FX Update: What is the best setup for USD bears? FX Update: What is the best setup for USD bears? FX Update: What is the best setup for USD bears?

FX Update: What is the best setup for USD bears?

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market seems to be in a holding pattern, with the US dollar easing lower as risk sentiment brightened yesterday and overnight, and the next event risk for the market is the US January CPI release up tomorrow. Today, we look at the easiest path lower for the US dollar, which would be nicely aided if the Bank of Japan proves the next major central bank to indicate a tightening bias.


FX Trading Focus: What would help the USD lower?

Note: I will host an FX Market Update webinar tomorrow at 1300 CET. Sign up here. In the webinar, I will try to provide perspective on what is moving the market and how the months ahead may shape up.

USD eases lower: what is the best setup for USD bears? The best setup for USD bears is more of what we got yesterday: risk sentiment that is able to continue stabilizing and little action in the treasury market with cooling energy prices. A strong US 10-year treasury auction today that keeps yields capped and a US January CPI number tomorrow that fails to trigger further rises in US rate expectations would also be a help. Although as I pointed out in yesterday’s update, it doesn’t seem the market gets much out of raised Fed expectations these days anyway after what we saw in the wake of the US jobs report shocker on Friday. As well, if the last “shoes to drop” on the need to tighten policy – the SNB and the Bank of Japan (more below in USDJPY chart discussion) do indeed drop, a further rise in US yields, even all along the US yield curve, may not necessarily support the US dollar as long as asset markets avoid a meltdown (i.e., reinforcing the point that increasingly, the last leg of USD support is ugly risk-off across markets).

European risk indicators of concern– on the surface, markets are putting on a show of stabilizing, but a couple of indicators are flashing red here for Europe and will have me reluctant to join wholeheartedly in looking for higher levels for the euro if their trajectory doesn’t moderate: first and foremost are the widening core-periphery yield spreads that immediately cropped up in the wake of the ECB meeting, particularly for Italy. The ECB and/or the EU’s political leadership needs to get ahead of this bad, old source of existential concern or there will be trouble once again that could echo the 2010-12 experience. The second is increasing strain showing up in corporate credit spreads, which have risen quickly to new cycle highs for all ratings of corporate debt in Europe, not yet to levels of major concern, but the trajectory bears watching.

Riksbank up tomorrow – I discussed tomorrow’s Riksbank at length in yesterday’s FX Update, and the SEK has firmed since yesterday, likely on the brighter tone in equity markets as SEK tends to be so risk-sensitive.

CEE currencies strong on backdrop of stronger euro and Poland’s central bank delivering another 50 basis points of tightening yesterday as expected, with an update later today that will provide further guidance from the bank’s governor Glapinski. The market seems happy to ignore the ongoing spat as Poland refuses to address the EU’s charges or pay the fines related to those charges as these are currently being deducted from fiscal transfers to Poland. The EURPLN rate is nearing the somewhat pivotal 4.50 area and the carry of over 300 basis points is quite rich.

Chart: USDJPY
An important decision lies dead ahead for the Bank of Japan if global yields continue to rise, as JGB’s have not avoided the pressure on sovereign debt globally, with the key 10-year JGB in recent days reaching within a few basis points of the Bank of Japan’s 0.25% yield cap under its yield-curve-control policy. We might expect a sudden and vicious JPY strengthening if the Bank of Japan shifts the goalposts or abandons the target entirely. Or, if it doubles down in its yield control commitment with a backdrop of rising yields elsewhere, the pressure on the situation would have to be absorbed by JPY weakening until the bank’s resolve is eventually broken. The JPY is so cheap already that it is difficult to understand why the Bank would be particularly afraid of its own shadow, but let’s see – the next Bank of Japan meeting is set for March 18. A BoJ member Nakamura actually spoke positively about the weak JPY overnight and said that rate hikes were not necessary unless wages were to rise.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The strong euro sticks out in an otherwise somewhat uninspiring set of readings as we await potential signs of stronger USD negative direction. Gold perking up may be one of those…

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
A bit short on new developments here, although AUD getting perky in more of the crosses and interested in what unfolds for SEK pairs through the end of this week. As well, watching USDJPY as noted above.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Mexico Jan. CPI
  • 1300 –Hungary Central Bank minutes
  • 1310 – Bank of England Chief Economist Huw Pill to speak
  • 1400 – Poland Central Bank Governor Glapinski News Conference
  • 1530 – EIA's Weekly Oil and Fuel Stock Report
  • 1700 – USDA's World Agriculture Supply & Demand Estimates
  • 1700 – Canada Bank of Canada Governor Macklem to speak
  • 1700 – US Fed’s Mester (Voter) to speak
  • 0000 – Australia Feb. Consumer Inflation Expectations
  • 0001 – UK Jan. RICS House Price Balance
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 is not intended to and does not change or expand on this. 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-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.