Macro: Sandcastle economics
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USD reigns supreme ahead of flurry of central bank meetings
John J. Hardy
Chief Macro Strategist
The USD is riding roughshod over this market, rising against everything now that the threat of trade wars has yielded to a shrug of the risk appetite shoulders and a resumption of business as usual: rising US equities, pricing in more Fed tightening and as the entire yield curve lifts again. The latest victim of the USD buying, aside from the constant pressure on EM currencies (see our latest EM FX Weekly published late yesterday) has been the New Zealand dollar, despite the country reporting Q1 GDP in line with expectations. Shortly after the report, the kiwi fell to a new local low versus the US dollar, joining its commodity dollar cohorts AUD and CAD in doing so and NZDUSD is now eyeing the lows since 2016 just below 0.6800.
We have no fewer than four central bank meetings today, starting first with the Swiss National Bank meeting where little signalling on policy should be expected, given still low inflation in Switzerland and the European Central Bank’s icing of its forward guidance at the meeting last week. The Norges Bank could see modest upgrades to the forward path, but oil prices haven’t been very supportive. A sufficiently positive vibe could see EURNOK dribble lower and perhaps support further upside in NOKSEK. The Bank of England shouldn’t be ready to pivot away from rather tepid expectations here, given its egg-on-the-face climbdown from hawkishness to a more neutral stance earlier this year.
Chart: EURUSD
The next big step for EURUSD is a break of the symbolic 1.1500 level, although strictly speaking the 1.1450 area was a more consistent pivot level in years past. Regardless, it’s hard to believe that USD momentum will end so quickly just below 1.1500, so we’ll have to sharpen our projections for where the selling may end as EURUSD looks an increasing value proposition below here. The 200-week moving average comes in just above 1.1400 while the 61.8% Fibo retracement of the entire rally sequence from the 2017 low below 1.0400 to the high above 1.2500 comes in at 1.1187.
The G-10 rundown
USD – the USD reigns supreme and there are few signs on what could stop the momentum at the moment – and in fact, the situation could end in a spike of further strength if the US 10-year benchmark becomes unanchored again and heads well above 3.00% – stay tuned there.
EUR – The EURUSD supermajor looks very heavy ahead of the obvious 1.1500 pivot zone – with the next levels noted above. Friday’s latest flash PMIs are the next fundamental data of note, but economic data out of the EU would have to surprise in the extreme to affect the interpretation of the European Central Bank’s dovish forward guidance. More volatility potential on EU existential questions and considerable focus on the June 28-29 European Council summit.
JPY – the yen is weaker again as the market quickly recovered from Trump’s latest tariff threats and US yields are stable. We use the US 10-year benchmark as our key coincident indicator on USDJPY direction – that 3.00% level is well anchored and USDJPY is likely also well anchored and toppish, while significant upside and new highs probably would need a threat higher in long US yields again.
GBP – Carney’s Mansion House speech tonight could get more attention than the Bank of England announcement today – not looking for drama as we have spent two full months in a tight range in EURGBP between 0.8700 and 0.8850.
CHF – expectations around the Swiss National Bank today at virtually nil – could USDCHF steal the focus again among CHF pairs if we cross back above parity and especially the range highs above 1.0050?
AUD – the AUD marking its fifth negative consecutive session versus the USD yesterday and is looking at a sixth today, with the next focus on the major range low from the last week of 2016 near 0.7160 still some way off. Watching interesting pivot levels in both iron ore and copper for more downside potential.
CAD– USDCAD has broken into the range extending to 1.3700+ and we assume trend is the friend for now until proven otherwise. The US yield advantage over Canada has reached new modest highs for the cycle over recent sessions.
NZD – the kiwi is playing some downside catch-up relative to its commodity dollar peers and further downside could await as NZDUSD focus may intensify on a break below the big chart range extending below 0.6800.
SEK – EURSEK has rejected the recent downside probe, but not sure we can expect much upside unless we see a new shift back to risk sentiment.
NOK – Norges Bank could cautiously upgrade the outlook, though we’re not holding our breath for more than modest NOK strength – NOKSEK has broken free of the local range.
Upcoming Economic Calendar Highlights (all times GMT)
0730 – Switzerland SNB policy meeting
0800 – Norway deposit rate announcement
1100 – UK Bank of England announcement
1230 – US weekly initial jobless claims
1300 – US Fed’s Kashkari (non voter) to speak
1230 – US Jun. Philadelphia Fed survey
1800 – Mexico Banxico rate announcement
2015 – UK BoE’s Carney Mansion House speech.
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