Head of FX Strategy
Summary: The US dollar ended last week on a strong note, and the busy US economic calendar and series of Fed speakers this week could finally see some more volatility in the market and possibly a broadening dollar resurgence if the market continues to drive US yields higher.
Equities are in a positive mood to start the week on the latest noise that the US and China are set to announce a deal that would end most tariffs. Trump and Chinese leader Xi Jinping may meet as soon as mid-March to sign off on a deal. Chinese equities may be focusing on the MSCI reallocation bump of (from 5% of its emerging market indices to 20%) and domestic speculative interest more than hard data. Note the South Korean February Manufacturing PMI up overnight at a new cycle low of 47.2.
The chief factor driving the resurgent greenback over the latter half of last week, in our view, is a reassessment of how quickly the Fed is likely to follow through on its pivot away from a tighter stance on monetary policy as well as higher yields all along the US yield curve. USDJPY was the first major USD pair to “break” in a technical sense and we look for possible follow-through elsewhere this week after the extensive bout of indeterminate range trading in the majority of USD pairs.
The ISM Manufacturing on Friday slipped to a new low since late 2016, but let’s recall two things: first, that it still suggests expansion, and second, that manufacturing is far less important than the non-manufacturing sector. Back in 2007, the ISM Manufacturing never registered a single reading as high as this February number of 54.2; the non-manufacturing ISM survey in January was 56.7 – a level that it fell below in mid-2006 and never recovered until 2011.
The US didn’t fall into recession officially until early 2008. The February ISM Non-manufacturing survey set for release tomorrow.
Elsewhere this week, our primary focus will be on whether the US dollar can finally piece together a directional move, possibly motivated by an extension higher in US yields if the ISM non-manufacturing survey is benign and the US February jobs report on Friday is likewise supportive. As well, a possible dovish pivot from the Reserve Bank of Australia tonight and the Bank of Canada on Wednesday could also set the tone with policy divergence the driving theme.
A number of weighty Fed speakers out this week as well, with the NY Fed’s Williams out speaking Wednesday, Brainard of the Board of Governors on Thursday, and Powell on Saturday discussing “Monetary Policy Normalisation and Review”. We are all looking for hints on the Fed’s thoughts about its balance sheet reduction, or QT, schedule.
For USDCAD, looking to stay long for a go well above 1.3400 and moving stops up to 1.3220.
For AUDUSD, looking for partial short positioning ahead of the RBA in spot or via options and then looking to add shorts if the RBA delivers with a dovish tilt and the price action shifts below 0.7050.
EURGBP: staying short for a go well below 0.8500 with stops above 0.8640.
The Aussie looks rather heavy, given the positive outlook for a US-China trade deal and ebullient Chinese markets, but the focus is squarely on the domestic housing market and it may finally be time for the RBA to raise the white flag and execute a more profoundly dovish pivot that takes the Aussie down a few notches. The technical focus here is on a hold below the 0.7000 level for a test of the post-GFC low below 0.6900 (not including the flash crash lows in AUD pairs).
USD – the greenback partially resurgent and a big week ahead for the economic calendar and potentially for Fed speakers as well.
EUR – the single currency seems neutral to developments elsewhere – note the potential EURAUD range break. EURUSD trading ranges are barely detectable, but should expand this week if USD strength broadens.
JPY – USDJPY broke important resistance last week and could continue to trend higher this week if the US economic data and Fed speakers continue to drive higher US yields.
GBP – sterling modestly bid after the pro-Brexit faction of her party issued a list of terms for supporting a revised Brexit deal. Crunch time next week with the series of votes on whatever May is able to agree with Brussels.
CHF – continue to scratch our heads a bit at lack of CHF downside despite the higher US yields, strong risk appetite and weak JPY – EURCHF staying in impossibly tight range.
AUD - the January Building Approvals data show activity in the housing sector continuing to slow rapidly, down some 28.6% year-on-year. The RBA is up tonight and we look for a change of message to continue to drive AUD downside risk – 0.7000 in AUDUSD is a potential trigger for more selling flows if taken out.
CAD – another weak GDP number Friday has rates at the short end of the Canadian yield curve at new lows and USDCAD responds with a big jolt higher that wrenches the focus back to the upside for now.
NZD – largely simply tracking the AUD recently – watching AUDNZD with interest over the RBA for the risk of a final run lower in the pair toward the secular lows near parity.
SEK – the backdrop is SEK supportive in normal times, especially after last week’s data inspired new highs for the cycle in Swedish yields. Still prefer EURSEK to pivot back lower for a test of the 10.35-40 area, provided 10.55-ish holds.
NOK – the sharp sell-off in energy markets keeping EURNOK from developing any downside momentum for now – sitting on our hands for a NOK outlook at the moment.
Upcoming Economic Calendar Highlights (all times GMT)
09:30 – UK Feb. Construction PMI
10:00 – Euro Zone Jan. PPI
21:30 – Australia Feb. AiG Performance of Services Index
01:45 – China Feb. Caixin Services PMI
03:30 – Australia RBA Cash Target