Greenback rises with US yields as dovish Carney sinks sterling

John Hardy

Head of FX Strategy

Trading ranges are expanding more forcefully in various corners of the currency market and next week should see the action continuing to heat up, with a heavier calendar of economic data risks (more on that below).

The most notable developments yesterday were an across-the-board USD rally that has changed the technical outlook in the greenback’s favour in a number of crosses, including AUDUSD and USDJPY, though not yet in EURUSD. If the last of these doesn’t manage a notable move on the day, it will market a stunning eight consecutive weeks of closing within about 30-40 pips of the mid-point of all of these closing levels (read: a big unchanged for nearly two months.)   

Elsewhere, sterling was smacked for steep further losses as insult was added to this week’s UK CPI injury when Bank of England governor Mark Carney was out yesterday suggesting explicitly that a May rate hike is no done deal due to ongoing Brexit uncertainty and unsatisfactory economic developments in recent months. As well, the European Union has rejected the latest UK suggested solution to the Irish border issue. Without some miraculous heavy lifting from Brexit negotiations in the near term, the sterling bullish case is lost in the desert for some time.

Besides sterling, the AUD and NZD have developed the most downside momentum versus a resurgent US dollar over the last couple of sessions. New Zealand’s CPI was in-line, while Australia’s latest employment report yesterday disappointed. AUDNZD has rallied smartly this week, but both currencies are sharply lower versus a modestly resurgent greenback, with a weak close this week pointing to further losses ahead for the two Antipodeans.

The FT is out with a couple of stories worth flagging this morning, including the escalating risk of interference from the Trump administration on Federal Reserve policy (this is critical as the focus could spike at any time on the next move from the Tweeter in Chief). The other story discusses the risk of fresh protectionist moves against China (paywall) as the US possibly seeks to block Chinese acquisition of US tech companies.

Next week

Next week we have three G10 central bank, all of which bring some degree of anticipation due. The first of these is Thursday’s Riksbank meeting, which comes after a long period of SEK weakness, which means that the bar is rather high for the Riksbank to surprise on the dovish side – stay tuned, as this looks like a classic pivot point setup if the Riksbank shows the least climb down from its dovish stronghold.

Then we have an European Central Bank meeting on the same day that comes after a long period of unwinding rate hike expectations – again, can ECB president Mario Draghi surprise on the dovish side? Then the Friday Bank of Japan meeting after Japan posts its highest inflation level for the cycle a month ago (last night’s data showed a slight dip in the core).

In EM, the two EM currencies suffering the most volatility recently, the Turkish lira and the Russian ruble, also see rate decisions next week on Wednesday and Friday, respectively. Elsewhere, Eurozone flash April PMI's will be scrutinised for further signs of economic deceleration in the EU and UK and US report first estimates of Q1 GDP on Friday.

Chart: AUDUSD weekly

AUDUSD suffering a sharp reversal after the prior somewhat bullish reversal never saw satisfactory follow through higher and the 200-day (below, the 40-week) moving average provided resistance as the jobs report disappointed and the noise in the press on strengthening lending standards from Australian banks and the risks to the Australian housing bubble has risen notable of late. Note the longer-term trendline in play not far below recent lows.

Enlarge

The G-10 rundown (express edition)

USD – on the mend; watching the USDJPY and EURUSD supermajors for whether this has potential for more on a further rise in US yields (note the 10-year benchmark and whether 3.00% falls).

EUR – the single currency got a boost from a wall of EURGBP buying over the last couple of meetings, but EURUSD shied away from 1.2400 this week. Dare we ask whether next week brings directional resolution in EURUSD?

JPY – the resistance in USDJPY is back in play, but the yen is looking firm in other crosses on the turn in risk appetite – most notably in AUDJPY and GBPJPY among the G7 currencies.

GBP – hardly anything has been flagged on the latest Brexit talks and the market has been caught offside by weak UK data and dovish BoE pronouncements just  after sterling was breaking through notable resistance.

CHF – 1.2000 in play in EURCHF – could this area prove sticky as a psychological hurdle to overcome? The ECB meeting and risk appetite are perhaps the two things to watch next week for the next clues.

AUD – an ugly development in AUDUSD late in the week that offers a technical hook for the bears with the 200-day moving average as the stop area for a test of the recent cycle lows and beyond. Q1 CPI next Tuesday the key data risk.

CAD – important data today for CAD in the form of the latest CPI print. A bit of heavy lifting to pull the outlook back to the positive side for USDCAD; for now we focus on the 1.2800 pivot area if the greenback maintains the upper hand here.

NZD – a very sharp and sudden weakening deserves attention and could lead to more as AUDNZD resistance under siege here and the recent NZDUSD rally has seen the 61.8% retracement falling overnight – a weak close today and weekly candlesticks suggest a bearish reversal with potential follow through below the 0.7155 range lows.

SEK – the Riksbank is the focus next Thursday. Can SEK continue to find new lows or has the bearish positioning become too crowded? We see risks to the latter.

NOK – red lights flashing on NOK and its inability to cobble together a rally despite Brent crude challenging $75/barrel this week.

Upcoming Economic Calendar Highlights (all times GMT)

   • 0930 – UK BoE’s Saunders to Speak 
   • 1230 – Canada Feb. Retail Sales 
   • 1230 – Canada Mar. CPI 
   • 1340 – US Fed’s Evans (non Voter) to Speak 
   • 1525 – Canada Bank of Canada’s Wilkins to Speak 

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