FX Update: EURUSD and GBPUSD eyeing downside breakouts

Trading interest

• EURUSD and GBPUSD tilting hard on support levels – bears in charge on a break lower of 1.1000 and 1.3000 today.
• NZD: AUDNZD looking interesting at top of local range toward 1.0450, but may rely on more positive sentiment out of China that coronavirus impact is receding. NZDUSD is in full breakdown mode if 0.6450 area gives way as we looked at yesterday.
• USDMXN overdone on downside in my book – but technically need a sharp bounce to confirm a divergent momentum setup.

Developments
US equities pulled to new highs for the cycle and safe haven bond yields picked up yesterday with a mixed reaction across markets. Is the US dollar taking its lead from US equities within the G3 (rising against JPY and EUR with risk on), while falling against EM on the same? That seems the pattern of late – let’s see if it continues. Elsewhere, the bounce in traditional risk-correlated G10 smalls has been less profound than in EM, probably due to both very low carry available and the fact that the commodity bounce-factback has vastly underperformed the surge in sentiment in risky assets.

As we point out in this morning’s Market Call podcast, the US yield curve remains flat to inverted, depending on which portion of the curve is in focus, a sign that the US Fed remains tight and behind the curve – tough, of course, to square this with the equity markets’ ongoing celebration of the liquidity provision/repos and the rate cuts in the bag. A lot of tension building here.

Many commodity prices have risen from the recent steep sell-off, but crude oil prices look very heavy and the NOK bounce and CAD bounces look likewise modest relative to recent sell-offs there. If supply disruptions continue, we could be set for new highs in EURNOK and USDCAD.

A slightly stronger than expected US ISM Non-manufacturing survey for January released yesterday at 55.5, but we note that the employment sub-component was at a multi-month low of 53.1 (but ADP payroll change at incredible +291k for Jan!) and the Order Backlogs sub-component printed its fourth month in a row below 50 and a new low at 45.5. All in all, less good than the headline suggested.

The Czech central bank is to announce its policy rate today – interesting to note across the CEE currencies the ugly negative real rates across the region, with the Czech central bank having been the only actor doing something about the situation, having raised rates to 2.00% from 0.25% starting in 2017. So while the carry may look attractive in EURCZK - the negative real yield spread is roughly similar if slightly better for Czech (although the December CPI print was at a new cycle high of 3.2% YoY) and EURCZK may be well supported in the 25.00 area if the Czech central bank continues to signal that it will sit on its hands.

Chart: GBPUSD
It is clear that the UK negotiations for a free trade agreement with the EU are fraught with risk and the latter has most of the leverage. The EURGBP pair can’t decide on a direction here, but the stronger US dollar is pushing on important breakout levels below 1.3000 and could be set for a positioning-inspired correction lower as it could be months before we have a sense of how the trade  deal is shaping up. Further cascade risks lower if the  1.09 area in EURUSD and 1.2900 area in GBPUSD give way on a deepening sell-off – perhaps putting the 200-day moving average into play eventually.