Head of FX Strategy
Summary: The Friday session saw a brief wobble in the ongoing risk melt-up, but the market is kicking off the action this week in a positive mood as emerging market currency strength, including CNY strength, continue ahead of the signing of the US-China trade deal and its unknown contents this week. Sterling is struggling on talk of BoE cuts.
The Friday session in equity markets saw last week closing with a bit of a wobble, but markets are in an upbeat mood to start the week as China’s major indices ripped to new cycle highs and the CNY extended its recent strength, taking the EM complex with it once again. It is interesting to note that within the G10, the small currencies traditionally correlated positively correlated with risk appetite have taken a breather here, while the EM rally continues apace and CNY strength has now seen USDCNY punch down through 6.90 as of this writing. Within EM, one of the most notable movers over the last two sessions has been the Indonesian rupiah (IDR), where the central bank has signaled it won’t fight strength (likely eyeing CNY to a degree?) and the UAE has announced a $22.8 billion investment in an Indonesian sovereign wealth fund that will focus on infrastructure products, including the building the country’s new capital city.
To briefly recap, the US December jobs report on Friday was slightly disappointing on the nonfarm payrolls change number, perhaps looking even weaker due to a positive bias ahead of the number from the blowout ADP numbers earlier in the week. More disappointing was the Average Hourly Earnings print, at a meagre 0.1% month-on-month and a 17-month low 2.9% year-on-year level. US longer-dated treasuries remain bottled up in the range and aren’t confirming the runup in risky assets, a disconnect that is making us increasingly uncomfortable. We have already noted that USDJPY upside potential looks limited as long as US long yields remain capped – but we are watching how the pair trades relative to overall risk appetite and safe haven yields here – as well as whether the psychologically significant 110.00 level acts provides resistance.
As for the US-China trade deal likely to be signed on Wednesday in the US, it is worth noting that the actual text of the deal has not been made available and may disappoint the market in its details, or even vagueness, once the text is to be made available after the signing (according to US Treasury Secretary Mnuchin). As well, while US President Trump is set to sign the deal, China’s President Xi won’t.
Chart: EURGBP
EURGBP is jumping out of the gates to start trading this week after the Bank of England’s Vlieghe indicated he would favor a rate cut if the UK data doesn’t improve. The market’s pricing of a BoE rate at the January 30 policy setting meeting have jumped from a virtual zero to nearly 50/50 odds. If we do see a rate cut and no improvement in the outlook for the eventual UK-EU post-Brexit trade deal, sterling weakness could drive further consolidation here, with the risk of an acceleration if 0.8600 is cleared – perhaps back to the 200-day moving average above 0.8750.
The G-10 rundown
USD – we saw a solid firming last week, but the USD strength has failed to add any momentum – a microcosm of the endless months of no directional impulses as the market cant seem to find a catalyst.
EUR – the euro in weak shape, needing positive catalysts on the policy front – or signs of economic recovery to deserve attention, although we are also interested in watching how the single currency behaves if the melt-up in risk currencies stumbles badly, though its outperformance here against the JPY suggests that the JPY remains the higher beta play on risk appetite swings.
JPY – USDJPY making a run at 110.00 this morning, but for better confirmation, we would like. Wondering if we see a near term peak in CNY and EM strength and therefore JPY weakness around the time of the US-China trade deal signing this week.
GBP – a BoE rate cut looks a done deal at one of the coming meetings, but is merely symbolic even if sterling negative – the UK needs a free trade deal with the EU and inbound investment, not rate cuts.
CHF – EURCHF has tested new lows for the cycle, but not looking impulsive here as the complacent backdrop doesn’t look supportive for testing the SNB’s resolve to defend against further CHF strength
AUD – AUDUSD suffered a bearish reversal last week and has back-filled to the 0.6925 pivot area – actually a sign of rather profound weakness that the hard-charging CNY hasn’t done more to support AUD. Considerable investment to come to deal with the bushfire aftermath that may flatter GDP numbers from here Down Under.
CAD – the loonie not responsive to the very positive Canadian December jobs numbers and huge drop back lower in the Canadian unemployment rate from 5.9% to 5.6%
NZD – the AUDNZD cross has executed a more determined reversal and looks tradable on the long side for bulls here to test the upper half of the medium term range.
SEK – the krona has only managed a bit of mean reversion on the Riksbank’s ending of its NIRP era and while the risk-positive backdrop is SEK-supportive, the ongoing growth struggles in Sweden and the EU continue to weigh. Next key resistance at 10.60-65 zone in EURSEK.
NOK – no pulse in EURNOK as it rides the underside of the 200-day moving average here – a move to 9.60-50 needs real signs of a global growth outlook perhaps more than mindless reach for yield.
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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.
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