Head of FX Strategy
Summary: The US dollar has weakened sharply here as the US Senate easily passed the debt ceiling bill, leaving only the formal signature of President Biden to disappear until at least early 2025 as an issue. As the focus has been on the risk of a USD liquidity pinch, given the US Treasury’s likely intent to build reserves now that it can expand issuance, the sudden USD weakness may suggest a sell-the-fact moment, as risk sentiment also brightened broadly. Today also sees latest US jobs data.
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USD: sell-off as debt ceiling impasse clears a “sell the fact” moment?
The USD weakening sharply in the wake of the debt ceiling bill clearing both houses of the US Congress is playing as a sell-the-fact moment for the US dollar, and a buy-the-fact moment for risk sentiment and US treasuries. That’s despite the concerns, also voiced here, that the US treasuries titanic issuance needs in coming weeks could. With money market funds growing apace as savers rotate out of zero- or very low yielding deposits, however, perhaps the liquidity concerns in the near term are overblown. Longer term, the US still risks a mounting credit crunch as banks contend with an unprecedented deposit flight and higher cost of funding to compete with alternative savings vehicles, but for now, if US treasury yields stabilize and continue lower, the USD could be set for a significant sell-off, provided data misses don’t prove too dire. It will take a bit more time to ensure that a reversal signal is in place here, starting with how the greenback ends today post-jobs data, but the energy in the move yesterday and the change of tone in commodities and the surge in commodity currencies discussed below suggests something new is afoot here and that in the short term, we and others may have been overplaying the short term concerns for liquidity on the post-debt ceiling Treasury General Account (TGA) rebuilding. Of course, all of the above is much ado about nothing if we reverse sharply again later today on, for example, strong US jobs numbers, but “the feel” is different this time around so far.
The USD is sharply weaker ahead of today’s US May jobs report, with about +200k in the nonfarm payrolls change expected. Watch for revisions as much as today’s data point. The goldilocks for risk sentiment is perhaps very slightly soft numbers or inline numbers with no surprises in the earnings, while USDJPY may get more attention/downside from surprisingly soft numbers. The most recent initial jobless claims readings suggest little risk of large downside surprises.
Chart: AUDUSD
Commodity currencies got a strong boost yesterday on the change in tone on risk sentiment and as cyclical commodities rallied sharply almost across the board. Copper is up sharply over the last couple of session and crude oil is likewise so ahead of this weekend’s OPEC+ meeting. AUDUSD has responded with a sharp rally off the lows and this powerful reversal back up through the 0.6600 level looks like a rejection of the last leg lower, though we’ll need to see the pair stick the move into the close today after the US jobs data, arguably a full pull back above the 200-day moving average and 0.6700 area would be a more emphatic signal of a major reversal than we have as of this snapshot. An RBA meeting next Tuesday likely carries little risk for the Aussie as long as risk sentiment and commodity price action is supportive. AUD is strong in the crosses as well, with AUDNZD posting new highs and soon threatening the 200-day moving average.
Table: FX Board of G10 and CNH trend evolution and strength.
An enormous momentum shift in the US dollar here over the last two days that looks decisive without a sharp reversal of the move into today’s close. Elsewhere, the Aussie has reversed recent weakness, while SEK and NOK are trying to do likewise.
Table: FX Board Trend Scoreboard for individual pairs.
Watching USD pairs over the coming week for possible new USD downtrends to develop. Strong risk sentiment has us looking at EURCHF as well for a possible rally/new uptrend, although price action is a bit too quiet there so far.
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