FX Update: Directional momentum is hard to come by

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  Volatility continues to fall across much of FX, with directional breaks hard to come by for the USD as support levels have continued to hold. The low volatility creates long term opportunities for long volatility exposure, but the short term unwillingness to commit in any direction makes for a treacherous market as it feels like we are all awaiting an unknown catalyst.


The euro rally on the back of enthusiasm for the possible framework for funding a recovery package via the EU Budget that we discussed yesterday has already faded if we look at EURCHF stumbling back below 1.0600 this morning and the EURUSD rally not managing to punch to 1.1000 yesterday before retracing a sizable portion of the gains on the day in late trading. This looks symptomatic of the energy seeping out of the market in general, as USDJPY also pulls back well away from 108.00 after a sniff above yesterday and likewise, AUDUSD and USDCAD can’t manage a to show USD weakness conviction outside of the recent ranges after brief feints yesterday.

Elsewhere, EURNOK managed to carve out solid new lows yesterday but has bounced quite a lot off those lows this morning. We get the latest US inventory and demand data today after a fairly blistering run higher in recent session in crude oil over the last few sessions. EURSEK is, however, having a bit of a go at the cycle lows here this morning in the wake of the publication of the Riksbank’s financial stability review, but the announcement in Sweden of large bond issuance to fund a large fiscal expansion to deal with the Covid19 crisis is perhaps the chief driver of ongoing SEK strength, and the EURSEK chart is one of the more interesting ones among the G10 FX crosses as we await a catalyst for more volatility elsewhere.

Looking to the day ahead, we’re not sure the calendar of event risks is there in the near term for catalyzing market volatility, which continues to drop precipitously. USDJPY 1-month implied volatility has dropped back toward 6% even as the pair has had a look at the very interesting 108.00 to 108.30 area, as I discussed on today’s Saxo Market Call podcast. But as implied volatility ebbs, longer term options become more attractive – let’s recall that long dated options volatility was at or near record lows ahead of the Covid19 crisis, and even in its early phases hardly picked up.

Traders interested in volatility exposure may consider 3-month plus options that are decently out of the money in pairs like NZDUSD, AUDUSD, or AUDJPY for downside potential and USDCAD for upside potential are worth consideration if we see another major spike in volatility from US-China tensions, slower than feared Covid19 recovery or otherwise.

Chart: EURSEK weekly
EURSEK is one of the more interesting charts structurally within DM currencies, as the latest sell-off wave has erased all of the action above the 11.00 area and virtually all of the entire previous upwave, with resistance found recently at the 200-day moving average. The pair has a bit more range to work with toward 10.40, with an opening up of 10.00-10.15 area if that gives way Sweden’s currency is generally very pro-cyclical, so the easy path higher for the krona is a strong economic rebound, particularly in Europe on a fresh fiscal impulse, while the threat of a major throwback rally rises if we see a new concerns on an L-shaped recovery, EU existential risks, weak risk sentiment, etc.

Source: Saxo Group

 Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – Canada Apr. CPI
  • 1330 – UK BoE Members Bailey and others before Parliamentary committee.
  • 1430 – US Weekly DoE Crude Oil and Product Inventories
  • 1700 – US 20-year Treasury Auction
  • 1800 – US FOMC Minutes

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.