Head of FX Strategy
Summary: The USD continues to press higher, although mostly against European currencies, as USDCNY remains stuck in the mud while we wait for Xi and Trump to meet at the end of the month. China appears to be extending an olive branch even as the US maintains a stern stance on trade issues.
The pattern of USD strength versus other currencies suggests a real yield focus – as US real rates (the yield on treasuries versus inflation) have gone clearly positive while they are punishingly negative in Europe and Sweden (with incoming hikes and very cheap currency helping a bit there), and quite negative in the UK and Switzerland and even Japan.
Until either the Fed changes course or other central banks show a firmer commitment to tightening policy, the US dollar may have a hard time falling. Late yesterday, the San Francisco Fed’s Daly (filling the spot recently vacated by David Williams, who has moved to the NY Fed) was out speaking in favour of a December rate hike and possibly two more in 2019 as the Fed’s job is to bring down the overheating US economy for a soft landing. This may have boosted the US dollar, though rate expectations were steady.
In other news, NOK is even weaker than the very weak euro on another anaemic GDP print for Q3, with EURNOK toying with the 200-day moving average – we still prefer NOK to the single currency unless oil prices maintain their current rate of decline (surely too steep?). Sterling is back on the bid against the euro as the EU’s Barnier made positive comments and as negotiators were working through the night to put together a deal.
The hope is still that an agreement can be reached by Wednesday to allow the scheduling of a late-November Brexit summit. As we have pointed out, however, the issue is whether the UK Parliament will sign on. Surely any deal would have to see the UK payment into the EU tapered sharply after next year as part of a deal since the UK will lose its vote? Important UK data on tap today as an input for the last Bank of England meeting or the year on December 20.
USDJPY is back on the rise as risk appetite likewise bounces back. Japan’s negative real yields contrast with the positive real yields available in the US, which may be a key driver here for the US dollar and leave the JPY out in the cold. Only very weak risk appetite, most likely also requiring a simultaneous fall in sovereign bond yields can seem to offer the yen any support (unless the Bank of Japan performs an about face, something that would likely require significant pressure from global bond market developments). With risk appetite bouncing back overnight and bonds offered in early Europe, the yen shows how quickly it can weaken again.
USD – real rates could be the chief focus here, keeping the USD bid as long as US yields continue to outpace especially the most negative real rate currencies where policy has no prospect of improving the real rate spread. Next US data point in the spotlight is tomorrow’s US October CPI print.
EUR – Germany’s ZEW survey today may remind us that the EU economic outlook remains weak and Italian recession concerns are building since banks are struggling and not looking to increase lending. Troubled Italian lender Banca Carige is the latest focus.
JPY – the speed with which the yen rolls back over to weakness again overnight suggests more sensitivity to global bond yields more than to risk appetite.
GBP – the EU may have as much as an incentive as the UK these days to hammer out a Brexit deal, as the rise of populism across Europe, the Italian budget issue at the December EU summit and May EU Parliamentary elections. But can May get sufficiently generous terms to ram the deal through parliament?
CHF – EURCHF breakdown risk still there as we challenge the 1.1350 area, but USDCHF looking the opposite way, having cleared the local range and now focusing on the 1.0300+ multi-year highs.
AUD – AUD maintaining more altitude versus the USD than many other G10 currencies likely due to the USDCNY floor remaining in place.
CAD – the USDCAD uptrend increasingly credible and focusing now on the highs of the range just ahead of 1.3400 for next steps.
NZD – the kiwi is making further progress in AUDNZD terms and may go for a full pull to the 1.0500 range support if the huge trendline stretching back to 2015 (four points on the line!) coming in around 1.0600 doesn’t provide support.
SEK – the focus on real rates notwithstanding, at least the Riksbank will be hiking rates soon and SEK remains too cheap versus the euro – high time for some follow through lower in EURSEK after the recent break below 10.30.
NOK – with the ongoing slide in oil prices, NOKSEK developing as a theme as 1.0700 comes under pressure here and EURNOK poking around at the 200-day moving average above 9.55 – an important resistance level.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Oct. Jobless Claims Change
0930 – UK Sep. Average Weekly
0930 – UK Sep. Employment Change / Unemployment Rate
1000 – Germany Nov. ZEW Survey
1300 – Norway Norges Bank’s Nicolaisen to speak
1500 – US Fed’s Kashkari (non-voter) to speak