FX Update: USD pulls back from new lows. TRY tailspin.
Head of FX Strategy, Saxo Bank Group
Summary: The US dollar weakened to new cycle lows this morning, only to perk up suddenly in what could be a sign of a tactical setback for USD bears, though too early to draw conclusions. In Turkey, the USDTRY spot rate accelerated to the upside to a new all-time high and other EM currencies were under a bit of strain, a possible source of the USD support here.
This morning saw another run lower in the US dollar in very early trading in Europe, only to see that move wiped away quickly, perhaps in part on the 3% and more acceleration higher in USDTRY as the Turkish lira comes under additional heavy pressure after the authorities there have apparently surrendered in their fight at the 7.00 level, which gave way yesterday. After the crazy spike in overnight implied yields earlier this week suggesting a fight against TRY shorts, rates have normalized even as the price action has picked up to the downside. No headlines or statements accompanied the move, which simply looks like a surrender. EM selling picked up elsewhere today, suggesting some contagion risk here, but perhaps only ZAR showing a noteworthy move to local lows against the greenback (although challenging all time lows versus the euro today).
Yesterday’s July ISM Services index (yes, it has been renamed from ISM Non-manufacturing) looked positive at 58.1, but the Employment sub-component dropped deeper into contraction, registering 42.1, a worrying sign for the job market in the US. As we discussed on this morning’s Saxo Market Call podcast, its worth reminding ourselves that employment recovery lags economic recovery in every cycle and the ISM Services Employment sub-index didn’t move consistently above 50 until well after 2010. Today’s initial jobless claims and continuing claims numbers offer the latest update on the state of the US jobs market.
For the US, the reaction to the virus resurgence has clearly slowed hiring as also seen in the July ADP payrolls data printing a mere +167k, even if June numbers were revised some 2M higher. More concerning still for the coming quarter and more, even as we await new stimulus, is the second round risks once the first push of lending programmes aimed to keep businesses and jobs on life support until the other side of the virus expire. Airlines will have to lay-off thousands and Wells Fargo, one of the largest main street banks in the US, is looking at headcount reductions as well. With these factors in mind, it is important to see how the degree to which new stimulus measures maintain the attempt at keeping businesses in business as opposed to merely keeping people fed and in their houses.
A similar set-up for AUDUSD as for the dollar index more broadly and EURUSD, in that we saw new marginal highs for the cycle unable to stick and setting up a “bearish momentum divergence” potential tactically on a weak close today. Momentum divergence is easy to come by when prices have trended aggressively and then when a short consolidation is followed by a new attempt at the highs. Any signal here is small fry and merely tactical compared to the implications of a deeper sell-off that takes the price action back below the 0.7000-50 area, and we are some way off that level and would likely need a spike reversal in precious metals/iron ore/risk appetite and the inflation narrative for this to materialize. Driving the AUD strength for weeks now, and really since the May time frame is that reflationary narrative and aggressive move higher in Chinese iron ore prices, which notched further heady gains overnight and are only a few percent below multi-year highs, with the share price of Australia’s mining giant BHP Billiton notching a huge surge overnight as well to new highs that take it to less than 5% from its all pre-virus meltdown highs from January.
The G-10 rundown
USD – has pulled back here from the brink – only of tactical interest for the rare USD bull out there unless we are about to lurch into a major consolidation of recent macro trading themes and see a sudden meltdown in risk appetite.
EUR – as noted above, a bit of momentum divergence here – but the move has been so aggressive in the euro that it can absorb a solid sell-off tactically without reversing the trend. First area of interest if we stick a close lower could be 1.1625 Fibo retracement.
JPY – suspecting that we see directional sympathy with the USD in the crosses as we see USD firmness today accompanied by a matching degree of JPY strength.
GBP – nothing to write home about from the Bank of England, which is expecting the unemployment rate to peak out at 7.5% and for the economy to return to pre-virus levels by late 2021. Perhaps the lack of more dovishness from the BoE behind a modest GBP comeback today, even outpacing a firm USD for today. Looks a bit unwarranted, but EURGBP getting interesting to the downside if it punches through 0.8950-25.
CHF – the franc grinding higher against the euro, but not a technically notable move until sub 1.0700 again in EURCHF and SNB likely throwing intervention against every tick.
AUD – one of the most sensitive currencies here if we are seeing the early phase of any hiccup in recent trends, even if just a brief bout of risk off on EM concerns. Hard to wax outright bearish AUD unless iron ore and other commodities prices stumble badly and investors question the inflationary narrative.
CAD – the major development has been the break of the 1.3350-1.3300 zone in USDCAD, but yesterday’s oil price move through resistance is stumbling badly and we are getting a bit of risk off here – still, we would need a reversal back to 1.3400-50 to call a false break here.
NZD – AUDNZD approached that key 1.0865-80 area but shied away on its first attempt. Have to wonder if AUD underperforms tactically if the reflationary narrative suffers a setback here. NZDUSD is closer to a downside pivot in the 0.6575 area than its commodity dollar peers.
SEK – a whiff of risk off today is seeing SEK respond in kind and heading lower – squeeze risks picking up if this continues and EURSEK pulls up through 10.35. Sweden’s Q2 GDP did outperform EU peers with its virus approach of “staying open”, but disappointed expectations slightly in registering a -8.6% QoQ reading.
NOK – EURNOK approached the 200-day moving average again yesterday, which has now moved up to 10.59, but with the oil surge yesterday in danger today, we hold our breath on the EURNOK outlook as a smashing of oil prices back into the prior range or worse would likely see NOK suffer further against the euro.
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