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Article / 18 April 2017 at 7:46 GMT

FX Update: French vote has markets holding their breath — #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
  • USD bounces on Treasury Secretary Mnuchin's remarks
  • Market holding its breath ahead of French vote
  • AUD dips lower on softening iron ore prices, RBA

Paris
All eyes are on Paris as a continued strong showing from the Front National's Marine Le Pen places the Eurozone's future in jeopardy. Photo: Shutterstock

By John J Hardy

The rest of this week is likely to see the market continuing to hold its breath ahead of the first round of the French presidential election. Geopolitical tensions are very prominent in the headlines, though ultimately a rather minor driver of broad market sentiment. 

Despite all of the sabre-rattling on the Korean peninsula, for example, South Korea’s Kospi index is closer in percentage terms to the highs for the cycle than the major US indices.  

The Trump trade is very much on the rocks after last week finished off with very weak US CPI and retail sales prints and US interest rates dipped to new post-November lows. The turn in the data has come on the heels of Trump’s seeing his Obamacare repeal bill rejected. 

(US Treasury Secretary Mnuchin did offer the dollar some support with comments on the long-term positives of a strong USD and with a continued hopeful stance on tax reform for 2017.)

Some see a further political test for Trump in a Georgia special election for a house seat, where an upstart Democrat is polling strongly in a district that hasn’t gone Democratic in decades.

AUD dipped overnight after recent strength. Iron ore prices have continued to run sharply lower and are trading at new lows for the year overnight and the Reserve Bank of Australia minutes showed the central bank fretting both the labor market and especially housing in its review of the Australian economy’s condition. The selloff provides a risk level in AUDUSD for fresh bearish positions.

Currency traders may be reluctant to take any significant positions in the spot market this week ahead of the first round of the French presidential election on Sunday. The key thing to have in mind is the risk that markets have over-invested in the short-term implications of this election and aren’t looking at the bigger picture, which is about the longer term viability of the European Union/European Central Bank framework. 

Italy’s spread to Germany remains pegged near the highs for the cycle well above 200 basis points.

Chart: USDJPY

USDJPY put in a bounce to kick off the week right at the 200-day moving average. So far, this is just a modest little uptick, but the placement is interesting and this week and early next week are important for testing the status of the Trump/reflation trade and direction for the USD via EURUSD, at least. 

In terms of any major recovery, however, USDJPY bulls will need a solid recovery back above 111.60 further out.

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Source: Saxo Bank 

The G-10 rundown

USD – few event risks of relevance for the US dollar this week; we are very reliant on sentiment for direction and ad hoc statements from Trump administration officials and also on the general wait for the French election.

EUR – a nervous week ahead into Sunday’s first round of the presidential election, especially given the recent surge of the far-left Melenchon in the polls.

JPY – the yen has recently absorbed all of the worries in Europe as EURJPY saw a remarkable selloff, and strong bond markets and weak equity markets have also boosted the JPY. But USDJPY has taken a stand a key level as we note above and the JPY upside is overdue a consolidation unless the global mood darkens further this week.

GBP – sterling powering stronger against the USD and soon running into some interesting consolidation lines around 1.2600 and the flat-line resistance at 1.2700 if the rally extends. But the bigger risk is perhaps how EURGBP is treated after the French election.

CHF – plenty of pressure on EURCHF – next status to be taken on the other side of this Sunday and then the second round of France’s election on May 7.

AUD – weak on plunging iron ore prices and RBA minutes; the selloff offers a hook for AUDUSD bears, though we need to return quickly below 0.7500 after the prior attempt lower was rejected.

CAD – USDCAD survived an exact test of the 200-day moving average around the Bank of Canada meeting last week and CAD looks weak relative to the oil price as risk appetite is somewhat weak, so we have conflicting pressures on the currency. The chart looks supported if we remain above last week’s lows, with a bigger break higher only evident if we managed to rise back through 1.3535.

NZD – AUDNZD rallied after a recent test of the 1.0750 area, but that area is coming under pressure again with the weak AUD overnight. NZD bears may prefer to have a look at NZDUSD, where the pair has not been able to separate meaningfully with the 0.7000 area. Still, a new threat below 0.6900 is needed for a more meaningful indication that we are headed out of this seeming perma-range.

SEK – EURSEK’s meander above 9.60 has been more or less rejected, though we’d like to see the other side of the French presidential election for better confirmation that we are ready to realize the downside potential. The 21-day moving average has been a solid trend indicator for EURSEK.

NOK – strong oil prices have kept EURNOK in the range, but the 200-day moving average near 9.10 is providing support – we will be looking higher if the oil price weakens again.

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank

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