FOREX 5 minutes to read

When will the dollar finally make a statement?

John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  Since peaking late last year, the greenback has staggered back and forth with multiple treacherous downside and upside breakouts. The latest broad firming will look convincing if EURUSD can finally break the range lower.


The melt-up scenario of a fresh blast higher for global asset markets on the combination of Chinese stimulus and accommodative global central banks is a theme that is increasingly on the ropes. First, while China released a batch of strong economic data last week supporting the melt-up narrative, data elsewhere have so far failed to indicate that this purported boost to demand is feeding through to China’s trading partners. Elsewhere, Europe’s flash April PMIs gave saw very little to celebrate and both Japan’s latest data runs for March and the flash April Manufacturing PMI have likewise failed to show notable improvement – the last of these showing a hardly meek bump from 49.2 in March to 49.5, merely indicating a slightly slower pace of contraction.

Over the weekend, Bloomberg threw further cold water on the Chinese growth resurgence narrative, pointing out the Politburo’s latest meeting’s focus on property speculation risks and deleveraging imperatives. Others have pointed out China’s inability to launch a stimulus on anything approaching the scale of 2008 or 2016 as long as the country maintains capital controls and a currency “peg”, as its current account is no longer in surplus. 

The currencies most positively aligned to benefit from the melt-up theme have stumbled over the last few trading days, including the Antipodeans (AUD and NZD), as well as emerging markets to some degree, while a EUR rally – at least in part driven by hopes that China’s new stimulus will feed through into export demand – hardly managed to register before folding on barely detectable bounce in the flash Eurozone PMIs last Thursday. 

Another wild card factor challenging the melt-up narrative has been the fresh rise in oil prices, aggravated at the beginning of this week by the US threat to eventually lift the Iran sanctions waivers. Recall that a ramp-up in crude oil prices in September of last year immediately preceded the market melt-down in Q4...

If the melt-up scenario fails to engage, we could be ready for a powerful slide in confidence and equity markets again soon. The failure of economic data to improve for another month or so could eventually overwhelm the prior chief support for global markets: central banks’ big shift into a more accommodative stance. 

For currency traders, I would expect a fresh deterioration in hit the commodity dollars, especially once the crude oil rally rolls over. Sterling looks vulnerable no matter what the scenario here and is struggling for air just below the pivotal 1.3000 level in GBPUSD, and the European Union outlook's inability to improve, along with Brexit and general existential concerns, could drive a spell of EUR weakness as well. Still, we need the 1.1200 level in EURUSD to finally surrender.

Chart: GBPUSD

GBPUSD looks on the verge of a Brexit pause breakdown as the greenback firms and sterling may struggle with the prospects for an eventual referendum that results in a No Deal exit. Speculative positioning in the US futures markets has seen the very large speculative short (-80k contracts in September of last year) now entirely eliminated. The first level lower is arguably 1.2800, but the ultimate target for bears would be 1.2500.
Source: Saxo Bank
The G10 rundown

USD – the US dollar gathering steam again, particularly against the smaller G10 currencies and CHF – need to see EURUSD joining the parade for a sense  that a bigger move is afoot.

EUR – all eyes on EURUSD if the US dollar is set to spread its wings; we need a close clear of the sub-1.1200 lows. EUR more vulnerable now unless EU data and perhaps bund yields pick up again.

JPY – the yen resilient in the crosses (note AUDJPY at risk of a full scale reversal), but going  nowhere versus the US dollar. JPY will likely track USD direction if we have weakening sentiment and lower yields. 

GBP – a significant failure below 1.3000 opens up the range toward 1.2500 and is a prominent risk as Brexit uncertainty drags on, particularly if path to a referendum opens up in the weeks ahead.

CHF – recent comments from SNB’s Jordan that the policy rate can go lower and an apparent general reassessment of CHF continues to see CHF weakness – next critical test is the 1.1500 area in EURCHF, although USDCHF is also a possible theme now that the range since early 2017 has been cleared.

AUD – the signals from China’s Politburo and risks of a Labour victory at the mid-May election weighing on AUD, which looks bound for a 0.7000 test in AUDUSD terms and likely then some if the  USD can put together a rally. Look out for Q1 CPI from Australia tonight.

CAD – strong CPI data and the oil price rally doing nothing for CAD in USDCAD terms – watching upside break potential there if USD rally continues, although AUDCAD shaping up as an interesting cross to express CAD outperformance.

NZD – NZDUSD has worked back below the 200-day moving average and the range to sub-0.6500 levels has been opened up on a further USD firming.

SEK – EURSEK looking firmly higher and USDSEK likewise – weak EU flash Apr PMI’s and worries that a global bounceback fails to engage are SEK-bearish.

NOK – a real grind for NOK bulls as a new significant pop in oil prices fails to generate much more than a head nod. This suggests underlying vulnerability for NOK, but EURNOK needs back up above 9.60-65 to suggest a squeeze risk.

Upcoming Economic Calendar Highlights (all times GMT)

• 13:00 – Mexico Mar. Unemployment Rate
• 14:00 – US Apr. Richmond Fed Manufacturing
• 14:00 – US Mar. New Home Sales
• 14:00 – Euro Zone Flash Apr. Consumer Confidence
• 01:30 – Australia Q1 CPI

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