Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 05 September 2016 at 7:47 GMT

FX Update: Currency traders in headless-chicken mode

Head of FX Strategy / Saxo Bank
  • Weaker-than-expected NFP triggers choppy USD trading
  • USDJPY narrative difficult to establish
  • Four big central bank meetings on week's agenda
  • GBP looks to UK services PMI for fresh fillip

The streets of New York weren't quite as crowded with
commuters as had been expected. Photo: iStoc

By John J Hardy

Headline US nonfarm payrolls growth of “only” 151,000 vs. 175-180,000 expected, took dollar down a notch on the initial reaction on Friday, with a disappointing earnings growth of only +0.1% and average weekly hours also at their lowest level since early 2011 doing as much as the headline figure to disappoint expectations.

Some have pointed out that US payrolls growth needs to actually fall toward +100,000/month and lower to track the growth of the US labour force – regardless, lower payrolls are only a positive signal for more Fed tightening if they feed higher labour utilization and wage growth. 

But the market reaction to the US jobs report was a tough read – first USD weakness, then an ugly squeeze on the fresh shorts into the Friday close, before we opened up Monday with a fresh USD selloff that took many USD pairs back to about unchanged. What’s the signal? Trend traders are hardly likely to come back from holiday on this kind of behaviour.

Bank of Japan Governor Haruhiko Kuroda was out speaking and, while talking up the BoJ’s ability and willingness to act, did express caution on the side effects of negative rates.

Today, with US markets closed and nothing of interest so far emerging from the G20 summit in China, the most watched data point is likely to be the UK Services PMI after a much stronger-than-expected UK manufacturing survey last week.

For the week, we have no less than four central bank meetings on the menu, with the Reserve Bank of Australia up tonight, Riksbank and Bank of Canada on Wednesday, and Eiropean Central Bank on Thursday.

The most likely two meetings to trigger a reaction are the RBA tonight (AUD is priced wrong relative to developments in interest rates, particularly in AUDUSD) and the ECB (little expected despite president Mario Draghi’s avowal to reassess policy), with growing political risk from here as the real medium- to longer-term wild card for the Eurozone that may eventually dominate market sentiment.

USDJPY gyrations

Hard to string together a narrative that explains the wild gyrations in USDJPY since the weak US Jobs report on Friday: first, the straightforward USD weakness followed by an ugly squeeze that looked rather bullish as a setup for this week – alas, only to deflate on Kuroda’s rhetoric.

The result? A big unchanged on the USDJPY from levels heading into Friday’s US jobs report.

From here, the market is likely to be surprised at JPY weakness even if the BoJ underwhelms at its September 21 meeting if US rates continue to head higher in the meantime. More rate convergence is likely needed, especially at the long end, if USDJPY is to head notably lower. Technically, we need to pull above the Ichimoku cloud for a more profound bullish breakout signal.

USDJPY gyrations have made it difficult to discern the narrative
Source: SaxoTraderGO
The G-10 rundown

USD – outlook is near-term neutral after Friday’s promising comeback fizzled badly this week – watching US bond yields as the most interesting input to the US picture at the moment – risk of a September rate hike may still be under-appreciated as well.

EUR – The euro is picking up few bids with focus on a fresh surge in risk appetite and as the ECB is hardly likely to surprise to the hawkish side this week. EURUSD bears have lost a notch or two of confidence as the broad USD picture has sputtered since Friday’s surge, though the EURUSD chart is nominally bearish if we can remain below the 1.1200 area.

JPY – It’s not just about the September 21 BoJ meeting, but also developments in bond yields, which are less supportive of JPY strength than in the past. We continue to watch the US 10-year rate as an important input for currencies, with a notably break above the 1.60/5% area pushing against JPY strengthening.

GBP – UK Services PMI key for GBP traders as the GBP rally may extend to key levels like 1.3500 in GBPUSD and 0.8250 in EURGBP. Plenty of longer-term uncertainty could attract longer-term sellers at some point after the recent squeeze, however.

CHF – alas, so much for the interesting relative development in CHF recently, as EURCHF dipped back into the range again below 1.0950. Still, USDCHF has rallied hard recently and we’ll be looking for a follow up move higher there if US rates pick up.

AUD – Traders buffeted back and forth as aggressive risk-on response to weak US data keeps commodity currencies relatively bid. The better-than-expected Caixin China Services PMI may also have supported the Aussie overnight. Next key test is the RBA overnight, with one rate cut priced in for the next 12 months.

CAD – we liked USDCAD higher after the recent rally back above 1.3000, alas we are challenging the last shreds of local support near 1.2950 as the USD comeback late Friday has failed to follow through into the start of this week – so USDCAD traders may remain lost in the broader 1.2700-1.3100 range if signs of support don’t emerge today.

NZD – NZDUSD won’t stay down, but can’t seem to follow through higher, either. A positive milk forecast from New Zealand’s biggest bank (ANZ bank) may be the driver of the latest surge in the kiwi, with Friday’s strong risk-on session in US equities also a likely supporter of carry trading in general.

SEK – Riksbank is up mid-week amid a lack of expectations. EURSEK steered away from the 9.60 level once again after a test on Friday. Believers in the perma-range will look at this as a chance to sell, though technically, would prefer the pair back below 9.50 for a firmer sign that a lid will stay on and SEK could be vulnerable if we see a renewed focus on higher US yields/global yields again.

NOK – solid bearish reversal signal in EURNOK on Friday seeing some follow-through lower, but big picture interest only picks up if the pair can cut through the 9.20/15 area.

Upcoming economic calendar highlights (all times GMT)

  • US Markets closed for Labor Day holiday 
  • 0730 – Sweden Jul. Industrial Production/Orders 
  • 0715-0800 – Eurozone Aug. Services PMI 
  • 0830 – UK Aug. Services PMI 
  • 0900 – Eurozone Jul. Retail Sales 

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank


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