FX FX FX

FX Update: USD a tough one to keep down.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The release yesterday of a negative first estimate for US Q2 GDP supported the kneejerk reaction to the FOMC meeting and sent the US dollar sharply back lower, especially versus the Japanese yen as the entire US yield curve dropped on the easing of Fed tightening expectations. But like the reaction to the Fed, the reaction to the GDP data is unwinding quickly, suggesting the risk of a rough ride over US data releases for the coming week.


FX Trading focus: USD a tough one to keep down

With Fed Chair Powell’s refusal at the FOMC meeting on Wednesday to provide forward guidance and indication that coming rate moves will depend on incoming data, the risk as we noted would be an increased sensitivity to data releases. And we saw that yesterday after the release of the weak first estimate of US Q2 GDP, which had annualized growth falling at -0.9% relative to the prior quarter (so an actual fall of less than 0.25%), led by shifts in inventories, weaker government spending and fixed investment, while personal consumption was +1.0%. Fair or not (and to be fair to observers like the Biden Administration, this does not look like a real recession at all yet) this drove the USD sharply lower, with the USD touching new local lows against the majority of G10 FX pairings and the JPY the highest beta currency to the situation on the sharp move lower in treasury yields. That reaction, rather like the kneejerk reaction to the FOMC meeting the day before, has in turn faded fairly quickly, if not fully, suggesting that the market realizes very well that the next data release could fail to support the trend toward lower and earlier peak Fed funds rates. Today we get the June PCE inflation data, but the busy data calendar through next Friday’s July US jobs report may offer a minefield for tactical USD traders, especially when the next CPI data points roll around on August 10 and September 13. Tactically, an important coincident indicator is the US 10-year Treasury yield benchmark, which finally punched below the 2.70% in the wake of the data release but has not followed through lower – if it reverses back sharply into the old range, that may be the end of this USD move lower for now – also in USDJPY terms (assuming no BoJ shift).

With the 10-year yield as one of the key indicators as noted above, the chief driver here is the direction in financial conditions, which, as I noted in this morning’s Saxo Market Call podcast, have continued easing here, whether in terms of market volatility risks like the VIX, corporate credit spreads or the Fed expectations themselves, which for next year are in steep reverse. But if we are headed for peak Fed and the beginning of a retreat next year, it is hard to believe that it will play anything like the late 2018/early 2019 style Fed shift. At that time, the Fed’s halt to QT and eventual move to cut rates and even resumption of QE was possible as there was no inflation to complicate the backdrop, and it while had softened a bit, there was no whiff of recession in the air. This time, the Fed is only likely to relent on further tightening and to begin ease because the labour market has come under severe pressure, which only happens in recessions. And recessions are historically where the Fed is busy chasing to get ahead of a worsening of financial conditions. And the latter only improve in a recession once the Fed has eased sufficiently to get ahead of the downturn. In short, the market is getting way ahead of itself here and we are likely well ahead of peak financial condition tightness – the point at which “something breaks” as we have phrased it before.

I still like USD longs – perhaps starting with GBPUSD and AUDUSD shorts if we close well south of 1.2200 and 0.7000, respectively, on the weekly close today. The risk, of course, is more choppiness next week on data releases.

Chart: USDJPY

This week has seen a tactical capitulation of the USDJPY bulls after the FOMC meeting and negative US Q2 GDP estimate. Overnight, the Tokyo CPI was a bit hotter than expected as well, although it is unlikely the BoJ will carry out a policy shift unless it is under duress at a time of weaker JPY and higher commodity prices. The Ichimoku level of note in coming days is the bottom of the cloud near 131.50, conveniently near the old cycle high that was retested back in June (likewise, perhaps not coincidentally, in the wake of the June FOMC meeting). As noted above the 2.70% area in the US 10-year Treasury benchmark is a critical coincident indicator, meaning that the top of the Ichimoku cloud could hold on today’s close if yield punch back higher post-PCE today.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Reserving judgment on the USD still as noted above, while the commodity currencies could be in for trouble if the greenback – which is a financial condition unto itself – rises again and risk sentiment rolls over. Sterling has been having a far too easy time of it lately.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
More JPY crosses trying to flip negative today (AUDJPY, GBPJPY, CADJPY, SEKJPY, even CHFJPY) – let’s see how this sticks – it is possible if longer yields can stick lower. EURSEK having a peek below the 200-day moving average today – as equities are ripping – as noted above, skeptical how much longer financial conditions can continue to support a development like that. Gold and silver are trying to flip positive, but bigger picture, gold needs a bigger pull higher above 1,780.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Jun. PCE Inflation
  • 1230 – Canada May GDP
  • 1345 – US Jul Chicago PMI
  • 1400 – US Jul. Final University of Michigan Sentiment
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 Capital 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.