EUR surges on migration deal. USDJPY pivotal next week

John Hardy

Head of FX Strategy, Saxo Bank Group
John Hardy joined Saxo in 2002 and has been Head of FX Strategy since October 2007. He focuses on delivering strategies and analyses in the currency market as defined by fundamentals, changes in macroeconomic themes, and technical developments.

There was a pronounced grinding of the gears across global markets overnight as the European Union summit produced a deal on migration in the wee hours of the night that was not anticipated. The deal is short on details, but outlines an intention to create migration centres across the EU as well as centres in Africa where migrants attempting to cross by boat can be returned if they have not reached the EU’s shores. Whether this is enough of a deal to save Merkel’s coalition with the CSU remains to be seen, but the market is clearly hopeful as the single currency surged higher across the board, particularly against a very weak JPY – more on that below. 

While the deal does offer hope that the EU can maintain order, we’re cautious in putting too much in the rally just yet – let’s see where we close the day today, and remember that today is the last day of the quarter, which can produce rather sharp moves intraday.

An interesting post from The Macro Tourist follows up on an earlier post discussing the US Fed’s “QT days” – days at the end of the month and occasionally mid-month when significant treasury holdings mature and seem to drive a weak equity market due to the liquidity implications. The question at this point is whether the phenomenon has become too obvious and might be front-run by the market. With a hefty chunk of Treasuries maturing tomorrow, today’s session or Monday’s would be the sessions to watch for this effect.


The JPY has actually been rather firm in the crosses recently, but USDJPY has stayed above 110.00 despite the recent wobbles in risk appetite and suppressed US yields, perhaps on the focus on China’s move to weaken its currency and the surge in oil prices. Next week sees a busy economic data calendar in the US. After the distractions of this week (weak risk appetite on China’s currency moves and the EU risk story) strong (more likely) or weak US data could drive a return of the focus to the Fed and the risk of further rate hikes. For USDJPY, if risk appetite remains relatively benign and US yields push higher again, USDJPY could be set to challenge the recent highs for the cycle and rally into the range extending all the way to 114.50. 

USDJPY (source: Saxo Bank)

The G-10 rundown

USD – interesting to see how the USD closes today after an eventful week and given the EU news overnight, but next week could quickly change the plot in either direction on the heavy US data calendar.

EUR – watching the flash June eurozone CPI data as the German headline inflation has printed above 2.0% for two months in a row. But interpreting inflation data is difficult given the ECB’s heavy-handed forward guidance. Still, fading EU existential risks could drive the single currency higher versus CHF, GBP, and perhaps even JPY if the latest wobbles in risk appetite also fade. 

JPY – the yen looking very weak on the combination of high energy prices and the strong boost to risk appetite in Europe from the migration deal. The volatility is set to continue on a busy macro calendar next week, especially linked to the fate of US yields.

GBP – sterling out in the cold here as EURGBP has broken the local range above 0.8800 (and did so before the EU deal on migration overnight) and now looks toward the bigger resistance levels into 0.9000. An EU showing more solidarity is not a positive for the UK’s side in Brexit negotiations.

CHF – EURCHF rally on the overnight deal a no-brainer and could extend if the market sees this as providing sufficient evidence of solidarity to crush Italian yields back lower. Strong US data next week and fading EU existential worries could see USDCHF powering higher as well as the massive 1.0000-1.0050 area can be overcome.  

AUD – an interesting reversal in AUDUSD overnight on the shift in the market’s energy. We have an RBA meeting next Tuesday – the market perhaps reluctant to take the AUD lower just yet. More downside there may . In the  meantime, we like AUD lower against CAD and higher versus NZD

CAD – CAD rather firm ahead of an important week of data next week and a GDP data point today. The July 11 Bank of Canada rate hike odds could move toward 100% next week on strong data and we like CAD in crosses like AUDCAD and NZDCAD. USDCAD runs into important pivot zone if it dips into 1.3125-1.3050.

NZD – the AUDNZD looking to establish a real trend now if we can avoid negative China focus, especially if China’s yuan move is a one off adjustment that now calms. The next important NZ data points are some ways off – technically watching whether the 0.6800 break in NZDUSD holds and if AUDNZD can surge to new territory above 1.0960.

SEK – would have though that the positive EU news would be even more positive for SEK, but that has so far not proven the case. To avoid a full pull to the top of the range, EURSEK needs to find resistance around the 9.50 level. Next week looking more interesting for SEK on the Riksbank meeting Tuesday and a number of Swedish economic data points.

NOK – if risk appetite avoids further weakness, would expect NOK to firm a bit more here, given he upgrade to the Norges Bank outlook and the surge in crude oil prices. 

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