FX Update: FX at a loss for catalysts ahead of quarter end FX Update: FX at a loss for catalysts ahead of quarter end FX Update: FX at a loss for catalysts ahead of quarter end

FX Update: FX at a loss for catalysts ahead of quarter end

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Markets remain in a generally complacent mood, though we have seen the JPY backing up higher in recognition of the strength in global safe haven bond markets, with the Swiss franc mimicking the yen’s latest move. The USD is firm but not yet able to make a technical statement as we await the latest signs on USD liquidity issues and how the Fed’s response will shape up in the weeks (and important the quarter) to come.


The ECB’s late resumption of QE was known to have pushback from the major core EU economies in the immediate wake of the ECB meeting earlier this month, but Banque de France head Villeroy was out today publicly inveighing against QE, saying it is not needed now based on how low rates are trading at present, though he is in favour of the forward guidance and rate cut.  Not much reaction in the market to this, where the focus is more on when Germany’s stern fiscal austerity stance is melted by the galloping recession that is unfolding there. On top of yesterday’s hideous flash September manufacturing (worst-since-2009 at 41.4) and services readings for Germany, we get a worst-for-the-cycle Germany IFO expectations survey for September this morning. Somehow, EURUSD continues to scrap around within hailing distance of 1.1000, as the market is unwilling to sustain a reaction to incoming data.

Yesterday’s daily Fed repo operation was smaller than the max amount (USD 66B vs. 75B cap), but today sees the first 2-week repo operation and a large 2-year Treasury auction of $40 billion. Please have a listen to this morning’s podcast for more perspective on the USD liquidity issues and how the large US banks’ size means they are pulling away from things like repo operations ahead of year end in an effort to keep their balance sheets as small as possible to avoid regulatory charges linked to their size (as G-SIFI – Global systemically important financial institutions). In short, we can expect liquidity issues to dog the US dollar through year end, where the Fed getting things wrong could make for volatile markets.

 Ahead of quarter end, it appears this market is at a loss for catalysts, wanting a look at the post China national celebrations environment and the status of the US-China trade relationship before committing risk to trading here. We suspect volatility is set to rise into year end.

Chart: AUDJPY
The classic risk-on, risk-off currency pair has largely tracked the direction of bond yields lately, with new lows for the cycle and even a dose of risk-off likely needed to drive new lows for the cycle here, though the outcome of US. Across markets, finding charts of almost anything that doesn’t correlate with this chart is a difficult task, as all traders need to maintain awareness of portfolio correlations in conditions like these.

Source: Saxo Bank

The G-10 rundown

USD – the USD liquidity issues will only mount from here and into year end, even if we escape further quarter-end drama here at the end of this month.  The Fed moving into a new gear and even the Trump administration activism likely needed to put a lid on the greenback.

EUR – the euro on its back foot after weak PMI’s yesterday, with the Euro Zone wide manufacturing PMI dipping to a cycle worst 45.6, led by Germany’s terrible 41.5. The IFO survey this morning out of Germany.

JPY – the yen politely inversely tracking the direction of global bond yields, with more risk off needed for the currency to put in a notable rally here.

GBP – the UK supreme court ruling today on Boris Johnson’s proroguing of parliament, with a on overturning of Johnson’s move theoretically allowing Parliament to convene immediately, though Johnson has indicated he might prorogue Parliament again on a ruling against him. Sterling looks optimistically priced here…

CHF – weak EU data diving a EURCHF sell-off, which is likely to correlate from here with bond yield direction and safe haven seeking.

AUD – the RBA’s Lowe to speak today and he should focus more on criticizing the government’s fiscal surplus stance than anything he can do on monetary policy. Supply side efforts to juice the economy don’t seem to be bearing much fruit as consumers are saving the surplus rather than splurging. This is what happens when an economy reaches the far side of a credit bubble.

CAD – USDCAD continues to fibrillate in the 1.3250-1.3300 range, with the USD outlook dominating for now. The Canadian election outcome looks highly uncertain, though implied volatility in USDCAD options is pegged near cycle lows here just under a month from the October 21 poll.

NZD – important test of the late NZD weakening over the RBNZ tonight, where the bank is expected to pass on further easing for now, likely awaiting the latest on risks from the trade war front before possibly moving 50 basis points again on a bad outcome at the next meeting. We still like AUDNZD higher for the long term, even if risk of more short term consolidation.

SEK – EURSEK stuck in limbo here technically, with SEK generally no liking bad news on the EU economic outlook, but we’re mid-range of the last to months’ price action.

NOK – still some upside momentum in EURNOK after the pair pulled away from a breakdown attempt on the dovish hike from Norges Bank last week. 10.00 the obvious pivotal level – likely needing risk off and weaker oil prices to pull notably above that level again.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0930 – UK Supreme Court ruling on Boris Johnson’s proroguing of Parliament
  • 1005 – Australia RBA’s Lowe to Speak
  • 1300 – US Jul. S&P/CoreLogic Home Price Index
  • 1400 – US Sep. Richmond Fed
  • 1400 – US Sep. Conference Board Consumer Confidence
  • 2245 – New Zealand Aug. Trade Balance
  • 0200 – New Zealand Official Cash Rate

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992