Head of FX Strategy
Summary: After avoiding new cycle lows in US equities yesterday, risk sentiment bounced strongly overnight on China easing a key lending rate. In FX, this pushed the US dollar lower and the JPY lower still after yesterday’s fuss and bother in JPY crosses that ended leading nowhere. The status of the USD rally is the current burning question as we head into next week, and the remarkable volatility in USDCHF is a novel diversion.
FX Trading focus: Further important USD supports under pressure
Yesterday, I looked at the potential for JPY volatility to come unglued should risk sentiment continue to deteriorate in combination with a significant further drop in long US treasury yields amid mounting evidence that the US economy faces headwinds. Yesterday, treasury yields did dip to new three-week lows in the wake of weekly US jobless claims ticking up to the highest levels since late January and an ugly miss for the Philly Fed survey (2.6 vs. 15.0 expected and 17.6 prior), now the second US regional manufacturing survey in May to hit a huge air pocket after the volatile Empire figure turned suddenly negative this month. But while USDJPY poked below the first pivot lows of 127.50 in the wake of the US data yesterday, there was little follow through and then both the JPY and the USD were sent back lower. Boosting that move and sentiment overnight was a larger than expected rate cut in China (for the 5-year Loan Prime Rate generally associated with real estate loans) of 15 basis points has helped to buoy sentiment further.
The USD pair showing the most volatility over the last few sessions is USDCHF, which managed to pull all the way above parity at the peak of the strong USD wave before retreating sharply all the way to below 0.9700 as of this morning before finding support. Surprisingly, that more than 300 pip retracement has only seen the pair testing slightly through its 38.2% retracement from the end-March lows below 0.9200 (!). The franc has found support on lower safe-haven yields that have also supported the JPY recently, but also after yesterday saw the SNB President Jordan out with the first firm hint that the bank is concerned about the inflation outlook and the risk of second round effects. No specifics, and Swiss rates haven’t really responded, but the CHF jumped on the news. All of this after the recent EURCHF attempt on 1.0500 has failed and USDCHF posted that parity milestone. Will revisit this if EURCHF Is down through 1.0200 support, for now the CHF move looks a bit of an overreaction.
Chart: USDCHF
USDCHF has managed the rare feat of providing significant volatility in recent weeks after a long period of choppy action as both currencies have often been classified as “safe-havens” in recent years. After launching a rocket ride from the sub 0.9200 base, USDCHF rose as high all the way above parity on the extreme Fed-SNB policy divergence story (Swiss short government debt will be some of the last negative yielding stuff standing for this cycle) as well as the disproportionate pressure on all things European in the wake of the Russian invasion of Ukraine. The consolidation has been sharp for the reasons noted above, but is still far above the break-out line below 0.9500. Looks like the pair has staked out the new range above that figure and at least to the old range highs into 1.000-1.0200 for now. Looking cheap here?
The chief question for me heading into next week is whether the US dollar is set to find support here or fall to the next layers of support perhaps 2-3% lower, depending on the pair (EURUSD structural bears can easily stand a move to 1.0750, but above 1.0800 and the bearish stance comes under fire. For AUDUSD, the next layer of resistance is into 0.7250+, near a previous pivot high and the 200-day moving average). A chunky USD rally into the close today on a weak equity market would be just the signal USD bulls are looking for to establish fresh positions, while another leg lower suggests next week could be about poking around for new lower support levels. Next week’s calendar highlights include a German IFO survey up on Monday, flash Euro zone and global PMI’s on Tuesday, a presumed 50 basis point hike to the OCR from the RBNZ and the FOMC minutes on Wednesday, and on Friday, the Apr. PCE inflation data. Next week will be the last week before the beginning of actual Fed balance sheet tightening to begin on June 1 of the following week.
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY volatility didn’t happen, although don’t write off its potential if the US equity lurches into bear market territory, which is demarcated at the 19.9% drawdown of the cycle lows. Note that the USD has lost nearly all of its positive steam – needs a boost or it is at the risk of falling farther.
Table: FX Board Trend Scoreboard for individual pairs.
The USDJPY pair didn’t stick the move to the downside yesterday, so the trend reading has not yet flipped – although it is threatening to do so today as the moving averages settle. Note USDCHF and USDCAD having a look at a trend-flip as well today – although as we note above, the USDCHF picture would require more downside to suggest the prior large rally has failed, while USDCAD does indeed look beyond the local tipping point as of this writing.
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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.
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