Head of FX Strategy
Summary: The big dollar is rising to the top of the pile again and threatening major resistance. A breakthrough in broad measures of the USD to new highs would increase the general focus on currencies and weaken global risk sentiment anew.
Trading interest
Risk sentiment weakened late yesterday after an attempt to put together a rally on hopes of a US-China trade thaw as Trump has made a series of friendly noises while the Chinese side has denied claims of “calls” at the weekend. After setting the yuan fix yesterday at 34 basis points weaker, the fix was only moved 4 basis points overnight and spot USDCNY/CNH is trading this morning slightly lower than yesterday’s close.
The almost sideways yuan fix may be behind the risk sentiment bounce overnight, though the USD continues to strengthen and will rapidly provide a countervailing force to further risk sentiment improvement if it rises further. We put back our focus on USDCAD upside after the nice snap-back from the sell-off and given where the fellow commodity dollars are struggling lower again against the big dollar. Already, the firmer USD has EM currencies on the defensive and credit spreads are headed in the wrong direction across EM. USDMXN has hit the 20 mark, and the China-leveraged exporter Malaysia is seeing its MYR at new lows since 2017 overnight.
Sterling is solidly bid as UK Prime Minister Boris Johnson is taking what FT calls a “narrow” approach in only asking the EU side to revisit the Irish backstop rather than a full reopening of existing deal. Meanwhile the UK opposition is in cahoots to do what it can do block a no Deal Brexit. The market is clearly hopeful that the worst case scenario for sterling will be avoided – but we’ll likely need a further breakthrough to get EURGBP down through the next key pivot area at 0.9000.
US treasury auctions this week so far proceeding with little to-do, with 5-year and 7-year notes on the block today and tomorrow. US yield curve inversion has become more profound, with the 2-10 slope this morning at -4 basis points.
Chart: USDCAD
Back to focusing on USDCAD after the nice snap-back from the sell-off that came after the bulls failed to take out the recent highs on multiple tries. A breakthrough opens the path to at least 1.3500 if not 1.3600+. CAD, because of the BoC’s relatively high policy rate is singularly vulnerable to any sign that the central bank is reluctant to find itself behind the curve in the pace of easing that other central banks have delivered. Next Wednesday’s Bank of Canada meeting is the next pivotal event risk for CAD.
The G-10 rundown
USD – appreciation from here (especially a push down through 1.1000 in EURUSD, which gets the broader USD measures in overdrive) would begin to lean against risk appetite generally, particularly in EM.
EUR – the euro price action remains uninspiring, but EURUSD looks heavy again and there may be complacency on the downside risk, given the glacial pace of its descent over the last 12 months.
JPY – the yen has failed to strengthen to the degree one would expect, given long bond yields remaining pegged toward the lows. Would still expect to generally correlate with broader USD direction.
GBP – sterling putting up a fight lately, but need a new breakthrough to take EURGBP down through 0.9000 (and GBPUSD looking a bit ambitious here without new developments as well.)
CHF – the consolidation moves are weak as long global bond yields remain pegged near the lows. Any roll over in risk sentiment could set EURCHF to new lows toward the 1.0650 area.
AUD – AUDUSD leaning heavily lower on the USD strength and set for new lows for the cycle if USD strength continues.
CAD – CAD on the defensive as yields at the front end of the CA yield curve collapse back toward the lows for the cycle.
NZD – kiwi under the Aussie’s thumb as AUDNZD makes progress toward our 1.0700 target.
SEK and NOK – Household lending in Sweden still below 5% YoY growth – rising risk of Swedish recession. Norway’s Q2 GDP numbers up tomorrow. Strong USD and/or risk off could push SEK and NOK further over the edge.
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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.
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