Sterling in focus on Brexit vote, USDJPY breaking higher

Sterling in focus on Brexit vote, USDJPY breaking higher

Forex
John J. Hardy

Global Head of Macro Strategy

Sterling trades near support versus the euro ahead of a key Brexit vote on the customs union with the European Union. Elsewhere, the US CPI data release is the last major data input ahead of tomorrow’s important Federal Open Market Committee meeting.

Not much of a market angle on the proceedings, but as someone who grew up in the dying decade or so of the Cold War, I had to stop in awe of a moment I never contemplated seeing, with US and North Korean flags staged together behind a table. Then a US president and a North Korean leader emerge, shake hands and sign documents.

What are those documents?

A peace deal? 

This market needs to make up its mind about a number of things by the end of the week as pivotal levels are approaching everywhere again - from US equities to US Treasury yields (see below in the comments on JPY) and the implications for USDJPY as it plays into key resistance to the situation for EURUSD over the two important central bank meetings tomorrow evening (FOMC) and Thursday (European Central Bank).

Even USD pairs like AUDUSD and USDCAD face a decision time soon. It is my high conviction that the Fed wants to introduce more uncertainty into its forward policy outlook but I have little conviction on how the market will deal with this message.

An abundance of pain for EM as most EM currencies are lower versus the US dollar and EM credit spreads have edged to new cycle highs recently, even if these are generally well short of levels back in 2015 and at the peak in early 2016. We doubt that the Fed wants to wax explicitly dovish and will move to continue quantitative tightening and a gradual pace of rate hikes as long as inflation and growth measures in the domestic economy are satisfactory. This could continue to put the screws to EM currencies on worsening USD liquidity, even without a notably stronger US dollar within the G10 as long as US yields remain near current levels or higher. The Fed’s QT is set to go to nearly 50% of the pace of the most generous era of QE back in late 2012 to 2013 at the beginning of July as it will theoretically shift to a rate of $40 billion/month of tightening.

Chart: USDJPY

While the US Treasury auctions yesterday saw a huge amount of debt absorbed, US yields remained steady near the highs since the recent post-Italian election EU peripheral debt blowout. As long as US yields continue marching back higher it appears USDJPY will do likewise and the pair is teasing through important local resistance near the 110.00 psychological level and the prior local high. It’s too early to trust the quality of the move until the outcome of tomorrow’s FOMC meeting provides us with the hawkish or dovish tilt that sparks the next leg, but with risk appetite still on the mend, if the FOMC can spin a tale of continuing to hike gradually (very likely) if a bit more slowly (this course already charted by expectations) while risk appetite maintains a strong bid, then the side of least resistance appears higher. 

USDJPY
Source: Saxo Bank

The G-10 rundown

USD – the CPI data point up today provides another test of what “symmetry” means from the Fed – does it mean no need to adjust the rate expectations higher until core PCE is above 2.0%? Or above the two-decade high of around 2.4%? 

EUR – tough to discern how the market is pricing the ECB, as the euro recovery of late is more of a function of the attempt to return to calm after the Italian debt storm. The combination of the Fed’s and ECB’s respective guidance shifts to tell us whether we revisit 1.1500 or rise back to 1.2000. Without a more aggressive Fed or a new ugly bout of risk off, we are looking for the eventual return of the USD bear in EURUSD.

JPY – yen struggling across the board; the outcomes of the FOMC and ECB meetings are the next step for assessing whether the yen weakness can continue apace here – the pivotal inputs are risk appetite (notable pivot in S&P 500 in view here around 2,800 and the 2.95-3.05% yield area in the US 10-year benchmark.

GBP – a possibly pivotal vote on the post-Brexit customs union proposal today, which provides sterling relief if passed. Meanwhile, April UK earnings data is released today as rising wages and a tight job market (in part due to Brexit-induced migrant labor supply shortage) is one of the areas showing promise for BoE leaning toward an eventual hike. Less sterling supportive was yesterday’s near record trade deficit number. EURGBP hovering near key resistance. 

CHF – Italian yields pushed sharply back lower, but EURCHF has yet to break up through the 200-day moving average again – something the may require a more full normalisation in EU peripheral spreads.

AUD – the Aussie getting a fundamental boost from stable to rising industrial commodity prices, but AUDUSD caught in a no-man’s land between perhaps 0.7550 and 0.7650 as we await a strong signal on the USD post-FOMC.

CAD – USDCAD can’t get any separation from the pivotal 1.3000 area and refusing to make a move until we have a look at Bank of Canada guidance. The US-Canada rate spread is at highs for the cycle and near the highs of May 2017 when USDCAD was trading above 1.3500. If the Fed tempers medium term rate expectations while we await incoming inflation data, this could allow a window for the BaoC to play some catchup if it can look through the risks from trade tensions, etc. We’ll look higher on a weekly close above 1.3000 and lower on one below 1.2900.

NZD – little to differentiate NZD from AUD at the moment, as the dovish broadside from Orr at the RBNZ meeting has failed to further takeaways on NZ yields. NZDUSD resistance zone stretched from 0.7060 to 0.7180

SEK – SEK buoyed by the easing of EU existential pain and there may be room for a run to 10.00 in EURSEK on further improvement here and a fairly dovish ECB, but we’re not on the lookout for a sustained trend so risk/reward is fair at best.

NOK – EURNOK continues to look heavy at the bottom of the range and has potential toward 10.20-25 on a break if the EU peripheral backdrop is supportive. 

Upcoming Economic Calendar Highlights (all times GMT)

   • UK Brexit Bill vote
   • 0800 – Norway May Region Survey
   • 0830 – UK May Jobless Claims Change
   • 0830 – UK Apr. Unemployment Rate / Employment Change
   • 0830 – UK Apr. Average Weekly Earnings
   • 0900 – Germany Jun. ZEW Survey
   • 1230 – US May CPI
   • 1700 – US Treasury Auction – 30 Year T-Bonds

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • 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

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

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