FX Update: GBP up as Brexit talks to extend. RBA takes AUD down.

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  There will be no Brexit talk deadline today, a relief for sterling bulls, but a situation that merely extends the uncertainty. Elsewhere, the RBA November 3 meeting is likely shaping up for a new easing push from Lowe and company as their overnight musings on longer term QE took the AUD down a few notches. Elsewhere, we watch the relative strength race between the USD and JPY as 105.00 has come into view in USDJPY.


Trading focus:

JPY still in the cross-hairs
As I have noted recently, the yen is receiving a double whammy of support from the strength in safe haven bond yields (the most important driver) and weak risk sentiment of the last couple of sessions. I speculated in this morning’s Saxo Market Call podcast whether one of the factors keeping the EURJPY from lower levels is the EU sovereign bond market, where bond traders have had a field day since the spring in bidding up peripheral debt (piggy-backing ECB flows) as EU sovereign spreads tighten. This element is entirely missing in Japan’s moribund JGB market, but the JPY remains undervalued in real-interest rate terms. We focus on the 105.00 area in USDJPY for a wider realization of this level – every prior attempt below this level since 2018 has been gathered up within a few trading days.

Pause button pressed for sterling
Just ahead of yesterday’s update, the headline crossed my screen that Boris Johnson would not walk away from talks today, which the market took as a hopeful sign that the current status of the talks is sufficiently amicable to indicate that a deal is reachable. According to sources in the major news media, both sides suggest that late October or the first week of November are the more likely timeframe for an agreement. On balance, the fact that talks are ongoing are promising for sterling, but we still likely will need that critical breakthrough for sterling to post any larger directional move. Until then, a break below 0.9000 in EURGBP would represent a fuller reversal of the prior rally and could lead to the exploration of the bottom of the range just below 0.8900, which also happens to coincide with the 200-day moving average.

AUD hit on RBA consideration of longer term bond purchases
The Australian 10-year yield dropped a chunky 7 basis points overnight (from 0.84% to 0.77%) on RBA governor Lowe out indicating that the RBA is considering extending the maturities of its bond purchases and mulling whether lowering 5-10 year yields would help the Australia labour market. The Governor complained that Australian 10-year yields are still too high. This has the market placing bets that the RBA is set for a bigger move at  the November 3rd meeting, which could include a rate cut and now more likely to see a proper QE programme that includes purchases to lower Australian yields all along the curve.

Chart: AUDUSD
The AUD is lower across the board on the RBA’s consideration of extending bond purchased out the yield curve and the local line of consolidation has fallen overnight in AUDUSD as the pair really only has the huge 0.7000 area to consider from here to the downside tactically. To get the pair significantly below that level, we would likely need to see further weakness in China’s currency, commodity prices like iron ore heading lower, and generally weak risk sentiment. The first area lower beyond 0.700 is the 200-day moving average just below 0.6800.

Source: Saxo Group

The G-10 rundown

USD – looking generally firm, but not the centre of attention at present. As long as US stimulus fears weigh on risk sentiment, likely to continue to see resilience.

EUR – considerable speculation around the ECB’s next measures, but the ECB is already doing plenty if we have a look at EU peripheral spreads, and the focus is likely to increasingly shift to the fiscal – watching for signals from the EU Summit today and tomorrow on that front.

JPY – very interested in the relative horse race of the USD and JPY as 105.00 and below approaches to see which achieves top status as a safe haven currency if yields continue lower and risk sentiment is rocky.

GBP – potential for further gains here, but still need the key breakthrough and wonder if the ceiling is a bit low for sterling even in the best of outcomes – more thoughts later now that talks likely to drag on for two more weeks or more.

CHF – a grinding bit here in CHF as EURCHF slowly moves lower – maybe more sensitive to global bond safe-haven seeking that risk sentiment swings per se?

AUD – Australia hit by the RBA and could trade on weak side until the November 3 RBA meeting, especially if global outlook remains further clouded by Covid-19 concerns and China’s yuan suffers a bout of consolidation after its recent run.

CAD – USDCAD has room to consolidated to 1.3250 without raising eyebrows, but seems low beta to the overall USD situation. CAD traders need keep an eye on oil prices as these traded near resistance yesterday.

NZD – the kiwi enjoying strength against the sudden downshift in the Aussie, but the RBNZ will be quick to take care of preventing pronounced NZD strength eventually. For relative strength in that pair, watching the 200-day moving average around 1.0620. Big level for NZDUSD is 0.6500.

SEK – the krona may be overachieve in short term, but still have a “fade the rallies” stance in EURSEK as long as we remain south of 10.500 for a move into sub-10.00 territory in 2021.

NOK – the EURNOK level of 10.75-80 is the one to crack tactically for NOK bulls – could be a short term walk in the desert here for those bulls if the Covid-19 partial shutdowns continue to weigh on the oil outlook over the winter.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0950 – Hungary Rate Announcement
  • 1230 – US Oct. Empire Manufacturing
  • 1230 – US Weekly Initial- and Continuing Jobless Claims
  • 1230 – US Philadelphia Fed Survey
  • 1300 – UK Bank of England’s Cunliffe to Speak
  • 1500 – US Fed’s Quarles (FOMC Voter) to Speak
  • 1600 – ECB President Lagarde to Speak
  • 2100 – US Fed’s Kashkari (FOMC Voter) to Speak on Economic Outlook

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.