Head of FX Strategy
Summary: Sterling droops on dovish dissenters at the BoE today, but the breakout picture not yet compelling. Elsewhere, the reaction to the purported US-China trade negotiation breakthrough was rather modest and shows weak transmission into currencies. Still, the AUD and JPY have reacted as one would expect and EURAUD is a standout pair in recent weeks.
The link below takes you to the latest FX Breakout Monitor, a concise PDF overview of all current and recent price breakouts for the short and medium term for major FX pairs and spot silver and gold.
Today's FX Breakout Monitor
The hoped for US-China trade-deal is getting priced more like a done deal at this point, as bonds swooned and US equity futures ripped to new historic highs in the wake of this morning’s announcement from Chinese official sources that the US and China have agreed to lift. The reaction in currencies markets was clear if rather constrained – the JPY was sharply weaker and the USD was initially weaker but firmed later.
So as we watch the follow-on reaction to this latest round of trade-related “news” unfold, it is interesting to note the divergent trajectories of two USD pairs: AUDUSD (still close to the upside breakout level after never achieving a follow-on rally after the breaks higher from last week) and USDJPY, which is still mulling an upside break for the greenback as US yields poke on new highs for the cycle here. Continued trade-deal hopes, risk sentiment melt-up and rising yields could see the USD moving in different directions in these crosses. Avoiding the USD, AUD also looks interesting versus the Euro, as EURAUD saw a successful break lower last week that is trying to follow through lower here below the 49-day low as well (see chart).
Elsewhere, momentum traders may have generally low conviction after such a high percentage of recent signals have failed, but the breakdown in EURSEK over the last couple of sessions – now extending to a 49-day low intraday today, looks interesting as well.
Today’s Breakout Highlight: EURAUD
AUD strength has been prominent in recent sessions and US-China trade headlines looks supportive here for further AUD resilience. EURAUD has taken a distinct turn for the worse in recent sessions and broke lower already last week locally, with a larger break of the 49-day low close quite clearly etched on the chart as well, should the smaller currencies continue to perform well against the euro here on ongoing optimism.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
