The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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USD continues to fade against confusing backdrop
John Hardy
Head of FX Strategy
Summary: Intermarket analysis is a conundrum as both safe-haven and risky assets are bid into today’s triple/quad “witching”. The USD rally never really got going and the next test is next week’s FOMC meeting and whether the market has over-anticipated the Fed’s dovish tilt.
The recent USD rally is no more as the greenback never managed to put anything together after the one-off boost around last week’s European Central Bank meeting. But the reversal of that rally hasn’t fired the outlook for USD bears just yet, judging from the ongoing collapse in implied options volatility. The Federal Open market Committee meeting next week is the next obvious event risk; we’ll preview that more thoroughly next week. For now, our chief question is whether the market has overreached in pricing in Fed accommodation.
The latest delay to the US-China trade deal outcome failed to do much to dent risk sentiment, at least as judged by the major US equity indices, but the action there may be more about buyback blackout periods to come and last-minute flows around the expiry of the options and futures today.
This week’s Brexit votes have only managed to churn sterling pairs viciously in a range as we still await any sense of clarity, with only the cliff-edge no-deal scenario seemingly avoided for now. Prime Minister May’s last-last ditch gambit is mobilising her version of Project Fear on Tory Eurosceptics: if they don’t sign her deal, she waves the risk that the UK will have to participate in the EU parliamentary elections and will eventually have to agree to a very long delay that would likely include UK elections and maybe even a second referendum.
Surely her days are numbered as PM already, but they will be especially endangered if next week’s vote fails, as I suspect it will. Sterling is still relatively bid, but would a very long delay do sterling any favours in the end? Not so sure – May’s deal passing seems the most direct route to a stronger sterling, but can it pass? The Tory Eurosceptic Jacob Rees Mogg has raised the idea that the UK could exit the deal anyway under obscure precedents from the past. If this is enough cover, perhaps enough Tories could hold their nose and vote in favour after all – but odds look slim.
Trading interest
Our half EURJPY short reached its stop-out level after proving unable to take all of the equity upside this week into triple witching. We haven’t given up on the idea, but this was clearly bad timing and we’ll see how next week develops.
On EURNOK shorts, it's tempting to lighten up ahead of our nominal 9.65 targets here ahead of the weekend and try to hold on to a half position over the Norges Bank meeting next Thursday (or a full position if the pair backs up higher early next week. Norges Bank is widely expected to hike. Stops pulled down well below 9.80 now on any remaining shorts.
We’ll consider early next week whether and how to position for FOMC meeting outcomes.
Chart: USDNOK weekly
NOK strength has been one of the few pronounced directional moves this week and it's looking particularly interesting in USDNOK terms on a weak weekly close today as EURNOK corrects lower as well ahead of next Thursday’s Norges Bank meeting, where a 25- basis point hike is expected. As Norges Bank expectations have moved in the opposite direction of Fed expectations, downside pressure could continue, though a less dovish message thank expected from the Fed next week could provide a tactical squeeze. In the longer term perspective, this chart looks toppish. A decent USD sell-off and firm NOK could see the pair toward at least 8.25 over the next few weeks.
The latest delay to the US-China trade deal outcome failed to do much to dent risk sentiment, at least as judged by the major US equity indices, but the action there may be more about buyback blackout periods to come and last-minute flows around the expiry of the options and futures today.
This week’s Brexit votes have only managed to churn sterling pairs viciously in a range as we still await any sense of clarity, with only the cliff-edge no-deal scenario seemingly avoided for now. Prime Minister May’s last-last ditch gambit is mobilising her version of Project Fear on Tory Eurosceptics: if they don’t sign her deal, she waves the risk that the UK will have to participate in the EU parliamentary elections and will eventually have to agree to a very long delay that would likely include UK elections and maybe even a second referendum.
Surely her days are numbered as PM already, but they will be especially endangered if next week’s vote fails, as I suspect it will. Sterling is still relatively bid, but would a very long delay do sterling any favours in the end? Not so sure – May’s deal passing seems the most direct route to a stronger sterling, but can it pass? The Tory Eurosceptic Jacob Rees Mogg has raised the idea that the UK could exit the deal anyway under obscure precedents from the past. If this is enough cover, perhaps enough Tories could hold their nose and vote in favour after all – but odds look slim.
Trading interest
Our half EURJPY short reached its stop-out level after proving unable to take all of the equity upside this week into triple witching. We haven’t given up on the idea, but this was clearly bad timing and we’ll see how next week develops.
On EURNOK shorts, it's tempting to lighten up ahead of our nominal 9.65 targets here ahead of the weekend and try to hold on to a half position over the Norges Bank meeting next Thursday (or a full position if the pair backs up higher early next week. Norges Bank is widely expected to hike. Stops pulled down well below 9.80 now on any remaining shorts.
We’ll consider early next week whether and how to position for FOMC meeting outcomes.
