Kay Van-Petersen
PMI data, Q4 growth and GDP figures are on tap in week 43, but central-bank meetings could be the key events, says Kay Van-Petersen, macro strategist at Saxo Capital Markets.
Article / 07 September 2016 at 7:33 GMT

FX Update: Dollar longs run for cover

Head of FX Strategy / Saxo Bank
  • Deluge of weak data sends greenback spiralling lower
  • New report claims BoJ may focus on yield curve
  • Sterling squeeze could depend on yen movements

US rate hike hawks are departing on soft data, with the greenback 
retreating as a result. Photo: iStock

By John J Hardy

The one-two-three of the US ISM manufacturing survey dropping through 50, the weak US jobs report,  and the ISM non-manufacturing survey missing expectations by a jaw-dropping 3.5 points has the USD on the defensive, especially after the Fed tried to massage rate hike expectations a few notches higher in recent speeches. 

Still, the knee-jerk reaction to the weak US data yesterday may yet fail to drive a bigger move in the US dollar here beyond the next session or two. Let’s recall that the clearly weaker than expected US jobs report saw the USD closing last week on a high note. 

Something suggests that US economic data are not the only driver. Whether another driver is the USD Libor issue or something else entirely remains to be seen, but every move in this choppy market deserves a jaundiced eye. 

Bloomberg ran with a story earlier this week suggesting that the Bank of Japan may focus on steepening the yield curve by slowing purchases at the very long end while cutting rates further into negative territory at the short-end of the curve. 

This keeps the banks happy by being able to extract returns from the “borrow short and lend long” model of banking, but it’s far from clear how it brings end demand into the economy or helps the Japanese yen lower/inflation higher unless the intent is to bring yields sharply lower at the September 21 meeting. 

(But at what point does the preference for stashing cash dominate – at minus 0.50% or at minus 1.00%?)

A newspaper report overnight suggests there is a three-way split on the BoJ on what to announce at this month’s meeting.

USDJPY at key dollar support level

The last major Fibonacci retracement, the 61.8% around 101.37, has been challenged overnight, leaving the 100.00/99.50 zone as the last support ahead of the September 21 Federal Open Market Committee meeting if the USD can’t find a lifeline today.

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Source: Saxo Bank 

The G10 rundown

USD – USD longs flushed as the trifecta of weak US data hits the greenback trade, but we’ve been unable to build a directional move in the USD for months now and that frustration for trend traders may continue until the other side of the September 21 FOMC meeting.

EUR – snapped stronger on yesterday’s ugly developments, though weaker against the JPY as the market risks a dovish surprise from the European Central Bank tomorrow. EURUSD might be the first pair to fade yesterday’s move if the knee-jerk USD selling was a red herring.

JPY – rushes to the strong side on the weaker USD and the rising US rates risk being taken out of the picture. Bank of Japan will need to innovate and surprise on September 21 if the JPY is to weaken as the Fed is out of the picture for at least another data cycle again, unless the FOMC really shocks with a hike this month (not its normal style).

GBP – has managed to pull into the last bit of the range into 1.3480/1.3500 in GBPUSD after the USD weakened yesterday, but note that the broader sterling strength fades when the JPY is rattling its cage – would expect the sterling squeeze to end soon if JPY continues to power stronger.

CHF – stronger than expected GBP growth and the drop in yields after the weak US data pushed EURCHF back over the edge into the lower range below the 200-day moving average. CHF likely dormant until/unless we ever get higher yields.

AUD – has pulled above the nominal Fibo resistance in AUDUSD, but not impressing in relative terms as AUD increasingly looks like a weak link – would still expect any further rally here to die somewhere between here and 0.8000 while the long term downside potential is on the order of 0.6000.

CAD – an ugly three day slide in USDCAD, bringing the last shreds of the range toward 1.2750-1.2660 into view. Don’t see much reason for the Bank of Canada to do anything besides repeating its wait and see stance. We’ll be looking at QE for Canada eventually if the US numbers are pointing to a recession.

NZD – the trade-weighted kiwi at another high since early 2015 as NZ is losing the currency wars, and the chase for yield takes the NZD ever higher. This is not sustainable, but no one knows what the turning point will be.

SEK – Note sure that Riksbank ready to signal any shift in policy as it is getting what it wants at the moment on the inflation front, but some of the recent confidence and PMI surveys are cause for concern.

NOK – EURNOK pushing into the final zone that has contained it for about a year now in the 9.15/20 area – would likely need a dovish ECB surprise and solid extension in the rally to take the action to the 9.00 area again.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0730 – Sweden Riksbank Decision 
  • 0800 – Norway Jul. Industrial Production and Industrial Product Manufacturing 
  • 0830 – UK Jul. Manufacturing Production  
  • 0900 – Sweden Riksbank Press Conference 
  • 1200 – Hungary Central Bank Meeting Minutes 
  • 1315 – UK BoE’s Carney, others to Speak 
  • 1400 – Canada Aug. Ivey PMI 
  • 1400 – Canada Bank of Canada Rate Decision 
  • 1800 – US Fed releases Beige Book 
  • 2255 – Australia RBA’s Lowe to Speak 
  • 2301 – UK Aug. RICS House Price Balance

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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