FX Update: USD weakens broadly, but are the drivers sustainable? FX Update: USD weakens broadly, but are the drivers sustainable? FX Update: USD weakens broadly, but are the drivers sustainable?

FX Update: USD weakens broadly, but are the drivers sustainable?

John Hardy

Head of FX Strategy

Summary:  A sharp US dollar sell-off has developed, one that materialized suddenly overnight and was extended by comments from Bank of Japan Governor Kuroda that inspired a steep plunge in USDJPY after its recent aggravated extension higher. The ECB meeting yesterday brought more hawkish than expected guidance, theoretically helping the EURUSD back-up well above parity, though the timing of the bulk of the rally in Asian hours offers cause for head-scratching.

FX Trading focus: What is the quality of this USD sell-off…and JPY rally?

The USD move overnight looked suspicious as it came just after midnight GMT – perhaps led by a run on stop orders above yesterday’s post-ECB meeting high around 1.0030? Hmm – the move was broad-based, so not entirely convinced. China set its yuan reference rate sharply higher than expected about an hour later, and then the BoJ Kuroda comments discussed below came on board. The move in EURUSD happening in Asian hours rather in the context of the ECB meeting having already sharply boosted EU yields earlier in the day yesterday has me scratching my head and wondering at the quality of this USD move lower – and wanting to reserve judgment on what is going on here at least until the end of today’s/this week’s action and possibly until we see how the market treats the EU’s power price cap plan after the summit on the matter in Brussels today and then next Tuesday’s US August CPI release.

It is no major surprise that some stern words from Bank of Japan Governor Kuroda were able to inspire a sharp consolidation lower in USDJPY after its wild extension higher recently that seemed a bit excessive relative to the support from coincident fundamental indicators like global long sovereign yields/spreads. After meeting Prime Minister Kishida overnight, Kuroda said that “sudden moves in foreign exchange rates increase uncertainty for firms and are undesirable.” And “ a two to three yen move against the dollar in a single day is very sudden.” A couple of figures on a comment are easy, more would require a more notable retreat in global yields and commodity prices and perhaps real intervention.

By the way, an FT article with the provocative title “Can Japan feed itself” makes clear that food prices have been capped by the Japanese supermarket industry for some time now at the retail level and are set for a significant reset on October 1. This will mean a leap in the official CPI numbers from the month of October. At the same time, PM Kishida is readying a new raft of packages aimed at supporting lower income households cost-of-living challenges. There is a chicken and egg problem here with price controls and preventing cost-of-living increases on the one hand and the Bank of Japan theoretically waiting for the Godot of wages beginning to rise to signal that inflation is becoming more embedded. With cost-of-living support, the wage earner is less likely to demand a raise…. Something is going to have to give, but it’s hard to believe that a stern few phrases from Kuroda will do the trick, although this could be the beginning of a far more choppy JPY trajectory from here, as from these levels or lower in the JPY, the Ministry of Finance may be willing to throw billions of intervention into the mix in an attempt to halt further JPY declines.

BoJ comments overnight have triggered a significant slide in USDJPY, if one not yet as large as the two-day rally
that sent the pair soaring all the way to the cusp of 145.00 two days ago. A retreat and close anywhere close to 140.00 today would create an interesting shooting star formation for the weekly candlestick, although really the pair needs to wipe out a great proportion of the move from the pivot low in early August at 130.40 to suggest a more profound reversal is afoot here. Meanwhile, a close today in the 142-143 range suggests that little harm has been done, even tactically, to the USDJPY up-trend.

Source: Saxo Group

The ECB meeting brought far firmer guidance from the central bank than expected, as German 2-year yields traded some 30 basis points higher today relative to the close the day before the meeting – to a new cycle high north of 1.40% before that move faded sharply today back toward 1.30%. The 75-basis point hike was the largest in the ECB’s history and is expected to be repeated at the late October meeting after the guidance that another move of that size can’t be ruled out in yesterday’s presser. But Europe needs sustained relief on the energy/power price front for a more sustainable rally. Curiously, the market waking up to EURUSD trading well north of parity this morning had nothing to do timing-wise with the ECB as it unfolded overnight. Yesterday, the market seemed unsure with what to do with the euro in the immediate aftermath of the decision and guidance. For EURUSD, a close above 1.0100, which was teased today, is needed to set the focus toward the next area into 1.0350, while a close back below parity today would suggest that the overnight pump was merely linked to poor liquidity, order flow and the Bank of Japan verbal intervention mentioned above.

An election is set this weekend for Sweden, with the currency market not particularly holding its breath in anticipation. EURSEK has corrected sharply lower in fitting with the strong risk sentiment of the moment, but has a lot of work to do to set the focus back lower, at least a move below 10.50.

As I am writing this, the Bank of England has announced that it is moving back its next meeting from next week to the following week, likely due to Queen Elizabeth’s death and the mourning period, but this will give the Bank the luxury of having a look at the FOMC meeting the day before and whether it needs to stiffen its message or even hike more than it anticipated if sterling is struggling to new lows going into the meeting.

Table: FX Board of G10 and CNH trend evolution and strength.
The USD momentum has shifted sharply lower over the last couple of days, but reserving judgment at least until the daily/weekly close today. Elsewhere, look at CHF continuing to power on despite the ECB hawkish guidance yesterday.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
It’s looking like cross-over day again for EURCHF after the ECB failed to sustain the recent rally despite the mark-up of EU yields. USDCHF has also rolled over and is threatening a turn lower, although looking at the chart, there is a lot of choppy range to work with yet.

Source: Bloomberg and Saxo Group

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