Article / 28 September 2016 at 7:51 GMT

FX Update: Currency traders struggling to find conviction

Head of FX Strategy / Saxo Bank
  • 'Market's attention span seems impossibly short'
  • AUDUSD reversal fails to prompt significant bearish signal
  • EURSEK breakout could place 9.75 in view

The Turning Torso in Malmo, Sweden
Twisting in the wind? The weak Swedish krona could represent an interesting 
circumstance in a market that lacks overall direction. Photo: iStock

By John J Hardy

Yesterday’s relief rally on the presidential debate outcome yielded to a risk-off flurry in the European session centred on worries about German banks, which then in turn yielded to a relief rally in the US session on no readily apparent catalyst. 

Once again, the market’s attention span seems impossibly short and the market unable to generate a sustained directional move.

AUDUSD had a go at new local highs before reversing, but not reversing sufficiently hard to suggest a convincing bearish setup. Elsewhere, USDCAD pumped twice through the 1.3250 resistance area before finishing the day’s trading in limbo near 1.3200, despite the ugly day for crude oil prices on the Saudi/Iranian impasse on possible oil production cuts. 

Among the key pairs, EURUSD remains entirely embedded in a tight range and USDJPY is running out of range to work within a descending triangle. We’re at a loss to identify the catalyst that will get things moving, but all of this uncertainty and lack of conviction likely means that once something gets going, it could move with surprising force as markets often store energy in periods like this. 

Around the edges, we have seen a notable development or two, however, with the AUDNZD rally of late of structural technical significance as it rejected an attempt at a major low last week. Next Tuesday’s Reserve Bank of Australia meeting, the first with governor Lowe at the helm (his focus is purportedly more intense on financial stability concerns), is the next focus for AUD. 

As well, SEK has managed to weaken to major new lows as EURSEK crossed the 9.60 line in the sand Helping the move was a further commitment to ease as necessary from the Riksbank, with fairly prominent mention of the krona in rhetoric from Riksbank members yesterday as well.

EURSEK (weekly)

EURSEK squeezed to new highs yesterday, through the important 9.60 level. While the pair has traded higher on an intraday basis, we’ve not closed above that level on a weekly basis since 2010. Next focus on a sustained break could be toward 9.75.


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Source: Saxo Bank 

The G-10 rundown

USD – the road to a stronger USD is most clear if we see rates back higher and risk appetite weaker. Until then, the market may lack conviction.

EUR – was weaker yesterday on the European bank fears, but is this just flavour-of-the-day stuff as trader simply lack conviction due to a lack of apparent policy divergence potential? We finally have a date on that Italian referendum, though it is much later than originally anticipated, on December 4. We’ll be talking more about the referendum in the weeks to come, but the parallels with Brexit are obvious.

JPY – USDJPY is quickly losing its pulse, but has run out of room to manoeuvre without requiring traders to react. The fresh plunge in bond yields looks JPY supportive.

GBP – the worries about German banks yesterday is helping EURGBP to consolidate and GBPUSD is bouncing up above 1.3000 again – another sign that the market is incapable of generating momentum just as a new negative trend appeared to be getting under way in GBP.

CHF – USDCHF support at 0.9650 looks more robust, but the pair, like EURUSD is stuck in a rut – needs to rally through 0.9800-0.9900 zone to show signs of life to the upside.

AUD – looking firm, especially in the crosses – next key event risk next Tuesday’s RBA – for a broader signal of strength, the entire 0.7700-0.7800 zone needs to be taken out after the long walk in the desert.
CAD – As mentioned, yesterday’s attempts to take out 1.3255 resistance in USDCAD frustrated, but the reversal not sufficiently energetic. Oil prices and risk appetite likely the key for direction here as for all commodity dollars.

NZD – the kiwi continues to look weak as the AUDNZD rally has turned the chart around. Given the mispricing of AUDNZD in rate spread terms, a sufficiently supportive RBA next week could help drive a further, significant repricing of the pair – where the longer term fair value is more like 1.10-1.12.

SEK – a weak krona is one of the few interesting trends of the moment, as we watch whether the 9.60 break holds in EURSEK – not much in the way of resistance above in technical terms – we might start with a round figure like 9.75

NOK – a solid performance yesterday, as the 9.15 area in EURNOK held once again despite the steep sell-off in crude prices from the Saudi/Iran negotiation impasse. That level is key for keeping the focus lower toward 9.00 and beyond.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0900 – ECB’s Draghi to Speak in London 
  • 1230 – US Aug. Durable Goods Orders 
  • 1330 – ECB’s Draghi speaks with German lawmakers (closed door) 
  • 1400 – US Fed Chair Yellen testimony on supervision and regulation 
  • 1415 – US Fed’s Bullard to Speak  
  • 1530 – ECB’s Villeroy to Speak at EU Parliament 
  • 1730 – US Fed’s Evans to Speak 
  • 2035 – US Fed’s Mester to Speak 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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