Chart: USDNOK weekly
NOK strength has been one of the few pronounced directional moves this week and it's looking particularly interesting in USDNOK terms on a weak weekly close today as EURNOK corrects lower as well ahead of next Thursday’s Norges Bank meeting, where a 25- basis point hike is expected. As Norges Bank expectations have moved in the opposite direction of Fed expectations, downside pressure could continue, though a less dovish message thank expected from the Fed next week could provide a tactical squeeze. In the longer term perspective, this chart looks toppish. A decent USD sell-off and firm NOK could see the pair toward at least 8.25 over the next few weeks.
The G-10 rundown
USD – the recent rally has largely reversed, but not yet in a pointedly bearish way as range expansion is nowhere in evidence. Waiting for the FOMC meeting next week for next steps.
EUR – the reversal in EURUSD is nominally bullish, but collapsing implied volatilities suggest that the reversal is a symptom of a lack of conviction. Elsewhere, the euro looks very neutral in the crosses.
JPY – the yen very weak on strong risk appetite and would be weaker still were it not for the persistent bid for safe-haven fixed income. There is dissonance there that would seem unsustainable.
GBP – May’s endgame faces its final test next week – another failed vote on her Brexit deal may keep sterling bottled up until we know whether the uncertainty time table stretches out over the horizon with a delay of Article 50, but the asymmetric downside risks seem thoroughly removed.
CHF – struggling to pay attention but nominally expecting weaker CHF if sterling outcomes are positive and EU peripheral spreads continue to compress.
AUD – watching paint drying is more interesting than trading AUDUSD these days. A collapsing RBA rate outlook only sees a shoulder shrug from the currency market as strong risk appetite, a stable CNY and strong metals prices provide offsetting pressure.
CAD – USDCAD is exploring the last shreds of the local support into the 1.3300 area and looks passive to USD direction. Rate spreads suggest the pair should be trading higher, but strong energy markets and strong risk appetite offsetting. Minor data up today from Canada.
NZD – the AUDNZD downtrend still in place, but momentum not impressive and the longer term valuation picture and relative rate spreads suggest asymmetric upside potential.
SEK – EURSEK trying lower once again and may finally be ready for that test of 9.35-40 we looked for the last time we saw a similar bearish reversal.
NOK – the krone’s recent strength could be ready for a more significant breakthrough next week on a sufficiently hawkish Norges Bank (guidance important, as market leaning hard for a rate hike) and if the crude oil rally is maintained.
Upcoming Economic Calendar Highlights (all times GMT)
• 12:30 – Canada Jan. Manufacuring Sales
• 12:30 – US Mar. Empire Manufacturing
• 13:00 – Canada Feb. Existing Home Sales
• 13:15 – US Feb. Industrial Production & Capacity Utilization
• 14:00 – US University of Michigan Sentiment
USD – the recent rally has largely reversed, but not yet in a pointedly bearish way as range expansion is nowhere in evidence. Waiting for the FOMC meeting next week for next steps.
EUR – the reversal in EURUSD is nominally bullish, but collapsing implied volatilities suggest that the reversal is a symptom of a lack of conviction. Elsewhere, the euro looks very neutral in the crosses.
JPY – the yen very weak on strong risk appetite and would be weaker still were it not for the persistent bid for safe-haven fixed income. There is dissonance there that would seem unsustainable.
GBP – May’s endgame faces its final test next week – another failed vote on her Brexit deal may keep sterling bottled up until we know whether the uncertainty time table stretches out over the horizon with a delay of Article 50, but the asymmetric downside risks seem thoroughly removed.
CHF – struggling to pay attention but nominally expecting weaker CHF if sterling outcomes are positive and EU peripheral spreads continue to compress.
AUD – watching paint drying is more interesting than trading AUDUSD these days. A collapsing RBA rate outlook only sees a shoulder shrug from the currency market as strong risk appetite, a stable CNY and strong metals prices provide offsetting pressure.
CAD – USDCAD is exploring the last shreds of the local support into the 1.3300 area and looks passive to USD direction. Rate spreads suggest the pair should be trading higher, but strong energy markets and strong risk appetite offsetting. Minor data up today from Canada.
NZD – the AUDNZD downtrend still in place, but momentum not impressive and the longer term valuation picture and relative rate spreads suggest asymmetric upside potential.
SEK – EURSEK trying lower once again and may finally be ready for that test of 9.35-40 we looked for the last time we saw a similar bearish reversal.
NOK – the krone’s recent strength could be ready for a more significant breakthrough next week on a sufficiently hawkish Norges Bank (guidance important, as market leaning hard for a rate hike) and if the crude oil rally is maintained.
Upcoming Economic Calendar Highlights (all times GMT)
• 12:30 – Canada Jan. Manufacuring Sales
• 12:30 – US Mar. Empire Manufacturing
• 13:00 – Canada Feb. Existing Home Sales
• 13:15 – US Feb. Industrial Production & Capacity Utilization
• 14:00 – US University of Michigan Sentiment