Article / 12 June 2015 at 7:30 GMT

FX Update: A critical week

Head of FX Strategy / Saxo Bank

US economy
Thursday's retail sales print is pointing to a US economy running on all cylinders, 
but the USD was hardly boosted by the release. Photo: iStock

By John J Hardy

USD traders are unwilling to make a strong commitment on USD direction, it appears, ahead of next Wednesday’s Federal Open Market Committee meeting after US retail sales data yesterday for May came out stronger than expected. 

Consumption numbers are one area that have dogged the apparent quality of the US recovery, so one would have thought that a strong number would have proven more USD supportive, but the market may be concerned that this data, in addition to the other data points assembled thus far since the weak Q1 growth numbers, simply aren’t enough to move the Fed to upgrade its guidance. 

The market is currently pricing in about 15 basis points more in interest rate hikes than it was at the low in mid-May (and thus currently looking for less than 70 basis points of hikes for the next 12 months), but the assessment hasn’t changed since last Friday’s strong US jobs report. 

The other factor holding back traders from either side of EURUSD is, of course, Greece, where total uncertainty continues to rein after IMF negotiators gave up late yesterday to return to Washington. 

A Eurogroup meeting of finance ministers next Thursday may be the next key milestone for development, and the end of the month is the deadline for Greece’s deferred IMF payments to be made, as Greece is only the second country to defer an IMF payment since Zambia did so in the 1980s. 

Euro shorts are afraid that a deal will be announced, while longs are afraid that the Greek leadership may be willing to take the country into at least a partial default to see what the situation looks like “on the other side.”

Chart: EURUSD four-hour

Yesterday’s support after the US retail sales release came in. It’s hard to know what the market will want to do with EURUSD ahead of the dual uncertainty of next Wednesday’s FOMC meeting and next Thursday’s Eurogroup meeting, but a breakdown through the 1.1175/50 area (not the confluence of the local 61.8% Fibo with the 38.2% Fibo of the bigger wave from the old lows.) could set up at least a test of the even more important 1.1000/50 zone in the sessions ahead. 

Meanwhile, a return above 1.1300/25 would shift the momentum back higher for a test of the range highs.

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Source: Saxo Bank 

The G-10 rundown

USD: Market not convinced, it appears, that Fed delivers much next week. Positioning suggests Fed will need to send a clear shift in the direction of hawkishness to get the USD rally back on track. Is it too early for this.

EUR: EURUSD needs to punch down through 1.1175/1.1150 to swing into a more bearish mode. Meanwhile, we have the constant risk of Greek headlines, though there may be few developments on this front today as no new negotiations are ongoing.

JPY: Market still trying to digest the seriousness of recent Kuroda comments, but certainly these should give JPY bears pause, as the BoJ will be responsive to any further weakening, particularly if this means USDJPY upside. So JPY strength in the crosses? EURJPY lower one way to look for this.

GBP: What is driving GBP strength? A bit tough to discern – GBPUSD looks overdone to the upside as the focus may be on EURGBP selling after the squeeze there. GBPUSD looks particularly overdone relative to interest rate spreads. The 1.5554 high was a bit short of the key 61.8% Fibo at 1.5570.

CHF: All about Greece and EURCHF, but let’s see if SNB sends any signals at next week’s once quarterly meeting. We should remember that holders of CHF must pay for that privilege with steeply negative rates.

AUD: Poised in the lower range and may be waiting for next week’s FOMC meeting for either punching to new lows or continuing to churn in the multi-month range. Prefer the downside in AUD in general.

CAD: Like elsewhere, trading within a range and perhaps unwilling to commit directionally until next week’s FOMC meeting.

NZD: Still reeling from the RBNZ cut and dovish guidance – looking for more downside in the days and weeks ahead.

SEK: A key Swedish CPI data point yesterday could trigger more SEK buying/EURSEK selling. Rate differentials (and likely Riksbank response) suggest that the downside potential may prove rather limited, even if we manage to push down toward EURSEK 9.10 and even 9.05.

NOK: Remains on the defensive as the oil rally faded and as rates at the front end of the Norwegian rate curve continue to drop – significant further potential there if Norges Bank waxes dovish at next Thursday’s meeting.

Economic Data Highlights

  • New Zealand May BusinessNZ Manufacturing PMI out at 51.5 vs. 51.7 in Apr. 
  • Japan Apr. Final Industrial Production out at +1.2% MoM vs. original +1.0% estimate. 

Upcoming Economic Calendar Highlights (all times GMT)

  • Euro Zone Apr. Industrial Production (0900) 
  • Canada May Teranet/National Bank Home Price Index (1230) 
  • US May PPI (1230) 
  • US Preliminary University of Michigan Sentiment (1400) 
  • New Zealand May Performance of Services (Sun 2230) 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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