FX Update: Getting close to watershed moment for USD

The FX Market veritably swirling with developments yesterday and into this morning. We’re tempted to call a turn lower for the US dollar here, but still need to see the coup de grace administered in coming days to make the call, as it wouldn't take much of a USD rally to give the impression that the churning  range in the USD will hold for now.

Sterling rallied the most it has in months after UK PM Boris Johnson and Ireland’s Varadkar suggested the possibility of a “pathway” in negotiations to a Brexit deal. The Irish leader said that talks were “very positive and very promising”. Some are interpreting this as a sign that Johnson is willing to allow Northern Ireland to remain in the EU customs union, but an FT article cited a “senior EU diplomat” indicating that Johnson’s position on customs cooperation shifted substantially. We await chief EU negotiator Michel Barnier’s opinion later today on whether talks have progressed sufficiently to move forward. Sterling upside potential remains on a deal, but we’re very cautious on the long term outlook for sterling after a possible one off adjustment if we are indeed headed for a deal before the October 31 deadline.

Yesterday was a bit of a watershed day for long bonds globally, as yields rose sharply. It is tough to attribute any single factor, but rising hopes that the US-China trade talks will move in a market friendly direction, the possible Brexit breakthrough, and the ECB minutes further underlining that the ECB is more or less done on the easing side likely all contributing. The US 30-year auction was neither here nor there, but yields remained high late yesterday and JPY and CHF were the weakest on this development – note EURCHF poking at the key 1.1000 level this morning – pivotal.

Chart: USDSEK
Outside of sterling crosses, one of the bigger moves yesterday was in the Swedish krona, which jerked back to the strong side after a hotter than expected CPI data point for September, but likely also due to the general shift in sentiment that saw safe havens weaker and the smaller currencies generally firmer. The USDSEK chart in particular, after yesterday’s weaker USD, has suffered a considerable reversal here – note the full rejection of the last rally wave in one fell swoop. Still, a move toward perhaps 9.60 needed here to begin confirming a more profound reversal.