risk sentiment to remain bid ahead of an important earnings season that is set to kick off today (have a listen to the extensive preview in today’s Saxo Market Call podcast). Both core and especially headline US March PPI data were softer than expected and the jobless claims remain in the new range between 225 and 245k, suggesting a less tight, but still strong US labour market. Today we have a look at March US Retail Sales, with further relative weakness after the huge January surge in sales.
The reaction pattern after the US data was telling, as the initial move lower in yields saw JPY reacting the most vigorously, but as yields reverted to unchanged, the JPY rally faded again and instead the recently quiet and rather weak Aussie roared to live, extending its rally to more than a figure off the days lows in AUDUSD and testing the important 0.6800 level on the AUDUSD chart. This coincides with copper rallying clear of resistance. Copper is a key proxy for the argument that Chinese growth set to accelerate and that the global electrification- and alternative energy push, which is very copper intensive. Alas, the copper move is wilting as of this writing, so stay tuned there. Anyone hoping for an Aussie rally extension needs some support from the metals/commodities space as long as the RBA is in pause mode. The EURUSD rally extension is discussed with the chart below. GBPUSD looks a bit less convincing as EURGBP has rallied sharply and outside of EURCHF, the euro strength is getting rather stretched here. Next week, Europe reports its flash April Manufacturing and Services PMI on Friday.
Chart: EURUSD
EURUSD broke above the higher water mark of the year at 1.1054 and traded to a new 12-month high into this morning’s session, driven in part by the policy divergence story, as the Fed is priced to reach peak rates in May/Jun or possibly already to have peaked, while another 75 basis points of further tightening is priced for the ECB through Sep/Oct with eventual cuts not seen likely until early next year (Fed already priced at 75 basis points below the current policy rate by the January 2024 FOMC meeting). It’s possible that EURUSD can wring more upside from this source, but hard to see a meaningful further widening of yield spreads when the market is pricing the Fed and ECB to have the same policy rate around the middle of the next year. Technically, the next objective is perhaps the 1.1275 area, which is the 61.8% retracement of the entire rally off the down-wave from the post-pandemic highs to the sub-0.9600 lows last year. Bears don’t have a case here unless we sharply reverse this latest up-move and close at least below 1.1000 to start.
As I am about to publish, I see the story from Bloomberg discussing Japanese life insurers getting set to make their investment decisions for the year ahead – a massive risk for JPY flows. Take note!
Table: FX Board of G10 and CNH trend evolution and strength.
The broad sterling underperformance of the last few session is notable and worth watching for further developments. It’s certainly not driven by anything rates related, and the BoE’s Chief Economist Pill was even out talking up the potential for a “positive demand shock” in the UK economy yesterday, driven by low unemployment. Elsewhere, the franc leads the pack as the CHF tracks the strong euro with the cherry on top of soaring gold prices (SNB maintains large gold reserves).
Table: FX Board Trend Scoreboard for individual pairs.
Many USD pairs at key range levels, including USDSEK, NZDUSD and AUDUSD, which have yet to break meaningful levels. AUDUSD is perhaps the key one to watch as noted above.
Upcoming Economic Calendar Highlights
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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