- USD slipped to new lows for the cycle versus EUR, JPY, several others
- Massive demand for US debt helped fuel the greenback's decline
- Draghi may try to dampen expectations of QE unwind tomorrow
US dollar, stalked by a bear. Photo: Shutterstock
By John J Hardy
The greenback’s woes continue, with new lows for the cycle posted overnight versus the JPY as 110.00-plus slipped its grip, a development likely aided by a solid bid for government debt as much as anything Kuroda had, or didn’t have, to say at yesterday’s Bank of Japan press conference.
The US two-year Treasury auction yesterday saw massive demand. The voracious bid for US government paper despite yields have ground higher for months on end makes it tough to argue for a further immediate run higher in yields. Today we have an auction of five-year debt and Thursday sees seven-year US treasuries on the block.
Broadly speaking, it seems clear that the US dollar bears enjoy this environment of heady global risk-on, so far this year a veritable melt-up with little volatility. And there is likely some reflexivity there as well as the USD is a kind of global liquidity measure to begin with. Any decent recovery in the dollar’s prospects will likely require a change of tune from global markets – a bout of volatility or an even more notable shift in perceived policy risks from the Federal Reserve – or both.
First order of business this morning is the Eurozone flash PMIs for January. These will begin to disappoint very soon, simply due to the nature of diffusion surveys like PMI surveys (i.e., the economy cannot forever continue to improve at a faster rate). If not this month, look for the surveys to begin mean reverting soon.
Important UK data up today as we rub our eyes and double-check whether GBPUSD has actually managed to vault above 1.4000 without a wisp of support on the Brexit front. The employment change survey has been the weakest and another negative reading for November might give the sterling recovery pause today.
All eyes on Davos tomorrow and Trump’s speech as we watch whether Trump will move to assuage the global elites fears or whether he will take the opportunity to posture for his protectionist inclined domestic base. Regardless, the bigger signal from Trump will more likely be at his State of the Union address next Tuesday.
It is difficult for EURUSD traders to know what to do with new highs for the cycle in EURUSD ahead of Draghi’s press conference tomorrow. There is no distinct pattern for the action in euro after the European Central Bank meetings since June of last year, though only one – the July meeting – saw notable EURUSD upside in the immediate wake of the meeting and many of the others saw significant pauses in the action and even consolidation to the downside within the overall trend. So bulls should certainly treat the event risk with caution and consider downside protection strategies.
EURUSD scratched to new highs in Asian hours overnight, but it is always difficult to know what to do with new highs for the cycle ahead of key event risks like the ECB meeting on Thursday. In this case, it was the weak USD doing most of the lifting. Next focus is on 1.2500 to the upside if the euro can maintain a bid after Draghi’s press conference tomorrow. Downside risks open up if the ECB meeting triggers a notable large sell-off bar that rejects these new highs.
The G-10 rundown
USD – on its knees until proven otherwise. It feels like this move is getting long in the tooth without consolidation when we note the likes of the AUDUSD and NZDUSD rallies. Could Trump speech next week serve as a kind of warning to the complacency?
EUR – tough to know the quality of the euro rally – is the market really willing to continue to pile into the single currency atop very large speculative positioning if Draghi does his best to delay anticipation of policy tightening?
JPY – the strong bid in global bond markets throwing the yen a solid dose of support and further US treasury auctions today could maintain this source of support for now. Those looking for a dovish success from Draghi might have a look at EURJPY downside potential in the near term.
GBP – sterling managing solid strength versus the USD and EUR ahead of today’s UK data and the technical situation in EURGBP looks particularly interesting over the ECB meeting tomorrow, as we stare down the 0.8750-00 pivot zone.
CHF – Swiss National Bank sight deposits didn’t build last week and yields have dipped globally – if the ECB manages a dovish blast, some risk for CHF bears that we see a failure of the rising channel and chunky consolidation lower.
AUD – AUD rally looks over-ambitious if we look at the usual indicators, but is likely caught up in the global risk-on melt-up. We're not far from the previous cycle top above 0.8100 in AUDUSD if the pair can work free of the 0.8000 area (though note that the highest daily close was 0.8060).
CAD – ongoing concerns on NAFTA and Canada’s exposure to the USD via trade relationship sees CAD out of favour in broad terms despite the huge advance in crude oil prices. A broader recovery would likely require a USD recovery and some relief on the NAFTA front.
NZD – a rare quarterly CPI figure up tonight a key test of the kiwi’s recent strength, which is likely driven by strong risk-on. Significant volatility risk on any downside disappointment for this number (the year-on-year data has been steady near 2.0% or just below for the last three quarters).
SEK – thoroughly bored with the action here as we await a more notable Riksbank shift or data to support the outlook for Sweden. Riksbank hawk Floden is out speaking later. The strong euro holding EURSEK back from correcting lower, perhaps.
NOK – interesting test of respective central banks up tomorrow for EURNOK. A more positive shift from Norges and Draghi delaying tactics could finally see a push more firmly below 9.60.
Upcoming Economic Calendar Highlights (all times GMT)
- 0800 - 0900 – Eurozone Flash Jan. PMIs
- 0930 – UK Nov. Average Weekly Earnings
- 0930 – UK Nov. Unemployment Rate/Employment Change
- 0930 – UK Dec. Jobless Claims Change
- 1030 – Sweden Riksbank’s Floden to speak
- 1445 – US Jan Flash Markit PMIs
- 1500 – US Dec. Existing Homes Sales
- 2145 – New Zealand Q4 CPI
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank