FX Update: Passive FX as CB's stagger towards tightening pause. FX Update: Passive FX as CB's stagger towards tightening pause. FX Update: Passive FX as CB's stagger towards tightening pause.

FX Update: Passive FX as CB's stagger towards tightening pause.

Forex
John Hardy

Head of FX Strategy

Summary:  Yesterday largely saw classic risk-on developments across G10, with the USD on its back foot and AUD leading the charge ahead of that country’s Q4 CPI data tonight, with New Zealand also reporting CPI data. EURSEK is also trying to tilt lower as the normally risk-sensitive SEK is finally picking up a bid on the strong resurgence in sentiment as US corporate earnings season kicks off in earnest today. The market mood has soured a bit today in Europe and US data and leading indicators are patchy at best.


Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: Classic risk-on, risk-off patterns across FX with uncomfortable backdrop. Bank of Canada up tomorrow. Sterling wobbling again.

Yesterday saw a further squeeze higher in risk sentiment on no notable news flow, a move that saw the usual suspects of market regimes past, as the US dollar was weaker, while the smaller G10 currencies like AUD and SEK charged higher, AUDUSD challenging the recent pivot highs above the significant 0.7000 level and EURSEK pushing down on range support and needing more to the downside to reverse its persistent uptrend there. Most of the market action, outside a meandering JPY, had a classic, highly correlated and passive risk-on, risk-off vibe as we await incoming data and incoming news.

This morning, we got the flash January. Given the enormous relief on the gas and power front in Europe after absurdly mild winter weather in December helped crush prices lower, the modest improvement in the surveys perhaps undershoots relative to the recent news flow on Europe and the scale of ECB hawkishness (both Eurozone PMI surprising modestly on the upside, but not shooting the lights out with 48.8 on Manufacturing and 50.7 on Services). The euro took a stab at 1.0900 but couldn’t sustain and the price action is awfully sluggish after hitting current price levels in the 1.0860’s eight trading days ago. Yesterday I pointed out that it may be difficult for EUR to find upside on the USD due to forward rate expectations for the ECB relative to the Fed, given that the 2-year yield, two years forward has risen as high as -15 basis points.

The UK PMI’s were a different matter, with the Services survey coming in at 48.0 vs. 49.5 in December and vs. 49.9 expected, a sour data point possibly suggesting a retrenchment in consumer behaviour after the holiday season. Sterling has traded to the soft side today, with GBPUSD down close to 1.2300 after 1.2400 earlier in the session and EURGBP rallying back into the range above 0.8800.

Data later today from the US is third-tier stuff as we await Thursday’s GDP print and Friday’s PCE inflation data (with inflation off the menu as a concern for now, it’s rather where we are in the recession cycle that grabs market focus). The greenback is more likely to get energy from the equity market keying off important earnings reports as the earnings season kicks in with full force today and through next week. GE has already been out spooking the market a bit with its forward guidance, with earnings guidance for the coming year significantly below analysts’ estimates.

The Bank of Canada is the next central bank meeting up tomorrow, but as I discuss below, surprises will likely be hard to find unless Macklem indicates that the BoC is ready to abandon the tightening ship already now rather than hiking the 25 basis points the strong majority expect at this meeting, or as most assume is the most dovish case, at the March meeting. We are at BoC peak rates, essentially, leaving CAD’s fate up to the direction of oil prices and risk sentiment from here.

Chart: USDCAD
USDCAD has traded somewhat heavy in the range here ahead of tomorrow’s Bank of Canada meeting, which looks entirely unlikely to deliver any hawkish surprise, and with a well-flagged deceleration to a 25-basis point move expected tomorrow, followed by a significant pause to assess the impact of the blistering pace of tightening last year. CAD bulls will likely have to hope for a further melt-up in risk sentiment and sustained rise above 85, if not 90 dollars/barrel in crude oil (WTI) to find significant further upside versus the US dollar. Levels to watch include the local lows in the low 1.3300’s followed by the 200-day moving average rising toward the mid-November low of 1.3226, but currently nearer 1.3200.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Few shifts of note since yesterday, but the Aussie’s rise has become significantly more pronounced as it gets a leg up more broadly, and SEK is attempting a revival, with some interesting levels approaching in key pairs, as noted below. Note that Australia reports Q4 CPI tonight, with the market looking for one or two more 25 basis point hikes from the RBA from here (Feb. 7 meeting priced at 50-50 for a move) and it feels like Philip Lowe and company would appreciate any excuse to do less rather than more.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
SEK working into some interesting with this latest rally, as a major pivot low in USDSEK approaches near 10.15, while EURSEK has poked below local multi-week lows just below 11.10, but needs to take out at least 11.00 to suggest a more significant reversal.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1300 – Hungary Central Bank Rate Decision
  • 1330 – Philadelphia Fed Non-manufacturing Survey
  • 1445 – US Jan. Flash Manufacturing and Services PMI
  • 1500 – US Jan. Richmond Fed Business Conditions
  • 1800 – US Treasury auctions 2-year notes
  • 2145 – New Zealand Q4 CPI
  • 0030 – Australia Q4 CPI

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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. 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 Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

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 are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

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

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.