Head of FX Strategy
Summary: Markets have sustained a tactical bounce despite China’s threat to retaliate on trade policy on hopes that a Xi-Trump call will sort things out. Our measures of Global Risk suggest market nerves remain ragged. EURUSD has reached a pivotal area ahead of the cycle lows.
Trading interest
Risk appetite suffered a brief if intense downdraft yesterday as China posted a response to Trump’s latest tariff delay, saying that the impending tariffs are in violation of agreements made at the G20 meeting in Osaka and that China has no choice but to retaliate. We have yet to receive the specifics of the Chinese retaliatory measures. Trump, meanwhile, promised a new phone call with his good friend Xi will be made soon. Will the call prove “tremendous”, merely “great” or, dare we hope, “spectacular”? The last of these scenarios is the most likely if the S&P 500 is posting new local lows.
US-China trade tensions notwithstanding, markets rebounded smartly later in the session, perhaps on the strength in US data. US July Retail Sales were particularly impressive, coming in at +0.9% month-on-month for the ex Autos and Gas, the fifth positive reading in a row. And the first two manufacturing surveys of the month (Empire and Philly Fed) both stronger than expected. Still, other news items of note suggest that at least some consumers are not doing so well – with subprime auto loans in 90-day or worse delinquency at new highs since 2009.
Our Global Risk monitor remains deeply embedded in the red here, with corporate credit spread widening a significant driver on top of recent rises in volatility in both equities and FX (we fear that something is amiss with our EM spread indicator based on an index from JP Morgan, which is relatively flat recently, at odds with other measures of EM strain, but that will take considerable effort to investigate.)
Norges Bank yesterday providing a more modest dovish shift than I was looking for, retaining language in the statement pointing to a bias for further hike in 2019, though clearly upping the uncertainty level as the short statement concludes: “The global risk outlook entails greater uncertainty about policy rates going forward.” There was also a brief mention of a weaker krone driving higher inflation. Market took the meeting as relatively dovish as 2-year NOK swaps punched about 3 basis points lower.
The USDCNY fix came in a 0.06% higher today at 7.0312 (highest for the cycle was after two days of lower fixes. Hong Kong announced an additional $2.4 billion stimulus package to counter the disruption to its economy from recent protests.
Chart: EURUSD
The EURUSD slide continued yesterday, taking the pair to the pivotal 1.1100 area. This even as yield spreads between the euro have tightened tighten significantly this year in the former’s favour. From the November 2018 widest level in 10-year swap yields of around -230 basis points, the spread has tightened to current levels around -175 bps, around the level of early 2018, when EURUSD traded well above 1.2000. Clearly, other issues are at the root of the USD’s strength, but this spread tightening is a relative fundamental support for the euro that will only increase as the Fed is forced to cut rates and bring back large scale QE in the months ahead. Technically, the pair needs to find support here in the 1.1100 area to avoid another test of the lows and probes into 1.1000. Bulls can take heart that the prior three new lows of this year failed to mark the start of major new sell-offs.
The G-10 rundown
USD – strong US data perhaps helping shift risk appetite higher, seeing the US dollar gaining slightly versus safe havens, while losing a bit of ground against risk-correlated currencies.
EUR – set your clocks for a Trump tweet if EURUSD manages to punch through to a new low here as this morning’s market action is only 20 pips above the low daily close of the cycle at 1.1085.
JPY – the yen taking a breather as downside momentum in global yields has eased a bit and risk appetite is attempting a comeback. Still looking for the yen to come out on top unless we see major reversal in the strength in global sovereign bond yields.
GBP – sterling pushing back against the crowded shorts after yesterday’s strong data blast (better than expected July retail sales, strong employment growth and higher than expected rise in earnings) but also perhaps as Corbyn’s hopes to become a “caretaker” prime minister was rejected by the LibDems.
CHF – a bit surprised to see the CHF holding so firmly given the risk appetite surge, but momentum lower in EURCHF is weak and the SNB is pushing against – requires ever larger doses of risk-off and lower bond yields to punch lower from here.
AUD – momentum is listless in AUD and positioning somewhat crowded. Bears in AUDUSD will handing in there until or unless the 0.6825-50 area is threatened.
CAD – USDCAD attempts at the 1.3345 recent highs for the cycle fell just short as oil prices and risk appetite made a comeback yesterday. This is a pivotal zone here for whether we are headed for 1.35-1.36 or back to 1.3000.
NZD – AUDNZD trying so very hard to get interesting for an upside run to perhaps 1.0700 to start – it’s crunch time for this development.
SEK – Swedish short rates punching through to new lows – nothing to support here for now and SEK risks sliding to new lows versus the Euro on fresh risk-off and deepening concerns of an EU - and Swedish - recession.
NOK – Norges Bank yesterday was seen dovish on balance by the market despite maintaining the bias to hike rates further in 2019. EURNOK likely would be higher were it not for the strong resurgence in oil prices and risk appetite yesterday on this.
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