Head of FX Strategy, Saxo Bank Group
The most interesting development this week would be strong US Treasury auctions that see a sharp drop in US yields as a test of the recent weak USD trend. On the risk appetite front, note that the highs on Friday near 2,750 are near a critical Fibo retracement level for the S&P 500, so that level looks pivotal for the next leg of market action.
The two key factors for the action from here are the state of risk appetite and the US treasury market, which faces an important test this week with three large auctions of two-, five-, and seven-year Treasuries on Tuesday through Thursday and the latest Federal Open Market Committee minutes on Wednesday. The big surprise many noted last week was the fresh highs in US yields failing to derail the ongoing equity market recovery.
On the currency side, the narrative is that the US dollar can continue to fall as US interest rates rise because the rise in US yields reflects concerns on the US fiscal/current account balance sheet more than it reflects a strengthening US economy. The US 10-year benchmark came within hailing distance of the huge 3.00% level last week, widely considered a critical structural chart point – it is hard to believe, last week’s action notwithstanding, that a persistent rise above this level would be met with a shrug by asset markets, from equities to emerging markets.
The most interesting development this week would be strong US treasury auctions that see a sharp drop in US yields as a test of the recent weak USD trend. On the risk appetite front, note that the highs on Friday near 2,750 are near a critical Fibo retracement level for the S&P 500, so that level looks pivotal for the next leg of market action.
Chart: EURUSD versus the S&P 500
The recent market action suggests there is a rough directional correlation of EURUSD and the S&P 500, something that is likely to continue as long as markets remain volatile as speculative positioning is relatively stretched (long EUR, short USD).
For EURUSD to continue to progress higher, we may need the recovery in risk sentiment to continue, which would allow for further build-up in positioning.
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