FX Update: Trade tensions still driving the narrative

Forex 7 minutes to read

John Hardy

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

  • Maintaining long AUDNZD with stops below 1.0450 now for 1.0625 and eventually 1.0700
  • Taking off EURUSD short spot hedge against long EURUSD 3-month call options.
  • Shorting EURJPY for 112.00 as long as remains below 119.50

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.)

Source: Saxo Bank and Bloomberg

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.

Source: Saxo Bank

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.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Jul. Housing Starts and Building Permits
  • 1400 – US Aug. Preliminary University of Michigan Sentiment.
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
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

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) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 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.