Head of FX Strategy, Saxo Bank Group
Summary: Market volatility remains muted, with recent sterling strength still dominating the picture. The Swedish krona is trying to get something going as well after particularly supportive data this morning.
Sterling found additional support yesterday on signs that Tory pro-Brexit hardliners are less vocal against Theresa May’s deal, given that it is increasingly clear that the options are shifting toward May’s deal or no Brexit at all (which opens up as a possibility if the vote on her deal fails, a delay is declared and the risk of a second referendum rises.)
Alas, given the market’s widespread lack of directional momentum, the price action is already backtracking today, with sterling retreating from yesterday’s highs, offering latecomers to the move a chance to get long around support levels (toward 0.8600 in EURGBP for example.)
Price action in the majors remains muted and implied options volatility continues to fall as traders lack inspiration for what catalyst will shake us out of the current ranges. A couple of interesting signals that could eventually spark further volatility down the road yesterday:
First, in his testimony yesterday before a House of Representatives committee, Fed Chairman Jay Powell suggested that the Fed will soon have a plan on how it will stop its quantitative tightening policy and said that the Fed can’t go back to the very small balance sheet it maintained before the financial crisis. Second, the European Central Bank's Jens Weidmann, one of the candidates to replace President Mario Draghi after his term ends on October 31, suggested that any large economic shock would require a fiscal response – such a critical admission that the ECB would need a fiscal impulse to work with to get traction in the economy in response to weak growth. Also, consider a Bloomberg column on the likely new ECB chief economist, Ireland’s Philip Lane who is a profoundly pro-euro and has a number of suggestions for the creation of euro-bonds.
It is clear that if EU politicians want to push back against the populist threat, the ECB is more than open to supporting a move toward fiscal stimulus and some form of mutualised debt. This would likely prove highly euro positive longer term, but the path to this policy eventuality may not be easy.
For those still in USDCAD longs (we initially looked at stops below 1.3150 but argued the need for moving this below 1.3100 given price action elsewhere), we are still nominally hanging in there.
Price action in AUDUSD getting more constructive for downside potential, though we likely need the outcome of US-China talks and weakening risk sentiment to know whether the trade develops.
The EURJPY downside idea so far a bust as weak treasury prices had JPY on the defensive. This idea may come alive again, but lack of volatility is not a friend of JPY longs.
For GBP longs, we suggest EURGBP needs to hold below the 0.8600-25 zone to remain constructive, which we do until proven wrong.
The Swedish krona is trying to get something going here on a much stronger than expected GDP estimate for Q4 – out this morning – at 2.4% year-on-year versus +1.5% expected and a strong January retail sales print. If the pair can hold below the 9.50-52 area former support, the pair could test the 9.35 area support in quick order.
USD – unable to find a pulse even after two days of Fed Chairman Powell testimony as the market is at a loss on what to do with the greenback on the lack of dynamism in market volatility or anticipation of the Fed’s policy outlook.
EUR – 1.1400 was rejected yesterday, but price action so muted it is hardly worthy of comment as we await a catalyst to spark price action outside the 1.1250-1.1500+ range.
JPY – the yen is finding support from Trump walking away from North Korea summit in a huff, but only after weakness yesterday as global bond yields pulled back higher. Daily directional changes last four days in a row.
GBP – strength could continue here as it is tough to see what could bring back the feared No Deal Brexit scenario.
CHF – the franc and yen are seeing a bit of support this morning from Trump’s quick exit from Vietnam after talks with North Korean leader Kim Jung Un didn’t progress as hoped. Swiss domestic data rarely gets much play, but the KOF Leading Indicator for February shows a continuation of the slide, posting the weakest reading since the months after the CHF revaluation of early 2015.
AUD – AUDUSD is dead in the middle of the price action of the last…six months. US-China trade deal outcomes likely the next trigger for a view north of 0.7300 or south of 0.7000.
CAD – USDCAD is rebounding again from a look at the range low yesterday – all of the USD/commodity dollar pairs in a similar technical boat here – need a new solid rally bar for the USD to boost flagging bullish confidence.
NZD – the ANZ survey of business opinion has been down in ugly territory for over a year and the latest reading overnight nothing to cheer about, but market can’t seem to find a reason to sell NZD. Our first technical trigger for scoping out NZD shorts would be a close above 1.0500 again in AUDNZD.
SEK – the very strong data out of Sweden this morning should be able to set the tone for a decent consolidation higher in SEK, provided broad risk sentiment stays reasonably stable.
NOK – the popularity of NOKSEK longs could mean that NOK held back by a surge in SEK here.
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