Head of FX Strategy, Saxo Bank Group
Summary: The last piece is now in place for a broader USD sell-off as EURUSD rose above 1.1500 – a move that coincided with fresh CNY strength versus the US dollar and noise that the US and China are headed towards a truce on trade.
Curiously, the time of day of the move was also just after the USDCNY stops trading in China and that exchange rate closed sharply lower ahead of the EURUSD move, with the CNY registering its largest single day gain in over a month. Given that the move is unfolding just as US-China trade talks are wrapping up and China is possibly scrambling to call an unusually timed plenum, one can’t help but speculate on whether the CNY exchange rate is a deeper part of the trade negotiations as opposed to simply receiving a boost as a sign of China’s good faith in the talks.
Clearly, something major is shaping up in China’s response to the mounting challenges of its deleveraging process and the showdown with the US over trade. For now, we will go with the flow – which points lower for the US dollar.
A parade of US Fed voters out speaking later today, including the Fed Chairman Powell himself, but we suspect that the market has reached saturation on Fed inputs for now: we all know that they have turned more cautious on the intent to hike rates further and will await developments in financial conditions and incoming data. More important will be the emerging specifics of the US-China trade deal and whether the market feels these are sufficiently impressive to boost risk appetite. Then we will look for signals on new directions in Chinese policy in the wake of the February 5 New Year and of course anything that emerges from a possible CCP policy powwow later this month.
The Bank of Canada yesterday was no surprise, as the bank lowered GDP forecasts relative to its October round in fitting with its dovish shift at the early December BoC meeting. The bank remains hopeful that the next policy move will be to hike. Today, USDCAD changes unchanged from where it was heading into the meeting and USDCAD may trade passively, given the lack of developments in the policy spread with the US – expect oil prices and risk appetite to set the agenda in CAD crosses.
The break above 1.1500 is very straightforward here and compelling after the long period of choppy consolidation within a restricted range. The immediate upside potential stretches toward 1.1800 in the first analysis in range terms, and in Fibo terms starts with the 38.2% still down within the upper range at 1.1728 and then the 61.8% not until 1.2045, with the 1.2000 as a round-figure magnet closer to the latter.
USD – EURUSD is the missing piece for a broader USD sell-off as we continue to eye the 1.1500 zone for further potential. Elsewhere, USD is struggling against risk-correlated currencies, but the move pausing a bit here, perhaps as market second guesses how far it has run with Fed expectations in the wake of Powell’s comments on Friday.
EUR – the euro makes a move and note that the break higher takes all other euro crosses with it, as euro shorts against riskier currencies were recently popular. EURGBP strength on Brexit dysfunction could be a positive at the margin. Broader shift in EUR strength possible as long as 1.1500 holds in EURUSD.
JPY – A follow up move lower in USDJPY suggests the consolidation off the flash crash lows may be over and we are headed towards a retest. Broader JPY outperformance more likely if risk appetite is weak.
GBP – we have argued for some time that the most likely scenario will be a significant extension of the Article 50 Brexit deadline as the May deal is set for failure in a parliamentary vote next Tuesday. EURGBP is threatening resistance and could actually progress higher if a long postponement of the deadline is the ultimate result as a further extension of uncertainty is perhaps worse than a no deal for delaying investment and economic activity in the UK.
CHF – EURCHF rebounding mildly off the key 1.1200 level.
AUD – AUD resilient against a struggling USD, but struggling against a resurgent EUR and JPY as risk appetite has soured in early trading. AUDUSD potential toward 0.7400-0.7500 on a sufficiently positive US-China trade deal.
CAD – USDCAD may trade with low beta to other USD pairs unless oil prices extend aggressively higher after the recent notable comeback after Bank of Canada brings little new to the table.
NZD – the AUDNZD rally hanging in there as long as 1.0550-75 supported – NZ Building Permits up late today.
SEK – a risk off tone and the bid in EUR pairs taking EURSEK further away from the downside pivot levels – see little upside potential unless a new risk deleveraging is suddenly afoot.
NOK – EURNOK still contending with the 9.75-80 zone, the sticking point for a more significant NOK rally.
Upcoming Economic Calendar Highlights (all times GMT)
1330 – US Weekly Initial Jobless Claims
1230 – ECB Meeting Minutes
1330 – Canada Nov. New Housing Price Index
1330 – Canada Nov. Building Permits
1335 – US Fed’s Barkin (Non-voter) to speak
1530 – US Weekly Natural Gas Storage
1700 – US Fed’s Powell to Speak w/ Q&A
1740 – US Fed’s Bullard (Voter) to speak
1800 – US Fed’s Evans (Voter) to speak
1820 – US Fed’s Kashkari (Non-voter) to speak
2230 – US Fed’s Clarida (Voter) to speak