Head of FX Strategy
Summary: The USD is on the move again in early European hours as EURUSD stops give way below 1.1300 and USDJPY pulls back above 114.00. The move will only further pressurise USDCNY as we assess the temperature of US-China relations through the G20 meeting at the end of the month.
The G-10 rundown
USD – this USD move pressurizing the USDCNY situation, even if the immediate technical focus is on the big EURUSD level giving way this morning as Asian FX is still held back by the gravity of CNY’s low volatility.
EUR – the euro bearing the brunt of the USD strength on the big technical break this morning – and we haven’t even seen a notable re-aggravation of the Italian yield spreads. Broad based EU uncertainty is a critical factor as 2019 looks like a very challenging year ahead for Europe with Italian populists still on the rampage, EU parliamentary elections in May, Macron’s popularity collapsing and political uncertainty as Merkel’s replacement will be found in December and may lead to new elections.
JPY – the JPY weaker versus the rising USD, but less so than the other majors and this resilience in the crosses could become more pronounced given the bid in US treasuries and especially if risk appetite rolls over for the worse.
GBP – sterling weaker than a very weak euro on fresh Brexit concerns, administering GBPUSD traders an ugly case of whiplash. Headline risk for sterling this week prominent.
CHF – EURCHF at risk of breaking down even as the news flow on Italy has not picked up pace – watching the sub-1.1350 lows. USDCHF, meanwhile, has cleared new highs for the year as of this writing, with a hold higher opening up the range to 1.03+
AUD – AUD under pressure against the USD along with nearly every other currency, though it isn’t getting the worst of it, which could change suddenly on any sign that China will allow the CNY floor to go.
CAD – If USDCAD can stay clear of the 1.3200 area, the next focus is the range high ahead of 1.3400. Some of the jolt weaker in CAD may be related to the restating of GDP for 2015 and 2016 announced late last week, which were linked to the collapse in energy prices at the time.
NZD – the kiwi maintaining the upper hand versus the AUD as the jolt higher in NZ yields on recent earnings data and the Reserve Bank of New Zealand meeting has held up.
SEK – Swedish CPI up on Wednesday and will be the arbiter of whether the move below the range support in EURSEK will hold. We’re not hopeful for the bullish SEK case if risk appetite begins to sour broadly on this USD move higher.
NOK – the krone bouncing back slightly on the attempt by Saudi and Russia clearly getting uncomfortable with the slide in oil prices and have tried to jawbone the market back higher over the weekend. EURNOK remains uninspiring until it clears the range lows and USDNOK actually at risk of breaking up if it can pull clear of 8.50.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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