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FX Update: Commodity FX vulnerable on further CNH weakness.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  While the euro garners new headlines as EURUSD trades to new local lows and threatens the 2020 cycle low, the currencies most at risk if the US dollar strengthens, and especially if the CNH continues to weaken, are commodity-linked currencies from the commodity dollars and NOK within the G-10, to EM currencies, whether Asian or commodity correlated.


FX Trading focus: Commodity FX vulnerable on further CNH weakness

As we look at the impact of the sharp Chinese yuan weakening that began a week ago and accelerated thereafter until yesterday’s “check” from Chinese authorities, the clearest losers have been currencies closely linked with direct export exposure to China, including especially commodity-linked currencies as commodities have been marked lower on the surging US dollar and Chinese demand concerns. The Caixin March Services PMI dropped to 42 and is expected even lower for April, suggesting powerful contraction.

On that score, the Aussie is doubly exposed and has tumbled lower just after reaching new broad highs on heavy anticipation of rising commodity prices, especially those for which price rises have been aggravated due the war in Ukraine. China’s virus-fighting challenges and the risk of imminent shutdowns in the capital of Beijing are driving further concerns of economic weakness. The whole situation means both that commodity import demand could be set to remain weak or even weaken further for now and reflexively, that China can allow itself the luxury of revaluing its currency in lower to help offset the downside risk on the export side of the economy from having lost competitiveness to peers in Asia – particularly Japan – all without new inflationary risks as commodity prices are, after all falling. Thus, as long as China is pursuing a considerable adjustment lower in its currency basket, to the tune of 5-7% perhaps on a broad basis, the weakness could risk having a multiplicative effect into commodity FX. Already, the most commodity-associated of the smaller G-10 currencies have weakened and could weaken further (the CAD somewhat protected by its proximity to the US and on-again, off-again correlation with the USD in the crosses. As noted below, NOK bears watching for aggravated volatility if it trades through key levels.

Pursuing the logic further and the knock-on effects into the rest of a FX, a decent consolidation in commodity prices could cool expectations for central bank hawkishness, even if only for a while after the late stunning rise in prices. This could send bond yields into consolidation mode lower and boost the Japanese yen and Swiss franc and even the euro to a degree in some crosses.

Another winner in the crosses could continue to be the Swedish krona in crosses like NOKSEK (although probably more than half of that consolidation has already occurred) while I also like fading EURSEK upside eventually, though concerned that a risk-off spike could yet see another spike higher. Speaking of NOK, key levels have been in play in USDNOK in particularly, where stops could be lined up above 9.2000 and primed for a considerable spike higher should crude oil prices correct through 98-100 in Brent. Similarly, we’re still far away, but the 10.00 level in EURNOK deserves attention if approached.

Chart: AUDJPY
Within G-10 FX, the AUDJPY has often been an excellent proxy for global risk appetite, but that status has been challenged, to say the least, in the recent cycle, as risk sentiment has suffered in part this year due to the sense that central banks are on a warpath against inflation, with the RBA to play some significant catchup later this year with other central bank expectations if wage pressures finally show signs of picking up. The AUD has also gotten a boost from the war in Ukraine due to its formidable commodity export portfolio, which includes massive LNG and wheat exports. But with concerns for Chinese demand and a modest CNY devaluation afoot, together with recent cooling in commodity prices, the Aussie has come under some pressure here and could be in for more, especially if broad USD strength and CNY weakness continues to see a decline in global commodity prices. At the same time, those same developments could boost the Japanese yen if global growth fears keep longer yields tame to slightly lower. In any case, AUDJPY has suffered a sharp reversal of its incredible run higher over the last few session. Another wave lower could see it tst the trend support into perhaps the first major Fibo just below 90, but possibly even all the way to the more existential (for the bulls) 86.25, should we get a wider risk deleveraging that drives global yields into a more pronounced consolidation.

Source: Saxo Group

Question of the day: Given the enormous spike in Hungarian wages (coincidentally, I'm sure) just ahead of Orban's sweeping victory in the early April election, why is EURHUF not trading above 400 - maybe it should be soon?

Table: FX Board of G10 and CNH trend evolution and strength
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Note the aggravated NOK weakness and how much worse it might get if crude oil breaks support. Also note that JPY has shown the strongest 2-day and 5-day positive momentum change, a mirror image and then some of what has happened in CNH.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURSEK trying to flip to positive on today – and NOKJPY the first JPY cross having a go at flipping negative, with AUDJPY possibly not far behind (barely positive after 55 days in the positive trending status!). On that note – watch CNHJPY as well.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Hungary Central Bank Rate Decision
  • 1215 – ECB's Villeroy to speak
  • 1230 – US Mar. Preliminary Durable Goods Orders
  • 1300 – US Feb. S&P CoreLogic Home Price Index
  • 1400 – US Apr. Conference Board Consumer Confidence
  • 1400 – US Apr. Richmond Fed Manufacturing Index
  • 1400 – US Mar. New Home Sales
  • 0130 – Australia Q1 CPI

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