FX Update: Whiplash pivot in risk sentiment, G3 rise versus the rest

FX Update: Whiplash pivot in risk sentiment, G3 rise versus the rest

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  The G3 currencies have risen sharply versus most other currencies, led by euro short covering, as risk sentiment has taken a sudden beating before and after weak earnings reports from key US megacap giants Apple and Amazon. At the margin, the market may also be spooked by a fresh spike in USDCNH today as US-China tensions are clearly on the rise.


Have a listen to today’s Saxo Market Call podcast and this morning’s Quick Take, in which we discuss the sudden pivot in risk sentiment and the likely drivers, including a sobering outlook for Q2 from Amazon on rising costs for dealing with the Covid19 outbreak. Elsewhere, we’re especially spooked by the new-old risk of US-China relations deteriorating as we discuss and I add to below.

The ECB meeting did see the bank deepening its commitment to easy terms for the banking sector as the rates on TLTRO loans can drop as low as -1.00% - a direct bank subsidy. Lagarde also announced a new PELTRO or “pandemic emergency” LTRO. But Italian BTP spreads were not notably improved or changed on the day as little was said otherwise with existential implications (nor is the ECB able to go there except by obfuscation on the mix of its purchases.). Still, the euro rallied hard later in the day – and I suspect that the timing of that rally, coming as it did long after the end of the Lagarde press conference, points more to unwinding of consensus EUR shorts across the board more than any narrative we can gin up from this ECB meeting, as EURUSD; for example, was trading near the lows of the day as the ECB press conference was concluding (also, not coincidentally, the high of the day for US stock futures).

USDCNH alert
Overnight, the USDCNH rate ripped higher to 7.13, a move of over +0.7% and thus the largest since March. (The mainland USDCNY rate was not trading due to the May 1 holiday). There was no specific catalyst other than a notable turn in US President Trump’s more pointed comments questioning the origin of the Covid19 virus and other recent comments suggesting he thought China was out to ensure that he would not be re-elected. This is certainly an important barometer for US-China relations and suddenly becomes a massive factor for markets if the rate is allowed to move more than another 0.5% higher or so to new highs for the cycle because it suddenly flags a possible intent to devalue that will thoroughly spook global markets. Stay tuned.

We are watching today’s closing levels for risk sentiment – especially the US indices, of course, with Europe out on holiday today – as a set up for our stance on the USD going into next week, a week expected to produce a monthly tally for job losses in April of over -20 million (already evident in the claims, but nonetheless…). And as we discuss below with USDCNH, we also add a more intensified focus on the risks of a deteriorating US-China relationship and the outbreak of new overt trade policy hostilities.

 

Chart: USDCAD weekly
Looking at weekly closes for the US dollar versus the more pro-cyclical currencies like the commodity dollars (AUD, CAD and NZD) as an indication of whether the big dollar is ready to retest the upside versus here in sympathy with new found negative sentiment across markets. In the case of USDCAD we saw a successful test of the consolidation lows and a strong move off those levels – a strong close today and we will be on the lookout for progress back toward the cycle highs in the weeks to come.

Source: Saxo Group

The G-10 rundown

USD – The USD firming notably against all risk currencies since yesterday and underlines its status as the flipside of risk appetite against risky currencies, while it was notably weak versus the Euro and to a degree the JPY as well.

EUR – as discussed above, the hard euro rally, especially in the crosses, speaks of positioning unwinding of recent risk-on trades more than any narrative I can cobble together from the ECB meeting..

JPY – the focus on EURJPY proved unwarranted, although the JPY has ceom back stronger and then some in the crosses as we have new signs of what we have seen before in recent weeks, a “G3 versus the rest” market as the JPY rallies against risk currencies as risk appetite weakens, but is less compelling in a G3 context (USD, EUR and JPY).

GBP – sterling got oddly ambitious yesterday – watching 1.2500 in GBPUSD as a sign that yesterday’s move was an anomaly and noting that the latest EURGBP attempt below 0.8700 has now reversed, and hard.

CHF – little to say here as heavy hand of SNB makes it untradeable – watching 1.0500 in EURCHF as a possible psychological catalyst if we drift back lower.

AUD – I noted “discomfort” with AUDUSD in my last update the day before yesterday and the pair managed to rally a bit further to a local high of 0.6570. Just as AUD flew the highest among the commodity currencies, it is falling the fastest, likely on the unsettling rally in USDCNH overnight. A close significantly below 0.6450 in AUDUSD points to a bearish technical reversal.

CAD – the USDCAD pair survived the 1.3850 area pivot test and has rallied hard off that level – potential toward 1.4500+ again on any more significant setback for risk appetite and notable that this significant crude rally of the last couple of sessions has largely been shrugged off.

NZD – the kiwi a big holdout against the more China-sensitive AUD, which likely dropped on the overnight move in the CNH overnight – still, wouldn’t expect the kiwi to escape negative focus either and warming up a bearish view on NZDUSD again on a weak close today.

SEK – EURSEK teased a breakdown but the price action didn’t linger below that key 10.69 area 200-day moving average and the rally into today suggests that SEK remains sensitive to risk appetite. As well, if the country doesn’t more quickly get its Covid19 numbers under control after its novel, less vigorous approach to slowing the spread, the risk of a more sustained shutdown rises.

NOK – EURNOK has found a based well above 11.00 for now and the risk of a rally back toward 12.00 or somewhat higher if medium to longer term oil prices (out 6 months or more) move back toward the contract lows or lower (we expect heavy official hands to avoid the kind of disorderly price action that saw 13.0+ in EURNOK)

Economic Calendar Highlights (times GMT)

  • 1400 – US Apr. ISM Manufacturing

 

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

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.