Article / 12 July 2016 at 8:02 GMT

FX Update: AUD leads charge higher versus USD, JPY

Head of FX Strategy / Saxo Bank
  • Theresa May's appointment brings clarity and boosts sterling
  • Strong risk appetite and intervention hopes batter yen
  • Next BoJ meeting not until July 28/29 but Abe may drop hints before then

No 10
 The next resident is clearly no anti-EU idealogue but Brexit does still mean Brexit. Pic: iStock

By John J Hardy

The Conservative Party in the UK whittled down the number of leadership candidates to one in quick order and Theresa May will be appointed new UK prime minister tomorrow. While she has stated clearly that "Brexit is Brexit", she is no anti-EU idealogue and is hitting all of the right notes in pointing to the need for stability and taking things carefully. The sudden political clarity, even if it doesn't point to where UK/EU negotiations end, is fuelling a relief rally in sterling that could have legs in the near term. Party of sterling's ability to pull itself off the mat is the backdrop of a weaker JPY on intervention hopes and strong risk appetite globally.

The relief rally in JPY crosses continued in the wake of the Upper House elections over the weekend in Japan, with USDJPY pulling close to the first key objective, the 103.50 area. This is beginning to unwind the strength of the downtrend, with the next focus the 105.00/50 area if the upside is sustained here. It remains a long wait for the next Bank of Japan meeting (July 28-29), though prime minister Shinzo Abe and his cabinet can drop hints on what is on the way at any time.

The possible final key to unlocking an even broader risk-on rally is the Italian bank situation. For the somewhat apocalyptic version of what is at stake here, please have a look at Russell Napier's musings on possible binary outcomes for Europe on this issue and whether Germany gives in on bailing out Italy's banks or insists on a bail-in according to rules that went into effect this year with the so-called BRRD. 

Eurogroup president Jeroen Dijsselbloem said that there is no acute crisis in Italian banks and that Italian banks will have to follow bail-in rules. Europe could be at more of an immediate crossroads on this issue, in fact, than over Brexit. Heightening the stakes is that Germany's own Deutsche bank, large enough to be a global systemic risk, is also seen as troubled. Deutsche Bank's own chief economist is calling for a EUR 150 billion bailout of Europe's banks. 

The Aussie is performing well in this environment after consolidating from Friday's strong close yesterday. A charge higher from here starts to have wider consequences as new local highs shift the focus to the descending trendline/arguable neckline of a head and shoulders formation. From an Elliott Wave perspective, we're missing a C-wave of a three wave consolidation, one that could mean a test towared 0.8150 if we get a C-wave as large as the original A-wave from the sub-0.6900 lows in January.
 Source: Saxo Bank. Create your own charts with SaxoTraderGO click here to learn more

The G10 rundown

USD - key US data up on Friday and two Federal Open Market Committee voting speakers on tap today. Those speakers could try to lean against the market's assessment of the Fed's rate hike odds, but the Fed has just about lost the last shred of its credibility. It will require heavy lifting from US data and Fed guidance or a fresh wave of ugly risk-off to get the USD back in rally mode.

EUR - inability to fall versus USD suggests risks of upside resolution potential, but beta to other USD pairs likely low and euro may remain weak against commodity/risk currencies.

JPY - anticipated BoJ/Abe helicopter money - with an apparent baseline of about ¥10 trillion, or 2% of Japan's GDP.

GBP - a relief rally on the first phase of political uncertainty clearly - first focus points are 1.3200/50 in GBPUSD and 0.8400 in EURGBP and next step is whether governor Mark Carney and company cut at Thursday's Bank of England meeting. The longer term is likely to be very long term as a Brexit will take years to negotiate and carry out.

CHF - 1.0900 in EURCHF under pressure as the franc has little to support it in this environment - a resolution of Europe's bank woes could unleash something bigger to the upside.

AUD - AUD enjoying the risk-on environment and looking higher versus the G3 currencies - see AUDUSD chart above.

CAD - fundamentals working against the loonie's fortunes after the large recent oil sell-off, but getting dragged higher this morning again by the enthusiasm of the risk rally.

NZD - NZDUSD pushing on 0.7300 again, though NZD finally showing signs of underperforming versus AUD - the next area looks like 0.7500 for NZDUSD if the USD remains weak.

SEK - CPI this morning with a backdrop that is SEK supportive relative to euro as long as we are in risk-on mode. 

NOK - oil selloff at odds with risk appetite improvement, keeps EURNOK handcuffed near top of range. 

Upcoming Economic Calendar Highlights (all times GMT)

  • UK BoE’s Carney to speak on Financial Stability (0900)
  • Poland Jun. CPI (1200)
  • US Fed’s Tarullo (FOMC voter) to speak (1315)
  • US Fed’s Bullard (FOMC voter) to speak (1335)

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank

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