FX Update: Important week ahead for USD on FOMC, jobs data

Forex 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Little drama for a gently consolidating EUR in the wake of the Draghi swan song at the ECB yesterday. An important week ahead for the US dollar after the currency has recently notched lower without yet signalling a structural shift and we have an FOMC rate cut and important US economic data through the latest US jobs numbers next Friday.


Draghi’s swan song at the ECB yesterday was rather short on developments, as the ECB president once again harped on the need for an EU fiscal union. His discussion during the Q&A of the ECB’s capital key for further QE purchases “by stock” rather than by size-of-GDP, was interesting in that it opens up for a longer period of QE than many have estimated. As well, Draghi simply stated that its QE limitations are “self-imposed” , also pointing to the lack of real, technical limit to how long the ECB can continue with the “QEternity”.

US Vice President Pence was out speaking on China yesterday, delivering further criticism of Chinese policy in what mounted to a lack-of-progress report some 12 months after an aggressively critical speech on China’s actions and behaviour last year. Still, there was no general call for disengagement and US-China decoupling and Pence expressed the hope that the two sides could come together on trade. There was zero market reaction, but this speech did not look like the basis for building new bridges between the two super-powers.

Sterling on the defensive as Boris Johnson aims for December 12 elections, which now hinge on the length of the delay that the EU grants for the Brexit deal. Labour’s Corbyn says he won’t support an election (requires two-thirds majority vote) unless there is a sufficient delay. The EU’s decision on the delay is expected today.

The Riksbank out yesterday with both hawkish and dovish signals. The hawkish was absorbed first as the bank insists it remains on course for a likely December rate hike, as many expected a longer wait. The Riksbank just seems determined to get back to zero, almost regardless of the economic situation,  even if it claimed to have two-way leeway on policy if the outlook worsened. But the guidance on the policy rate for the longer term was lowered, suggesting that the bank sees the rate at zero for the foreseeable future after a December hike. Elsewhere, the Riksbank lowered GDP forecasts for this year and next slightly, raised unemployment rate forecasts for 2020 and 2021, and raised the core inflation forecast for next year 0.1% to 1.8%. EURSEK quickly rallied back to unchanged after an initial sell-off.

Gold and silver swung into action yesterday without any particularly notable signals from other markets, like the usual suspects long bonds and the yen, but I suspect the massive chops to policy rates across EM and prospects for more could be playing a part, as well as the sense from the ECB that QE will continue over the horizon for now. Turkey sliced its policy rate 250 basis points yesterday to 14%, a large move than expected, and the year forward carry available has dropped close to 10% as further rate cuts are expected. The Russian central bank will chop rates again today and will keep doing so as long as USDRUB remains rangebound and Brazil next week is expected to reduce the already record low Selic rate another 50 bps to a policy rate of 5.0%.

The Riksbank supported SEK today – at least in the kneejerk reaction – in delivering unchanged guidance for “most probably” hiking in December rather than pushing the rate hike further over the horizon. However, the longer term guidance was lowered to zero for a “prolonged period”, suggesting that the Riksbank remains uncertain about the outlook for growth, and the statement also saw the bank retaining easing potential (rate cuts or expansionary policy “in some other way”) in the event “the economy were instead to develop less favourably.” GDP estimates for this year and next were lowered slightly, but the core CPI forecast for 2020 was raised to 1.8% vs. 1.7% previously. The subsequent price action suggests the immediate reaction might be overblown – other key elements needed to stitch together a SEK-positive story – like an upswing in the global growth outlook and EU (and Swedish) fiscal stimulus. Today’s Sep. Household Lending survey showed another drop – to 4.8% - a new low for the cycle and suggests gathering recessions risks for Sweden.

Chart: USDCAD weekly
USDCAD has proven consistently heavy over the last couple of weeks in the wake of the Canadian election, where the story is that Trudeau will have to maintain fiscal expansiveness to satisfy left-leaning coalition partners (even if that spending is not particularly productivity enhancing, in the case of spending on climate initiatives, etc). There is certainly room for a much larger drop to come  if the US and its neighbour to the north avoid a recession and risk appetite remains buoyant. But Canada has inflated one of the largest private debt bubbles in the world relative to GDP, so any shift to a credit crunch scenario and recession could quickly see the high-flying CAD come in for an ugly direction shift. For now, the technical focus in the key USDCAD pair is on whether the pair can break down through the pivotal 1.3000 area and next week’s battery of event risks should prompt volatility.

Source: Saxo Group

The G-10 rundown

USD – the test of tests arriving next week with an FOMC meeting mid-week,  followed by US jobs report and ISM Manufacturing on Friday. Looks like a stand-or-fall week for the greenback, given its pivotal technical situation in many USD pairs.

EUR – A polite consolidation thus far in EURUSD after the ECB meeting – and the late rally isn’t threatened unless the pair pushed back below 1.1000. Next week looks critical for the broader USD picture.

JPY – long bonds remain bogged down in a tight range and risk appetite maintaining an even keel, keeping yen price action moribund for the time being - but would expect the beast to be awakened at some point – next week looks important for JPY with FOMC and BoJ meetings and the US jobs report Friday.

GBP – sterling consolidation as uncertainties remain on election outcomes if an election is to be held. Don’t see why the EU would throw a wrench into the Brexit path with a short extension, but let’s see how sterling behaves to today’s news.

CHF – EURCHF remains poised for an interesting break higher if it can clear the 1.1050 technical hurdle – perhaps on further clarity emerging from the Brexit situation and eventual news of an EU switch to fiscal.

AUD – the AUDUSD consolidation has not yet threatened the recent rally, but the pair needs to work through 0.6900-0.7000 to shift the chart into neutral or better after the long bearish slide.

CAD – USDCAD heavy as oil prices and the strong shift in short Canadian rates above their US counterparts offer support. Big test next week as both Bank of Canada and FOMC meetings next Wednesday.

NZD – kiwi weaker against the AUD as rate spreads remain supportive for AUDNZD.

SEK – a tough spot for SEK traders as the Riksbank doesn’t send a strong signal and the course for SEK from here more likely on the outlook for EU growth and risk appetite. The EURSEK chart still looks nominally toppish as long as the price action stays below 10.80-85, and 10.60 is the downside pivot level of note.

NOK – very little mention of the krone in yesterday’s Norges Bank meeting offers no new information for NOK traders. EURNOK break higher credible as long as we stay north of 10.05-07

Upcoming Economic Calendar Highlights (all times GMT)

  • 1030 – Russia Central Bank Key Rate
  • 1400 – US Oct. 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/legal/disclaimer/saxo-disclaimer)
- 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
3 Church Street, #30-00
Samsung Hub
Singapore 049483

All departments are available 08:30 to 17:30 Monday to Friday.

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 is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.