Head of FX Strategy
Summary: While the volatility in US equity markets raised eyebrows and drove the usual directional moves in FX one associates with safe haven seeking, the transmission effect into FX was very weak as broader measures of risk sentiment were little affected. Things could change however if the volatility continues, the reflationary background narrative suffers further doubt and the USD and JPY start to punch through technically pivotal levels.
Trading focus:
The USD perks up on ugly day on Wall Street, but hasn’t crossed key tech levels:
Watching 1.1750 area in EURUSD and 0.7250-25 in AUDUSD for signs that this USD consolidation is developing into something more.
The action yesterday was deja-vu all over again for many of the episodes since this spring’s COVID-19 inspired gyrations, when FX absorbed little of the rather significant gyrations in the equity market – some of that lack of energy may be warranted if the volatility is a self-contained, non-fundamentall driven spectacle linked to options market dynamics as we discussed in this morning’s Saxo Market Call podcast. Still, the USD has pulled stronger and the JPY is along for the ride as well, and any deepening of yesterday’s move that takes risk sentiment lower would begin to see chart levels breaking soon for both USD and JPY pairs. Safe haven bonds have backed up aggressively, but the central banks’ backstopping of investment grade credit makes it difficult to put together any wider risk sentiment signal. (Though high-yield ETF’s did come under some pressure yesterday and bear watching.)
Chart: EURUSD
It’s the same chart we’ve shown in recent days (and quite similar to the EURJPY chart below – the two usually show positive directional correlation), and tactically EURUSD has underlined the recent pattern since first achieving the 1.1900 area of posting higher lows with each brief sell-off in this overall regime of a choppy, rising channel. That begins to breakdown if yesterday’s lows below 1.1800 give way and then we work through 1.1750-1.1700. Given oft-noted heavy speculative long position in EURUSD, the favoured scenario is some exploration of the key major trend support zone that stretches down toward 1.1500 and just below, although we remain in an uptrend if that structural support holds.
The JPY – will it ever shake or even stir the G10 currencies again
In JPY pairs, watching the 124.50 area in EURJPY in particular as next Thursday’s ECB approaches
We’ve seen a few false starts for the JPY of late, which has responded with a bit of firmness to the comeback in bonds as safe haven yields have been tamped back down after their recent, tantalizing rise. Any turn in the general narrative away from reflation and back toward deflation could add significant fuel to a JPY comeback, so we keep an eye on commodities prices in addition to the usual long yield and general risk sentiment focus.
Chart: EURJPY
The new highs in EURJPY have not held well and the fall-back in bond yields and some commodity prices is a boost for the JPY, which is sensitive to the reflationary narrative (negative correlation). If the ECB is able to sufficiently impress at next Thursday’ meeting and/or if commodities consolidate lower still after their recent wobble, together with a fresh wave of weak risk sentiment and lower bond yields, EURJPY could be set for a significant trend reversal. The first test of that setup technically is the 124.50 area noted on the chart below. Note as well the fading momentum in the MACD during the last phase of the longer term rally.
The G-10 rundown
USD – the greenback has firmed, but has not yet broken back higher and we’re quite far from levels that suggest it may in EURUSD (1.1700), while AUDUSD is a bit closer to triggering potential downside levels into 0.7250-25. The “profligate US spending” narrative helping to drive real yields ever lower is being held back by political dysfunction in the US that could extend well past the election.
EUR – an important ECB meeting coming up that tells us whether the market has given up believing that the central bank can move the needle with its existing tool set – innovation will be required and mostly on the fiscal side (as well as recapitalization of EU banks) to dig the EU out of its hole.
JPY – as noted above, the JPY sits, together with the USD to a degree, as the flipside of the reflationary narrative and could come alive on broader evidence that this narrative is being challenged, to some degree already evident in the firming of safe haven bonds in recent days.
GBP – Bloomberg flags the important fact that Chancellor Sunak will be looking to unwind some of the UK’s emergency pandemic relief measures, starting with the restaurant subsidy this week and continuing with ending some eviction restrictions on September 20. The government has signaled it wants to stick to the timetable for other programs, with the fate of the furlough program supposedly set to end Oct 31 the most critical on that account. Oh, and then there is Brexit, where progress by the mid-Oct EU summit is imperative if we’re to avoid a nail-biter into the end of the year. The recent sterling rally has run out of steam and 1.3250 needs to hold in GBPUSD to keep the focus higher.
CHF – EURCHF is dipping back below 1.0800 and becoming a non-factor again – watching reactivity around ECB next week for whether the franc merits much attention.
AUD – we continue to watch the 0.7250-25 area technically for AUD and note that it’s remarkable how well the AUD has performed given its slower approach to opening up its economy – the reflationary narrative and select commodity prices have helped a great deal on that note and are the driving factor for AUD, with risk sentiment as a secondary factor unless the two move more forcefully in unison.
CAD – a busy week next week for Canada and USDCAD a favourite for potential further consolidation back toward USD strength tactically after the major 1.3000 objective was realized this week. The loonie strength must be showing up to a degree on the BoC’s radar, oil prices have weakened significantly and
SEK – the EURSEK price action bottled up in sideways range as SEK doesn’t appreciate risk sentiment weakness. The Riksbank governor Ingves has been out jawboning and suggested similar to the Fed that it would not worry about inflation overshoot (supposedly SEK bearish if inflation was a concern here, which it isn’t) but also noted that SEK developments have not been a concern over the past half year (SEK supportive). SEK needs more optimism and a breakout in the major European indices to run higher.
NOK – correction in risk sentiment and the lowest oil prices in about a month yesterday driving a sharp reversal in EURNOK back higher that is particularly disappointing after new lows since March were posted. If oil runs lower still on double-dip concerns, the pair could work back toward 10.75-80.
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