Forex 5 minutes to read

USD bears not yet able to sink their claws in

John Hardy

Head of FX Strategy

Summary:  Dollar shorts have so far been unable to find additional momentum from Friday’s weak jobs numbers as Treasury yields have edged back higher.


The US Treasury market rally was unable to find additional fuel after Friday’s very weak jobs report and given that weak US data driving an additional flurry of Treasury buying late Friday seemed the proximate cause of the USD ending the week on a sour note, it looks like the consolidation in Treasuries has also eased pressure on the greenback.

AUD and NZD have already effectively rolled over versus the US dollar and USDJPY has pulled away from cycle lows as well on the double impact of still strong risk appetite and the consolidation US yields. The former may continue to fall if risk sentiment rolls over, while the JPY will more likely take the majority of its cue from the US treasury market.

Speaking of risk sentiment, this week has gone off with quite a bang as not only US equities, but global equities are putting in a strong rally led by China’s potent rally of over 1% to start the week.

My general view on the USD is that it will be unable to sustain a sell-off until the Fed actually delivers sufficient easing to impress the market – i.e. proves that it is getting ahead of the curve for now, at least. This would be marked by new highs in US equities, strong equity markets globally, and a period of rising (somewhat gently) US long yields. 

Ten Tories are vying for leadership of the Conservative party in the UK, with pro-hard Brexit Boris Johnson supposedly leading the pack ahead of the first vote set to take place this Thursday. He has vowed to cut personal and business taxes, but has largely avoided the spotlight, some argue to avoid making any unfortunate gaffes. The market does not appreciate the general spectacle and uncertainty as sterling has pushed to new lows versus the euro.

Full attention on the CNY charts these days as yesterday saw USDCNY jumping to its highest levels of 2019 briefly before the fixing was set back within the prior range overnight. US President Trump threatened yesterday, in his typical rambling style, to hike tariffs on China immediately if China’s Xi Jinping won’t meet with him at the G20 summit in Osaka near month-end. China has yet to confirm any intent for a Trump-Xi meeting on the sidelines of the summit.

Chart: AUDUSD

AUDUSD wiped out all of Friday’s gains and the fresh attempt at the obviously pivotal 0.7000 level was beaten back. The next test for the pair arrives with Thursday’s Australian jobs data, as the Reserve Bank of Australia has linked its rate cut intentions to the strength of the labour market. But perhaps Trump’s fresh tariff threat has weighed on AUD on the margin here as other factors are AUD-supportive, including a fresh steep rally in iron ore prices.
Source: Saxo Bank
The G10 rundown

USD – further USD weakness from here may require the same kind of painful logic we saw in evidence on Friday, and at times during the era of QE: a celebration in global markets of weak US data as a sign that the Fed will be forced to bring more easing now rather than later. Next test the US CPI Wednesday and then the May US Retail Sales data on Friday.

EUR – a squaring of heavy speculative shorts against the US dollar and the weakness of sterling may be the drivers of the euro’s modest rally, but we’re not looking for a spreading of wings here, or really ever, until the economic growth outlook improves and/or the prospects for a fiscal package materialise. Meanwhile, the bears may be ready to pounce on a close near 1.1250 or lower.

JPY – the yen back to the weak side on the consolidating Treasury market and USDJPY could even post a near-term reversal if that consolidation deepens and boosts the pair back over 109.00. There is plenty of room for US yields to pull back higher without reversing the secular trend that started late last year.

GBP – sterling rolling back over to the downside versus the US dollar and posting new local lows versus the euro as well as we await the outcome of the Tory leadership contest and the further signalling on Brexit.

CHF – loose correlation with JPY as the bounce in global yields and strong risk sentiment fail to drive new lows in EURCHF. The pair is around the pivotal 1.1200 level as we await the Swiss National Bank meeting this Thursday and the rhetoric on defense of CHF.

AUD – the NAB Business survey was mixed overnight, with a drop to new lows in the Business Conditions to the lowest level since 2014, but a hefty jump in the confidence portion of the survey puts that indicator back in the upper half of its multi-year range. Still watching for downside risk in AUDUSD if the price action remains below 0.7000, but trading ranges are impossibly constricted and a general breaking of the volatility logjam would be refreshing either way.

CAD – Friday’s Canadian employment report was flattered by a 0.2% drop in the participation rate (which helped the impressive 0.3% drop in the Unemployment Rate headline) and the employment change data series is rife with large mean reversions that will be overdue in the next month or two for a negative reading. In general, the USDCAD move may be overdone here.

NZD – a solid consolidation of the recent slide in NZDUSD looks done for now as the downside has re-engaged with vigour. A test of lows may come sooner than later on further US-China trade distress, a weakening in risk sentiment, etc.

SEK – Swedish short rates have dropped sharply as the market has lost all faith in the prospect for any further policy normalisation from the Riksbank for now. Downside risks remain for SEK after EURSEK took a stand and failed to drop below 10.60 if this week’s Swedish CPI comes in on the low side of expectations.

NOK – EURNOK is thoroughly bottled up in the range ahead of today’s CPI and the May Region survey. Already disappointing that NOK couldn’t put more together during the recent consolidation in the crude oil sell-off and strong equity markets. But no technical catalyst for fresh NOK weakness unless EURNOK pulls above 9.85.

Upcoming Economic Calendar Highlights (all times GMT)

08:00 – Norway Region Survey
08:30 – UK May Jobless Claims Change
08:30 – UK Apr. Average Weekly Earnings
08:30 – UK Apr. Employment Change and Unemployment Rate
12:30 – US May PPI 
22:45 – New Zealand May Card Spending
23:20 – Australia RBA’s Kent to Speak
00:30 – Australia Westpac Jun. Consumer Confidence

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