Head of FX Strategy
Summary: The USD posted a comeback today, especially versus precious metals as China moved to strengthen its currency ahead of a possible US-China trade deal. That same factor likely has gold and silver under sudden pressure, as does the stronger than expected US ISM Non-manufacturing survey for October, which is driving USD strength.
The link below takes you to the latest FX Breakout Monitor, a concise PDF overview of all current and recent price breakouts for the short and medium term for major FX pairs and spot silver and gold.
Today’s Breakout monitor
It’s been tough for USD traders to draw a bead on USD direction, as the few USD pairs that spilled over to the downside have backed up as the USD has suddenly firmed again this week – note especially USDSEK and NZDUSD in this category, reversals that deepened a bit in the wake of today’s stronger than expected ISM non-manufacturing survey.
Elsewhere, China’s move to strengthen its currency sharply versus the USD looks like a friendly overture to encourage the US side to sign on for the phase one trade deal purported to be in the works and the strong risk appetite has been associated with weaker bond markets and higher yields, boosting USDJPY above its 19-day high close, as we discuss below.
Today’s Breakout Highlight: USDJPY
USDJPY has traded much like an inverse proxy of US long treasuries, rising as the yields have pulled back higher on the global melt-up in risk appetite. After selling off steeply in the wake of the FOMC meeting last week (initial knee-jerk was actually higher, but quickly rejected), USDJPY failed to follow through lower as bond yields reversed sharply. The pair could be set to rise further if this current backdrop of strong risk appetite and weak safe haven bonds persists – especially if the US 10-year benchmark breaks towards 2.00%. Note that USDJPY never took out the intraday high well above 109.00 while the current price is actually clear of the 19-day and 49-day high closes for the cycle.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
