FX Update: Risk sentiment eyes US data, EU reply to BoJo Brexit plan FX Update: Risk sentiment eyes US data, EU reply to BoJo Brexit plan FX Update: Risk sentiment eyes US data, EU reply to BoJo Brexit plan

FX Update: Risk sentiment eyes US data, EU reply to BoJo Brexit plan

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Key US data over the next couple of sessions, with USDJPY likely the most sensitive USD pair to data surprises. EURUSD is trying to turn the corner back higher, but is some way from doing so just yet, while USDCAD has undergone a major reassessment after the most recent rally and could be headed much higher if the price action sustains above 1.3300.


The narrative here is that weak data is driving the latest sell-off in risk sentiment, even if a number like yesterday’s small miss on the US ADP payrolls number is far too insignificant a data point to have driven the degree of weak risk sentiment we saw yesterday. I would suspect that the move through technical, flow-generating levels are behind the scale of the move yesterday and can’t help but think that the beginning of the quarter may be involved here as well (remember last years major sell-off began on trading day 1 of Q4).

Regardless, if the US data is driving the narrative, then we have two more important data points dead ahead, today’s US ISM Non-manufacturing survey, which registered a large bounce to 56.4 in August and is expected today at 55.0, and tomorrow’s Nonfarm Payrolls Change. On the ISM non-manufacturing survey, I would lean for more risk of a negative surprise, given the odd jerk higher in the August survey from July’s 53.7 and the Markit survey showing a weak 50.9 in August. Safe to say that anything lower than 53 or so will spook the market, as it re-establishes the downward trend suggesting decelerating growth in the services sector. On the US payrolls change tomorrow, a consistent pattern of negative revisions of prior months’ data and the very weak ISM Manufacturing employment subcomponent could drive the first significant miss in the payrolls number in a few months (remember that the private payrolls number is gaining in important for a time as 2020 US census hiring is picking up into next year.)

Judging from the last two days of action, continued weak risk sentiment will drive a strong G3 trio, with the USD the weakest within that trio, while seeing various degrees of weakness elsewhere, and especially EM at risk if the general deleveraging keeps up pace. One interesting thing to note is that the US yield curve has steepened the most in a while on the last couple of days of market action as the market prices in more aggressive rate cuts. The Fed struggling to keep up with the needed amount of easing and a steepening yield curve have often been associated in the past with bear markets in equities.

The September UK Services PMI out this morning dipped below 50 again after doing so in March before dribbling back above 50 for a few months. This is likely not the last time we see a sub-50 print suggesting a contracting UK services sector, judging from the weak credit impulse that suggest weak growth out at least another two-three quarters.

Chart: EURUSD
The EURUSD is trying to turn around here, but bulls really need a sharp leg higher into 1.1075-1.1100 to reverse the downward momentum and argue for a turn in the chart. We are open-minded here, as US data risks dragging the US dollar down versus the other highly liquid currencies, chiefly the EUR and JPY.

Source: Saxo Bank

The G-10 rundown

USD – bad data will likely be bad for the USD, but likely only versus other highly liquid alternatives.  An October 30 FOMC rate cut is already guaranteed, in our view, and risks ballooning to a 50 bp move if US equity markets suffer a very deep correction.

EUR – If EU rates have more or less reached absolute zero, the convergence of US rates lower together with the Fed riding to the rescue on balance sheet expansion may mean EUR is trying to find a bottom soon if not already.

JPY – the 107.00 area in USDJPY is an important one for triggering potential further downside, as the pair is one of the most sensitive to US data surprises.

GBP – the weak UK services PMI showing that UK recession is here and now and not sure that Brexit news flow stands much of a chance of brightening the outlook – especially if EU brusquely rejects Boris Johnson’s plan today, hoping to have a different counterparty in negotiations after a delay and a UK election.

CHF – very interesting divergence in normal behaviour to see EURCHF poking back higher even as risk sentiment and EURJPY head lower. We’ll file it under “interesting” for now – but perhaps the “absolute low in EU yields more or less reached” argument helps suggest similar for EURCHF and any whiff of promise on fiscal moves from the EU could boost the pair further. First step is retaking 1.1000.

AUD – the AUD has bounced a bit against a struggling greenback, but we don’t find the AUDUSD the most compelling option for a weaker USD if we see a continuation of the present risk-off move. AUD traders awaiting inputs from US-China trade talks.

CAD – the USDCAD technical outlook pointing higher after the smart reversal as CAD is too strong here if a US recession is incoming, oil prices remain low and lower, risk sentiment weak and the Bank of Canada rate outlook is lowered.

NZD – risk for NZD bears that AUDNZD has to explore a bit lower before finding a new base, though we still likely higher for the long haul.

SEK and NOK – weak risk sentiment and bad economic data are poisonous for these currencies and EURNOK risks a squeeze higher if it gains significant separation from 10.00 on a capitulation-like move. EURSEK is not far from its highest daily close for the cycle either.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Fed’s Quarles (Voter) to Speak
  • 1230 – US Weekly Initial Jobless Claims
  • 1400 – US Sep. ISM Non-manufacturing
  • 2235 – US Fed’s Clarida (Voter) to Speak
  • 0130 – Australia Aug. Retail Sales
  • 0130 – Australia RBA Financial Stability Review
  • 0320 – Australia RBA’s Ellis to Speak

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