FX Update: May 3, 2018

USD rolling over on shift in sentiment to EM

Forex
Picture of John Hardy
John J. Hardy

Global Head of Macro Strategy

The US dollar is turning broadly lower, likely due more to the shift in sentiment in emerging markets and risk appetite rather than due to the weaker-than-expected US CPI data and any spin from the European Central Bank meeting.

The US August CPI data came in much lower than expected, with the core month-on-month reading at  +0.1% versus 0.2% expected and the year-on-year figure at 2.2% versus 2.4% expected and 2.4% prior. Plenty of other evidence points to ongoing inflationary pressure in the US and the US Treasury market reaction was swiftly reversed later in the day, so we can safely say that this looks like a blip.

Nonetheless, the US dollar remained lower, suggesting other factors are afoot. One of those was Turkey’s massive 625 basis point increase in the one-week repo rate, which was about double the consensus expectations and engineered a significant rally in the Turkish lira yesterday, with other EM currencies rising in sympathy with the move. 

That shift in sentiment is critical here and could have legs if the move sticks – EM have been under pressure for a long time. A less important factor was the ECB meeting, which more or less confirmed the autopilot timetable of further tapering purchases into year end. On the “hawkish” side, the ECB’s fresh inflation forecasts were unchanged from the previous round of forecasts, though growth forecasts were moderately lower. The rate outlook was entirely unchanged, so the rally in EURUSD was more about getting past the event risk rather than deriving any narrative from it.

Interesting to note that the renminbi has pushed to new lows versus the euro, even as USDCNY remains rangebound. This has an interesting signaling value that China will allow the exchange rate to move around more as that 8.00 level has not been crossed except for briefly intraday in July.

Russia’s central bank meets later today and chief Nabiullina is in the hot seat as the government pressures to ease rates after she indicated a bias to hike. Given the decent RUB rally of last few session, she may choose to not hike but still issue a two way statement.

Chart: EURUSD

EURUSD has pulled higher here, and looks ready to take on the key resistance zone into 1.1750-1.1800 at minimum if it vaults the minor 1.1733 local high hurdle. A weak US dollar is the more likely driver of the action as we may have just seen a momentum shift in USD sentiment. As well, a move higher . Targets higher, assuming 1.1800 is properly cleared, could be the 200-day moving average ahead of 1.2000 or the big round level itself. To see more than that to the upside, we would like need a more profound shift higher in the EU economic outlook or downward shift in the US outlook.

EURUSD
Source: Saxo Bank
Chart: USDSEK

We like SEK higher in the near term, and if the USD is turning lower here, a USDSEK trade combines the EURUSD bullish and EURSEK bearish outlooks. Note the break of the big 9.00 level that could lead to an eventual test of the 200-day moving average, currently all the way down below 8.60.
USDSEK
Source: Saxo Bank

The G-10 rundown

USD – a notable shift in sentiment yesterday linked more to attitudes to EM and risk appetite, in our view, rather than any implications to the Fed rate outlook on the back of the weak CPI. To prove the point, rate expectations are actually higher as of this writing than they were before the CPI release yesterday.

EUR – constructive on further EURUSD upside – the big challenge in the 1.1800 area. 

JPY – the yen is the weakling as the market can’t gin up any expectation of a BoJ shift and the yen isn’t traditionally a strong performer when EM risk and general risk is on and sovereign bond yields are rising. 

GBP – sterling simply tracking the euro here as we await incoming headline risks next week and beyond. Risk of two-way volatility and we like the idea of positioning for longer term outcomes via options.

AUD – If the US dollar is turning here, there is a strong risk of a short squeeze into 0.7500 or higher if 0.7200-50 is properly cleared today or early next week. This is due to very crowded speculative positioning rather than any shift in the longer-term outlook.

CAD – USDCAD trying to break down through the 1.3000 pivot, with the next levels just below 1.2900 for whether this develops into a more profound rout. The medium-term chart is a mess, but 1.3000 is clearly an important line in the sand.

NZD – the plot thickens next week with New Zealand’s GDP release on Thursday for whether the AUDNZD rate makes NZD worth paying attention to relative to its bigger Antipodean brother.

SEK – the Swedish CPI this morning coming in weak (both core and headline at -0.2% month-on-month, but it is not a seasonally adjusted data series and there is often a summer dip) and disappointing for SEK bulls as they go with a more delayed rate hike forecast from the Riksbank (February rather than December). We are still constructive on SEK.

NOK – the move lower in EURNOK has been rather brutal, so tactical backfilling a risk ahead of next Thursday’s Norges Bank meeting, where we look for a rate hike and guidance will be important for whether EURNOK can realize further downside into 9.50 and beyond. We are constructive on NOK’s prospects.

Upcoming Economic Calendar Highlights (all times GMT)

• 1000 – UK BoE’s Carney to Speak
• 1030 – Russia Central Bank Meeting 
• 1200 – Russia Central Bank Governor Nabiullina press conference
• 1230 – US Aug. Retail Sales
• 1300 – US Fed’s Evans (non-Voter) to Seak
• 1315 – US Aug. Industrial Production and Capacity Utilization
• 1400 – US Sep. University of Michigan sentiment
• 1400 – US Fed’s Rosengren (non-Voter) to Speak

Quarterly Outlook

  • 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