FX Update: Euro back on the rally track — #SaxoStrats

By John J Hardy

EURUSD has bounced from the local 38.2% Fibonacci retracement level and ahead of the 1.1300 pivot area, putting fresh energy in the rally as the market looks for US jobs data to provide a further green light for the pair to rise through the pivotal 1.1450 area and now toward perhaps 1.1700-plus.

It’s US jobs report day. There are a couple of scenarios to consider: one is tepid or slightly below expectations data on balance that continues to drive the weaker USD and the central bank policy convergence theme. The other, more interesting scenario is one showing quite strong or very strong data (a solid beat in payrolls, a rise in participation rate, and an upside surprise in average hourly earnings above 2.6% year-over-year). 

This could aggravate current market action, driving both bonds, equities, and emerging market currencies and perhaps the JPY lower versus the US dollar, but not necessarily derailing the EURUSD rally. The latter would require spectacular data strength, in our view, as the USD needs a severe jolt in forward Federal Reserve expectations to outrun the policy convergence theme.

We’ll be watching the G20 summit for developments. Most of the attention is on the Trump-Putin meeting, but the most dangerous geopolitical situation at the moment is in North Korea, and on that note, the tone and exchanges between. Meanwhile, Trump has tried to position himself as the defender of Western civilization in a speech in Poland obviously inspired by adviser Steven Bannon’s worldview. 

We’re not looking for broad consensus on policy or in the G20 communique, and in fact, a general feeling of hostility and self-interest form the US side could be a meaningful warning that we are headed toward less global coordination and rising risks of trade and currency tensions, particularly from the US.

USD – as we indicate above, a strong jobs report may only see USD strength in places, while a weak one could see a weak USD nearly across the board if yields ease back lower.

EUR – the strong euro is the most prominent trend and move at the moment and we are looking for continuation after yesterday’s bounce.

JPY – the yen remains weak, but how long can the BoJ hold back the pressure of rising global yields?

GBP – sterling looks adrift amidst the Brexit uncertainty and the twin deficit dynamics don’t look attractive in a world of rising yields and political isolation. EURGBP may look above the pivotal 0.8850 area again.

CHF – the franc poised at key resistance in EURCHF – looking for a break of 1.1000 and whether this can feed new momentum into the post CHF-reval highs into 1.1200.

AUD – The Aussie hanging in there versus the US dollar, though we need to see a fresh rally into 0.7700-plus to generate interest.

CAD – important test for CAD today as the jobs report and Ivey PMI are the last major data points ahead of next week’s Bank of Canada meeting, where the majority are looking for a rate hike. Potential for near-term two-way volatility around 1.3000 in USDCAD, but looking for an eventual continuation of the trend into 1.2500.

NZD – NZDUSD has lost some momentum, but it will take some doing to reverse the trend. Meanwhile, AUDNZD threatening the lower end of the recent range.

SEK – next Thursday’s CPI the next pivotal test for the krona as valuation is getting ahead of the Riksbank’s foot dragging on policy normalization. USDSEK and NOKSEK are interesting alternative routes for expressing SEK strength.

NOK – EURNOK pulling back higher on crumbling oil prices. Have to love Bloomberg article (can’t provide link as only available on platform at the moment) showing that Norway’s economy has supposedly diversified away from oil and is now driven more by housing. Great: rates are slashed to deal with the collapse in oil and this feeds an asset bubble concentrated in housing. This is not at all good for the long-term health of Norway’s economy. And Sweden is perhaps the world’s worst basket case on the housing bubble front.