John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 11 May 2017 at 7:14 GMT

FX Update: Commodity dollars struggling for air — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • RBNZ reiterates dovish guidance, NZD sells off
  • Moody's downgrades six Canadian banks on debt fears
  • USDCAD could head sharply higher on a break of 1.38

The Toronto skyline continues to add condo after condo, but Canada's big banks may be teetering on the edge of a lending catastrophe. Photo: Shutterstock

By John J Hardy

There is clearly little wrong with the New Zealand economy, but it is also clear that the country’s central bank nonetheless wants to keep a lid on the kiwi exchange rate. We thought this was eminently clear from the last Reserve Bank of New Zeland meeting in which (governor Graeme) Wheeler and company tried to ice expectations for any rate move from here until well into 2019. 

Apparently, the market didn’t get the message and thought that an obviously strong economy and a pick-up in inflation would force the RBNZ to change trajectory yesterday. Instead, the message is that the RBNZ is willing to look through higher inflation for now, maintains expectations of not tampering with rates until 2019, and that despite a reduced alarm level on the international backdrop says that a rate cut is as likely as a rate hike. 

This caught hawkish expectations off-guard and the kiwi was smacked for steep losses across the board. It should be difficult for the kiwi to get a significant leg up from here unless we get a strong return of the global reflation trade that finally forces the RBNZ’s hand. 

Elsewhere, Moody’s downgraded debt on six of the large Canadian banks  (most of the entire Canadian banking sector, as it is very concentrated) on concerns over broad private leverage levels in Canada. Are we finally stumbling towards a Minsky moment in Canada after years of talking about unsustainable debt levels? 

The recent Home Capital Group trouble could prove to be a kind of Bear Stearns moment for Canada if house prices drop from here and confidence levels in Canada lead to credit contraction and a drop in housing prices. 

It was interesting to note how this story easily outpaced the implications of a very strong rally in crude oil prices yesterday after the release of a big draw on US inventories.


USDCAD poking near the highs for the cycle again despite a strong rally in crude oil prices as the focus on the risk to Canada's economy via the housing market dominates. Theoretically, the path to the 1.4600 highs area open on a new move to 1.3800-plus but positioning is getting stretched and oil was trading below $30/barrel in a context of very weak risk appetite when the pair was trading up there in early 2016.


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Source: Saxo Bank 

Today we maintain a focus on the weak commodity currencies after the RBNZ meeting and the Moody’s move on Canadian banks, but AUD deserves a bit of the negative spotlight as well as iron ore prices punched to new lows for the cycle – this is Australia’s single largest commodity export.

The G-10 rundown

USD – the dollar has rallied via the EURUSD correction after the French election, with signs of broader strength on another leg higher versus the euro here. It is somewhat remarkable that the political firestorm in Washington and possible risks to the Trump trade from it haven’t dented US treasuries or the USD much.

EUR – the euro has eased back on a sell-the-fact reaction to the presidential election, but is still within range. Not sure how the market wants to look at the currency, but it should be classified as a low-yielder if we continue to see yields stretching higher and strong risk appetite from here.

JPY – the chief focus for the yen remains on yields,with higher yields driving yen weakness. The 115.00 area in USDJPY looks important as the last notable level ahead of the 118.00-plus top.

GBP – focus on sterling today with a heavy load of data and the BoE. Carney and company may wax hopeful but cautious now that inflation risks have eased a bit and sterling is a few percent stronger than at the March meeting, but a surprise additional dissenter or two does present the risk of two-way potential for sterling today.

CHF – the franc continues to look weak, but wondering how much potential EURCHF has through 1.1000 until we get a look at the weekly SNB sight deposit data to ensure that the market’s bets that we are seeing an unwinding of safe haven flows is indeed playing out.

AUD – concerns for AUD as iron ore dumps to new lows overnight. Australia risks the same kind of negative attention linked to housing that Canada is already suffering. Stay tuned. Watching AUDUSD potential into the prior lows below 0.7200.

CAD – the sentiment on CAD is reaching rock bottom with this latest Moody’s downgrade. At some point, positioning will have sloshed too far to the negative side, but we may not be there yet.

NZD – NZDUSD has poked to new lows overnight after recent new lows saw the pair unable to build further downside momentum. Important for the bears that the negative action sticks here. Also note that the strong comeback in AUDNZD overnight arrived just ahead of the 200-day moving average near 1.0600.

SEK – key test for SEK with today’s CPI release. After the recent rally in EURSEK, seems it would require an ugly miss on the downside to drive further SEK weakness – looking for a move back below 9.65-60 to raise hopes that the highs are in for now.

NOK – the oil rally feeding straight into NOK strength – will likely require significant further roil upside to driver EURNOK below perhaps 9.25.

Economic Data Highlights (all times GMT)

  • 0730 – Sweden Apr. CPI 
  • 0830 – UK Mar. Manufacturing Production 
  • 0830 – UK Mar. Construction Output 
  • 0830 – UK Mar. Visible Trade Balance 
  • 1025 – US Fed’s Dudley (FOMC voter) to speak 
  • 1100 – UK Bank of England Announcement and QIR 
  • 1130 – UK BoE’s Carney Press Conference 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1320 – US Apr. PPI  
  • 1630 – Euro Zone ECB’s Praet to Speak 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank

Patto Patto
It is far from "clear that the RBNZ wants to keep a lid on the kiwi". In fact this Statement was the first in 5 years that *didn't* say NZD was "overvalued".....
fredajerusha fredajerusha
This comment has been redacted


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