Article / 10 June 2016 at 14:30 GMT

FX 4 Next Week: Calm before the Brexit storm

Head of FX Strategy / Saxo Bank
  • EURJPY an interesting vehicle for euro weakness
  • Blockbuster post-RBNZ kiwi move likely excessive
  • Loonie likely ready to ease down from oil-rally heights
  • Emerging market currencies appear overextended

Mexico City
When markets decide that bad news is no longer good in the Fed-delaying sense, emerging market currencies like the MXN will likely head determinedly lower. Photo: iStock

By John J Hardy

The US dollar spent this last week vacillating after the huge drop from last Friday on the US jobs report as the adjustment to the weak data has so far stopped after the initial kneejerk selloff. 

Risk appetite seemed to be suffering a headwind ahead of the weekend, particularly in Europe, and this informs our market view heading into next week as wobbly sentiment may plague markets as we head into the uncertainty of the UK referendum the week after next. 

The Federal Open Market Committee meeting next week may lack the usual impact as the Federal Reserve is likely to peddle a hopeful-but-cautious stance with total data-dependency after the embarrassment of last week’s jobs report. 


The euro is looking weak and only managed its recent bump on the aggravation of Brexit fears, EURGBP buying and the bad news from the US that saw EURUSD back higher. In other words, the euro itself is rather inert. 

If risk appetite continues to suffer and investors begin to consider the risks to Europe if the world does indeed risk dipping into a lower growth phase as bond markets (flattening yield curves) and perhaps now equity markets are beginning to tell us, then the euro could suffer within the G3.

The euro may suffer a bit anyway at the hands of the Brexit safe-haven currencies in the last full week before the vote itself on June 23, as evidenced by EURCHF breaking down through important support over the last week. 

Trading stance: EURJPY bears will tread lightly, respecting the choppiness and volatility of this instrument as the we potentially gear up for a steep selloff toward 118.00 or even 117.50 over the next week. A strong close back above 122.00 suggests the bearish case has lost its traction.


The potential for the US dollar at the moment is somewhat unclear heading into the FOMC meeting next week and after the last weak US jobs report, but one imagines that the committee will seek to keep a rather low profile after stumbling over its own hawkish forward guidance recently. As for CAD, it is a satellite economy to the US and weak US data are CAD-negative, too. 

As well, we feel that commodity prices have perhaps maxed out their near-term potential, in particular oil. This, combined with our concerns that risk aversion could plague markets in the near term puts the focus higher for USDCAD.

Trading stance: Watching how USDCAD settles after the Canadian jobs data on Friday, but USDCAD bulls may look for a test toward 1.3000 again in the near term as long as the price action remains north of this week’s lows.

Short emerging markets

This is a short-term trading theme predicated on our recently expressed belief that, with central banks increasingly seen as losing their effectiveness (note the Bank of Japan's practical limits, the European Central Bank up against the same with the German 10-year yield almost at zero, and Fed seen as sidelined), bad news would eventually be bad news again. 

This was initially not the case after the terrible US jobs report last week, as the market preferred to celebrate the implications of weak US data for the Fed as positive for global liquidity and risky assets. But the action later this week, and perhaps ongoing macro concerns as the UK referendum vote approaches on June 23 could pressure the riskier currencies next week.

Trading stance: Traders bearish on global asset markets may look to short the EM currencies like MXN, ZAR and even CNH and TRY against USD, JPY, and/or EUR for the next week or so.

Short NZDUSD via options 

Yes, this is a repeat idea from last week despite the Reserve Bank of New Zealand’s decision to hold rates steady and issue a statement that some regarded as less dovish on guidance than one would expect, given the lack of a cut. 

But the kiwi was already overvalued ahead of this meeting, and the resulting strength already makes the RBNZ more likely to lean against the strength at coming meetings. We see this week’s reaction in NZD as overdone relative to the market environment and the kiwi’s already stretched valuation.

Trading stance: NZDUSD bears may look to buy two-month puts with a strike price around 0.6900, expecting spot to move toward the 0.6600 area over that time frame.

End of the line: Oil is consolidating lower and risk sentiment is on the wane, 
so the loonie looks likely to take a tumble. Photo: iStock

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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