Head of FX Strategy, Saxo Bank Group
Summary: Momentum traders remain frustrated with the latest surge in the US dollar, which spent Friday consolidating back to the weak side for a second day after the surge earlier in the week. Key event risks this week include Wednesday’s FOMC meeting and Friday’s US jobs report.
With key US data points, including a Federal Open Market Committee meeting up this Wednesday and Friday’s jobs report, this week may either see the recent surge confirmed or denied or – the worst scenario – further indeterminate price action, possibly because we are still awaiting the outcome of the US-China trade talks, which US Treasury Secretary Mnuchin claims are “in their final laps”.
The question is what continues to drive the US dollar when the Fed is seen as dovish and risk appetite, at least in US equities and in financial conditions (the safe-haven bid in longer US treasuries does not fit the picture) that are not normally associated with a firm USD bid. The answer may be that, as long as the US economy is outperforming its global peers, the market will continue to prefer the US dollar and its still slightly positive real yields relative to the rather negative real yielders across the rest of G10.
So exceptionally weak data might be a bigger risk to the US dollar than a Fed that continues to transform its inflation policy and focus on “catch-up” inflation – could the Fed even be on the path to considering rate cuts even if economic data fail to indicate gather clouds in an effort to boost inflation above 2% for a time.
If the US dollar sustains a break higher, this could add further support for rate cut arguments.
Largely unchanged from last week: USD longs via GBPUSD shorts (as long as price action below 1.3000), USDCAD longs (if above 1.3400 area) and AUDUSD shorts (if below 0.7100).
EURSEK longs as long as above 10.55
EURUSD: Positioning in the US futures market is already heavily short EURUSD – over 105,000 contracts as of last Tuesday as the break lower was unfolding. But this piece of information provides little information value at this level. Back in the late summer of 2014, for example – also at an extremely low in implied volatility, by the way – the positioning was even more negative as EURUSD traded at 1.34 and was on the cusp of an incredible freefall to 1.0500 by the following March.
For now, we’ll stick to the status of the latest break attempt to a new low since 2017 and whether this week’s event risks and market flow will allow the next targets to come into view toward 1.1000 and then the 76.4% retracement of the 2017-2018 rally sequence at 1.0865.
USD – an important week ahead for the greenback, though with the risk that the market is waiting for the US-China trade deal to emerge before driving more notable USD flows. We also have PCE inflation up today. The FOMC could further eliminate rate hike inclination, though the bigger signal on that front may be reserved for the June meeting and the accompanying materials. That outing also comes after this notable meeting, which could drive the formal arguments for a more dovish policy mix.
EUR – the Spanish election perhaps a microcosm of the coming EU parliamentary election, which could show an advance for right-leaning populist parties, but a fractious general result. EURUSD focus is lower as long as we trade below 1.1200.
JPY – strong US long Treasury market the likely driver of JPY resilience and this provides clanging dissonance for the otherwise bid tone in risk sentiment.
GBP – little volatility in sterling and nothing new expected from the Bank of England this Thursday. The collapsed shorter implied volatility offers more compelling risk/reward if developments begin to point to a new referendum risk well ahead of the new October 31 Brexit deadline (three-month GBPUSD volatility now below 7% after trading above 10% in late March, for example).
CHF – room for USDCHF to consolidate back to 1.0100-25 without calling a technical reversal, but focus there only if USD strong and EURCHF rally picks back up above 1.1400.
AUD – the Chinese growth sentiment has come off the boil, as have the stock prices for Australia’s mining giants, and rate cut odds for next week’s RBA have accelerated after last week’s CPI miss. Only USDCNY and trade deal optimism holds AUDUSD above 0.7000
CAD – the oil slide keeps the USDCAD consolidation from biting too deep and we continue to focus on a rally extension after the Bank of Canada waved the white flag last week and flattened its rate adjustment bias to neutral.
NZD – the next test for the kiwi Wednesday’s NZ Q1 employment data, where the trend has slowed, though at very low unemployment levels. The NZDUSD back-up needs to halt ahead of 0.6725-50 if the bears are to maintain the case for a downtrend.
SEK – consolidation so far orderly after the big slide last week on the dovish Riksbank meeting – looking for test of cycle highs above 10.70 in EURSEK as long as 10.55 area holds.
NOK – Norges Bank expectations faltering a bit already before the vicious slide in crude oil prices on Friday. EURNOK squeeze risk higher remains if the oil slide deepens, and the price action remains above 9.65.
Upcoming Economic Calendar Highlights (all times GMT)
07:30 – Sweden Mar. Household Lending
08:10 – UK BoE’s Carney to Speak
09:00 – Euro Zone Apr. Confidence Survey
12:30 – US Mar. PCE Inflation
14:30 – US Apr. Dallas Fed Manufacturing Activity
01:00 – China Apr. Manufacturing and Non-manufacturing PMI
01:45 – China Apr. Caixin Manufacturing PMI
Economic calendar Highlights for the rest of the week
Tuesday: China Apr. Manufacturing and Non-manufacturing PMI, Euro Zone Q1 GDP Estimate, Germany Apr. CPI, Canada Feb. GDP, Mexico Q1 GDP
Wednesday: New Zealand Q1 Employment report, UK Apr. Manufacturing PMI, , US Apr. ADP Employment Change, US Apr. ISM Manufacturing, US FOMC Meeting
Thursday: Euro Zone Apr. Manufacturing PMI, UK Bank of England Meeting,
Friday: UK Apr. Services PMI, Euro Zone Apr. CPI, US Apr. Change in Nonfarm Payrolls, US Apr. Average Hourly Earnings, US Apr. Unemployment Rate, US ISM Non-manufacturing, US Federal Reserve speakers at Hoover Institute Policy Conference