Head of FX Strategy
Currencies are showing classic signs of risk-off behaviour as traders head into JPY and CHF, seeking refuge as an embattled President Trump continues to rattle markets with trade war rhetoric and as Italy awaits its latest potential sovereign bond rating adjustments from Fitch.
EURCHF has taken a sharp turn for the worse, perhaps in part driven by fears that Italy’s sovereign debt faces downgrades from Fitch and others, but also on some alarming rhetoric from EU Commissioner Moscovici, who remarked in an interview with an Italian newspaper that “if you create the conditions for exiting the euro, it means that it is actually what you want”. Among other rather stark comments, he also stated that “the euro provides for compliance with rules, not respecting the rules means wanting to leave the monetary union”.
It is clear that Italy’s government does not want to respect the rules, or wants at least to have those rules changed to allow for larger deficits – something has to give. For now, that thing is EURCHF, which is staring down the lows for the cycle again below 1.1300. As well, EURJPY has reversed course again after its recent chunky rally. The Italian government has also threatened to disrupt the EU budget process in recent days on the issue of immigration.
Elsewhere, the action is mixed today after yesterday’s brutal session for emerging markets, which was led by the parabolic downward spiral in the Argentinian peso and fresh woes for the Turkish lira as the country's central bank governor resigned yesterday. China continues to hold the floor under its currency, and the US dollar doesn’t seem to be leading the action today, as the highest beta currencies to market developments are suddenly the JPY and CHF.
Yesterday’s US July PCE inflation data were in-line with expectations (matching the recent peak of 2.0% at the core) and not much reaction today after the EU August flash CPI level came in a tad softer than expected at 1.0% core/2.0% headline, both 0.1% below the July readings.
Trump’s ongoing trade tantrums, including fresh EU bashing and threats to slap tariffs on another $200 billion of imports from China are seeing Beijing cosying up to Japan on trade, among other effects. The continued application of these policies will harm US growth and result in stagflationary risks that present an ugly quandary for the Powell Fed. Given the reversal potential in USDJPY here (see chart below) and the recent large reversal in EURUSD, we are pondering whether the US dollar has more decisively turned the corner here and set for a longer-term weakening.
Looking ahead, we have a three-day weekend in the US (Labor Day on Monday) and the flurry of US first-week-of-the month data next week, where we will look for whether the tilt toward negative US data surprise becomes even more severe.
USDJPY has turned tail in a critical area near the top of the daily Ichimoku cloud and is suddenly now having a look at the bottom of the cloud. That level and down into the recent lows and the 200-day moving average in roughly the 110.00 area look pivotal for establishing whether USDJPY is at risk of tilting into a new bear trend. If US yields remain low and risk appetite continues to suffer, this could keep the downside pressure on the pair into the next retracement levels below 108.00.
USD – USDJPY and EURUSD have boosted the case for USD to turn for the worse, though the evidence elsewhere is mixed. Next week is a good testing ground for USD direction as we have a busy economic calendar.
EUR – Italy’s woes are a key focus, but EURUSD has posted a major reversal recently, rejecting the action below 1.1500. We need to see more positive euro developments for any move beyond 1.2000.
JPY – perhaps too early to call a reversal on USDJPY, but the ducks are lining up for the USD bears if the pair can punch through 110.00. Meanwhile, if a general unease in risk appetite is the salient theme, other JPY crosses (AUDJPY, for example) may offer more beta for JPY longs.
GBP – the hopeful developments on Brexit have neutralized the downside risk for now, and technically the 1.3000 area in GBPUSD looks like a bull/bear line of sorts, with similar for the 0.8900-50 area in EURGBP. Still, the situation looks a bit binary in coming months. A solid deal that keeps the UK de facto in the customs union, even if with a “pay to play” setup, would likely see a sharp sterling rally indeed.
CHF – EURCHF spiking back toward the lows, but would be surprised if Italy’s situation can see the pair make much progress beyond 1.1200. The Swiss National Bank will get more motivated to intervene from here given that level in EURCHF as USDCHF has also dipped sharply.
AUD – AUDUSD looking heavy into the lows for the cycle, but we’ve seen a steady pattern of new lows not holding well and plenty of backfilling, perhaps the side effect of crowded speculative positioning on the short side. The AUD the most sensitive of the G10, perhaps, to China allowing the CNY floor to drop out.
CAD – the 1.3000 area trying to hang in there as USDCAD has traced out a choppy descending channel. The bottom of that formation currently in the 1.2800-50 area, while the bulls need a sharp pull higher through 1.3100-50.
NZD – the kiwi outperforming the Aussie again here, even as rate spreads have moved against the smaller Antipodean’s favour. This is taking AUDNZD back near that pivotal 1.0800-50 zone
SEK – signs of a top in place for EURSEK, but we’ll need a Swedish election outcome that keeps the political centre intact, even if long term political questions remain after the September 9 vote.
NOK – some momentum divergence in EURNOK encouraging for the bears, but need another leg lower into 9.65 or so to get a sense the tide is turning for the too-weak krone.