USD continues to fade against confusing backdrop

USD continues to fade against confusing backdrop

Forex 7 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  Intermarket analysis is a conundrum as both safe-haven and risky assets are bid into today’s triple/quad “witching”. The USD rally never really got going and the next test is next week’s FOMC meeting and whether the market has over-anticipated the Fed’s dovish tilt.


The recent USD rally is no more as the greenback never managed to put anything together after the one-off boost around last week’s European Central Bank meeting. But the reversal of that rally hasn’t fired the outlook for USD bears just yet, judging from the ongoing collapse in implied options volatility. The Federal Open market Committee meeting next week is the next obvious event risk; we’ll preview that more thoroughly next week. For now, our chief question is whether the market has overreached in pricing in Fed accommodation.

The latest delay to the US-China trade deal outcome failed to do much to dent risk sentiment, at least as judged by the major US equity indices, but the action there may be more about buyback blackout periods to come and last-minute flows around the expiry of the options and futures today. 

This week’s Brexit votes have only managed to churn sterling pairs viciously in a range as we still await any sense of clarity, with only the cliff-edge no-deal scenario seemingly avoided for now. Prime Minister May’s last-last ditch gambit is mobilising her version of Project Fear on Tory Eurosceptics: if they don’t sign her deal, she waves the risk that the UK will have to participate in the EU parliamentary elections and will eventually have to agree to a very long delay that would likely include UK elections and maybe even a second referendum.

Surely her days are numbered as PM already, but they will be especially endangered if next week’s vote fails, as I suspect it will. Sterling is still relatively bid, but would a very long delay do sterling any favours in the end? Not so sure – May’s deal passing seems the most direct route to a stronger sterling, but can it pass? The Tory Eurosceptic Jacob Rees Mogg has raised the idea that the UK could exit the deal anyway under obscure precedents from the past. If this is enough cover, perhaps enough Tories could hold their nose and vote in favour after all – but odds look slim.

Trading interest

Our half EURJPY short reached its stop-out level after proving unable to take all of the equity upside this week into triple witching. We haven’t given up on the idea, but this was clearly bad timing and we’ll see how next week develops.

On EURNOK shorts, it's tempting to lighten up ahead of our nominal 9.65 targets here ahead of the weekend and try to hold on to a half position over the Norges Bank meeting next Thursday (or a full position if the pair backs up higher early next week. Norges Bank is widely expected to hike. Stops pulled down well below 9.80 now on any remaining shorts.

We’ll consider early next week whether and how to position for FOMC meeting outcomes.

Chart: USDNOK weekly

NOK strength has been one of the few pronounced directional moves this week and it's looking particularly interesting in USDNOK terms on a weak weekly close today as EURNOK corrects lower as well ahead of next Thursday’s Norges Bank meeting, where a 25- basis point hike is expected. As Norges Bank expectations have moved in the opposite direction of Fed expectations, downside pressure could continue, though a less dovish message thank expected from the Fed next week could provide a tactical squeeze. In the longer term perspective, this chart looks toppish. A decent USD sell-off and firm NOK could see the pair toward at least 8.25 over the next few weeks.
AUDUSD
Source: Saxo Bank
The G-10 rundown

USD – the recent rally has largely reversed, but not yet in a pointedly bearish way as range expansion is nowhere in evidence. Waiting for the FOMC meeting next week for next steps.

EUR – the reversal in EURUSD is nominally bullish, but collapsing implied volatilities suggest that the reversal is a symptom of a lack of conviction. Elsewhere, the euro looks very neutral in the crosses. 

JPY – the yen very weak on strong risk appetite and would be weaker still were it not for the persistent bid for safe-haven fixed income. There is dissonance there that would seem unsustainable.

GBP – May’s endgame faces its final test next week – another failed vote on her Brexit deal may keep sterling bottled up until we know whether the uncertainty time table stretches out over the horizon with a delay of Article 50, but the asymmetric downside risks seem thoroughly removed. 

CHF – struggling to pay attention but nominally expecting weaker CHF if sterling outcomes are positive and EU peripheral spreads continue to compress.

AUD – watching paint drying is more interesting than trading AUDUSD these days. A collapsing RBA rate outlook only sees a shoulder shrug from the currency market as strong risk appetite, a stable CNY and strong metals prices provide offsetting pressure.

CAD – USDCAD is exploring the last shreds of the local support into the 1.3300 area and looks passive to USD direction. Rate spreads suggest the pair should be trading higher, but strong energy markets and strong risk appetite offsetting. Minor data up today from Canada.

NZD – the AUDNZD downtrend still in place, but momentum not impressive and the longer term valuation picture and relative rate spreads suggest asymmetric upside potential.

SEK – EURSEK trying lower once again and may finally be ready for that test of 9.35-40 we looked for the last time we saw a similar bearish reversal. 

NOK – the krone’s recent strength could be ready for a more significant breakthrough next week on a sufficiently hawkish Norges Bank (guidance important, as market leaning hard for a rate hike) and if the crude oil rally is maintained.

Upcoming Economic Calendar Highlights (all times GMT)

• 12:30 – Canada Jan. Manufacuring Sales
• 12:30 – US Mar. Empire Manufacturing
• 13:00 – Canada Feb. Existing Home Sales
• 13:15 – US Feb. Industrial Production & Capacity Utilization
• 14:00 – US University of Michigan Sentiment

Quarterly Outlook

01 /

  • 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 ...
  • 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...
  • 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