- ECBb purchases might eventually slowdown
- USD fell after NFP, but could recover
- Oil prices will hardly head much higher, which will affect commodity currencies
- GBP could continue to melt lower while showing huge volatility
A weaker GBP makes real estate investments in the UK more affordable.
However, money can't buy everything - Buckingham Palace. Photo: iStock
By John J Hardy
This week’s many developments included a broadening USD rally for much of the week that initially was focused on JPY weakness as USDJPY broke a key trend-line and then an important Ichimoku cloud level above 103.00 as it became clear that the initial reaction to the Bank of Japan’s new framework announced on September 21 had failed to take JPY higher. To that was added a breakdown in NZDUSD this week and then the sterling flash crash in Friday’s Asian session.
Elsewhere, talk of an ECB taper (according to Bloomberg sources at the ECB) midweek is likely a distant early warning of an eventual slowdown of ECB purchases and kept the Euro within the range versus the USD. Then on Friday, we got a largely indifferent US jobs report just as the key US 10-year rate was pushing on the pivotal 1.75% level. The reaction initially took the USD back lower, but we nonetheless keep potential USD long trades on our radar next week if the USD recovers from the disappointment, and especially if the US 10-year rate breeches that 1.75% level.
The end of QE could put pressure on less liquid currencies
This is another theme we have mentioned in previous weeks. A weak NZD trend is a theme that could have legs in the coming weeks and months, helped along by a focus on higher interest rates, and a reduction in carry-related trades. Of this NZD was formerly the most prominent for much of this year on the “reach for yield” theme. As well, in a world in which the market begins to fret the end of QE and weaker global liquidity, less liquid currencies in countries with current account deficits (like New Zealand) could come under pressure. Trading stance: Given our other USD related themes this week, some traders may prefer not to have too many USD related positions on, though NZDUSD bears appear in the driver’s seat for a run lower to the next downside pivot zone at 0.7000/0.6950 as long as the 0.7200/25 area remains intact as resistance. So NZD bears might prefer to focus on relative value trades like AUDNZD higher, EURNZD higher, NZDCAD lower, or a basket trade including any number of these for a longer holding period and significant (3-5%) broad devaluation in the kiwi in coming weeks to a couple of months.
USDCAD upside, but only if it break above pivot
This is idea from the recent past, but one that has been frustrated by the rise in oil prices, but even so, it’s impressive that we’ve remained so bid in the range recently despite that development. Looking forward, we can only underline that the side of least resistance in USDCAD remains higher if the energy rally falters and possibly even if it doesn’t. Our commodities team expect that oil prices will have a hard time heading much higher from here, and the risks to Canada from a large current account deficit and a private leverage bubble that is reaping considerably more attention lately could weigh increasingly on the currency in the next weeks and months, with a break of the highly technical 1.3250+ area as the technical trigger. The market tried to break the 1.3250 area again on Friday, only to see a lacklustre US jobs report and a strong Canada jobs report smashing the pair back lower. If on Friday or early next week the pair is able to survive the selling assault and rally back above the 1.3250+ break level, traders may maintain a focus higher toward the major Fibonacci retracement, the 61.8% retracement of the sell-off from the 1.4650+ highs to the lows just below 1.2500 that comes in around 1.3820.
Trading stance: USDCAD bulls will look for USDCAD to rally back above 1.3250/75 after the divergent US/Canada jobs reports and then maintain longs as long as the action stays north of the pivot area and then look for progression higher toward 1.3500 and even 1.3800+ eventually, even if the latter takes some time to achieve.
USDCHF upside if US 10-year rate heads back above 1.75%
The USD view against the lowest yielding currencies may remain largely driven by the direction in US yields, as the most negatively yielding currencies like the franc look less attractive if yields head higher as rate spreads widen. We’ve seen some CHF weakening this week on the talk of an ECB taper. In USDCHF, we saw the pair having a look at the important 200-day moving average resistance around 0.9800 this week as US rates approached the very pivotal 1.75% yield area.
There are a series of further range-related resistance points higher through 0.9950 and even parity, with a rally through these having potentially large implications for the bigger picture, but the key coincident indicator for USDCHF could be the US 10-year yield, which could support a sustained USDCHF rally if it manages to get over the jobs data disappointment and head higher next week.
Trading stance: If the USDCHF can maintain avoid a fresh meltdown through 0.9750/00 and long US rates head back higher next week through 1.75%, USDCHF bulls may look for a more sustained rally to grind through the layers of resistance toward parity.
This week taught us that the liquidity is very poor in sterling and that the downside potential has perhaps been drastically underestimated – yes the flash crash was aggravated by thin liquidity, but were that the only problem, the subsequent bounce should have been more complete than it was. With the “hard Brexit” theme gaining increasing attention, based on the stance of both the May government and counter parties on the continent, and facing a potential long stand-off between the two sides until Article 50 is invoked some time in Q1 of next year, sterling could continue to melt lower, even if it can’t be stressed enough that the volatility of this week could mean extreme swings either way on ad hoc order flows, fresh headlines, etc.., requiring traders to tread extremely carefully.
Trading stance: Given the tremendous volatility potential in the spot exchange rate, traders may prefer to express their views in options, EURGBP optionality may be preferable to GBPUSD for trading options horizons that go beyond the US presidential election, although they are priced similarly. Traders expecting GBP to devalue further might consider EURGBP calls and call spreads for expiry in 1-2 months, or buying spot with an options collar (long a put and short a call) to limit loss potential.
USDCHF can maintain avoid a fresh meltdown. Photo: iStock
— Edited by Clemens Bomsdorf