USD bear needs one more test

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The USD has turned sharply lower as the market decides to celebrate the anticipated string of Fed rate cuts. But let’s keep in mind that forceful Fed easing will require bad news on the US economy – something the market has certainly not celebrated in past cycles.

The US dollar finished last week on a low note, with EURUSD above 1.1350 for the first time since March and EM currencies and markets in a tizzy as global markets are celebrating the return of the Fed policy punchbowl. The difficult path for asset markets from here will be how they deal with a real slowdown in the US economy that suggests the Fed was already well behind the curve before launching its easing campaign (nearly guaranteed to start in July). 

So sure, the Fed is set to cut and could cut at a breathtaking clip on deepening signs of economic weakening, but the market’s celebration in risk sentiment terms could come to an abrupt halt. How the US dollar behaves during the next bout of risk-off behaviour is the test for how profound a USD weakening we can expect from here, but the sense now is that the USD is turning lower and may have peaked for the cycle. 

Reserve Bank of Australia Governor Lowe expressed some frustration overnight as he regretted that “everyone is easing”, making it difficult for the RBA to get any traction from its latest easing campaign as he sees the exchange rate providing a major portion of an easing policy’s impact.”…if everyone is easing, there is no exchange rate channel.” He also sounded rather hawkish in saying that “there are limits to what further easing can achieve.” and saying that is dangerous to attempt to out-dove other central banks. In general, his comments echo some of his historic comments expressing distaste for extremely low interest rates. Rather, he argued, the government should take advantage of low rates to invest in infrastructure and provide fiscal stimulus as a better way to stimulate the economy. Is this a hint that Lowe won’t want to take the policy rate below 1.00%? The market is looking for more, so stay tuned.

Well, not everyone is easing and finally the Norges Bank’s “lone hawk” status is paying off for NOK bulls, helped by a strong risk sentiment impulse in the wake of the FOMC meeting last week and a recent surge in crude oil prices. EURNOK has now broken down through the immediate range support, but still has work to do to achieve bear trend status. The divergence of the dovish Fed relative to the hawkish Norges Bank is finally gaining more attention as we discuss in the chart below. 

Trading interest

Looking for going long AUDUSD on dips with stops below 0.6870 and looking to add on a break above 0.7000.

Buying dips in EURUSD (stop placement difficult – sub-1.1300) for a try toward 1.1500.


The policy divergence between the Powell Fed and the Olsen Norges Bank is the strongest within the G10 and is finally getting traction in the USDNOK exchange rate. The pair is soon within reach of the 8.40 range lows for this year as the market sees the Fed set to deliver a series of rate cuts and the Norges Bank now expected to deliver another rate cut in September (explicitly spelled out by Olsen late last week)
Source: Saxo Bank
The G10 rundown

USD – the US dollar on its back foot and may be rolling over for the cycle - as discussed above, we await the behaviour of the greenback in the event we see a downdraft in risk sentiment on the theme of USD liquidity concerns (nowhere in evidence at present).

EUR – the euro trying to turn back higher now versus the US dollar – may underperform smaller currencies as long as this risk appetite melt-up extends. Watching the European Central Bank leadership contest closely and signals from EU commission leadership battle. A fiscal approach could do wonders for the euro. 

JPY – interesting to note long end yields picking up a bit here as it is very difficult to sustain a melt-up in equities and long end treasuries at the same time. This week is quarter end and could see significant portfolio adjustments that may not favour JPY if long yields continue to rise.

GBP – sterling struggling to maintain altitude versus the euro, but what further conclusions can we draw for now as we have to await the official transfer of power to take place and measure the mood in the next round of EU-UK negotiations to have anything to go on.

CHF – the franc looking a bit ambitious here with a backdrop of wild-eyed strength in risk appetite, yields ticking back up, and the market perhaps taking lame-duck Draghi too seriously.

AUD – the RBA comments are a risk to still-crowded AUD shorts, but AUDUSD needs to vault the key 0.7000 area to get something more profound going technically.

CAD – the surge in oil prices and last week’s hot CPI reading from Canada allowing USDCAD to explore the last bit of range to the downside. The next hurdle is the 1.3000 area.

NZD – if AUDNZD can’t rally on interest rate spread differentials, perhaps a glance over at current account fundamentals is worth a trader’s while. New Zealand’s current account deficit has deepened to -3.6% of GDP in Q1, with the last three quarters showing the largest deficits since 2013. Meanwhile, Australia’s current account has improved rapidly in recent quarters and is at -0.6% of GDP, the least negative balance in modern memory.

SEK – EURSEK looking heavy above the important 10.60 pivot area and should be able to take it out with the supportive backdrop here.

NOK – as indicated above, constructive on NOK in this environment and watching whether EURNOK can take out next pivot area below 9.60, though a few trendlines a bit above there.
Upcoming Economic Calendar Highlights (all times GMT)

0800 – Germany Jun. IFO Survey

1430 – US Jun. Dallas Fed Manufacturing Activity

2245 – New Zealand May Trade Balance

2350 – Japan Bank of Japan Meeting Minutes

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