Head of FX Strategy
Summary: The US dollar staged either a comeback or a short-squeeze on Friday, depending on the USD pair in focus. It was a move that looked modest relative to recent weakening in the USD of late , but the back-up in USDJPY was particularly forceful and is the first chink of any note in the armor for USD bears. The next USD pair with pivotal levels coming into sight is AUDUSD ahead of a little-anticipated RBA meeting tonight.
The USD ended the week and the month on Friday with a sharp short squeeze with no readily identifiable trigger, save perhaps for increasingly crowded USD bears’ taking profit ahead of the weekend after a particularly steep sell-off in the USD last week. End-of-month flows may have been in play, with the EURUSD ending July some 4.8% higher than it started the month, its strongest calendar month performance in almost 10 years. After the brutal move higher in EURUSD, the retracement looks innocuous enough, but the USDJPY technical situation looks far different, as the USD back-up there was both more forceful and occurred after the pair looked below the key 104.50 area we discussed a great deal last week.
US weekly IMM futures show the USD short at its largest since early 2018, the vast majority of that in EURUSD, where the net speculative long position vaulted beyond the early 2018 highs to the highest level ever at 158k contracts as of last Tuesday. Elsewhere, US futures traders remain modestly long of Japanese yen versus the US dollar and oddly short the pound sterling, given that positioning usually at least weakly echoes trend direction.
Looking ahead, the primary initial focus has to be on the next round of US stimulus and how soon the White House can hammer a deal into place with the Dems to avoid denting US confidence and the growth outlook (Trump’s side must be particularly motivated sooner rather than later to avoid disruptive outcomes), particularly now that Trump is getting a bit of momentum in the polls as the coronavirus numbers are possibly turning for the better. The market seems quite sure that a deal will be made soon. Until then, the euro seems to have gotten ahead of itself and, given the positioning headwinds mentioned above for euro bulls, not to mention other factors are rather loudly failing to support a weak USD narrative in the background (most notably the lack of Fed balance sheet growth for over two months), a bout of consolidation may set in – with 1.1626 the first major retracement for the latest wave higher.
In EM, we note two FX stories of interest: Turkey and Russia. The FT and the WSJ (paywalls) are both out with pieces detailing Turkey’s aggressive attempt to stimulate and intervene its way out of trouble and the risky gambit it is making that the virus fears will fade soon and see a powerful resurgence in tourist arrivals and the economy more broadly. Negative net reserves is risky business for the Turkish lira’s stability, as the government there has dipped into its banks’ and savers’ US dollars to intervene in the FX market to the tune of $60 billion this year. With the USD so weak of late, it’s worth having a glance at EURTRY, which recently took out the all-time highs from the summer 2018 panic (yes – not terribly relevant given all of the carry differential since then, but worth noting as Turkey seems to be trying to defend 7.00 in USDTRY.)
As for Russian, it appears the latest sharp weakening in the ruble is likely linked with the election in Belarus for this coming Sunday, with accusations from the Lukashenko-led Belarussian government that Russia sent militants to disrupt the election while the government also deals with a loud new opposition that has motivated the largest public demonstrations since the fall of the Soviet Union after a leading opposition figure was arrested and his wife runs in his stead. Ruble asset holders and traders are perhaps drawing parallels with the Ukraine situation back in 2014-15. The EURRUB closed July just below its highest level since early 2016.
Chart: USDJPY
The most notable technical reversal in major USD pair was in USDJPY, which looked below the pivotal 104.50 area (multiple tests with not weekly close below since 2018) on Friday, only to rally viciously into the close. A close above 106.00-50 suggests the pair is set to remain stuck in the wide range between 105 and 114.50 established since early 2017.
The G-10 rundown
USD – the squeeze on shorts Friday chiefly victims late comers to the USDJPY sell-off. Next we watch AUDUSD for signs of whether this is more than merely a temporary setback for the USD bears.
EUR – with 20-20 hindsight, the euro went too far too fast and didn’t manage to stick the close above the 61.8% retracement north of 1.1820.
JPY – a move back above 106.00-50 would more thoroughly neutralize this latest downside attempt in USDJPY – and easier to argue for that outcome and even higher if long US treasury yields rise rather than continuing to fall as they have done since early June.
GBP – the rally versus the greenback reversing back to the 1.3000 psychological support today, while EURGBP traders mull whether there is sufficient cause to take the pair below the 0.8940 area pivot (I can’t spot a trigger for this development).
CHF – would have to imagine that any SNB consolidation today (likely) was also in USDCHF – which has now bounced back to the 0.9200 area that supported since 2015 before last week’s break lower. Given USDJPY action, more CHF headwinds may lie ahead.
AUD – the RBA is set to meet tonight, with no expectations for a policy shift. Iron ore prices support AUD while a new virus resurgence and strict lockdowns in Melbourne are a drag. If AUDUSD can’t sustain above 0.7050-0.7000, the pair may face a larger scale throwback risk toward perhaps the 200-day moving average, currently near 0.6700.
CAD – the CAD resilient versus the rest of G-10 on its link to the USD (AUDUSD and AUDCAD often directionally sympathetic, for example, and AUDCAD looks very long term overdone to the upside)
NZD – AUDNZD needs to snap back higher on the RBA tonight or we have a disappointing fizzle to th rally last week that took the pair above the locally important 1.0750 area.
SEK – EURSEK found resistance at textbook former 10.35 former low – would like for the mood to continue to pick up in European asset markets to look for any major break to new lows
NOK – very sensitive to crude oil and the global growth outlook – right now EURNOK sandwiched between the 10.50 downside pivot and the 10.95-11.00 upside level that will likely only trade if crude oil sells off deeply on fresh growth concerns.
Economic Data Highlights (all times GMT)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
