Article / 07 June 2016 at 7:50 GMT

FX Update: G3 weak on resurgent risk appetite

Head of FX Strategy / Saxo Bank
  • Yellen speech indicates rate hikes 'still in the pipeline'
  • Post-NFP risk rally heavily concentrated in EM
  • EURAUD challenging 200-day moving average again

Aussie higher: The RBA statement released overnight was hawkish by default, with no easing-related announcements to clip the AUD's wings. Photo: iStock

By John J Hardy

Federal Reserve chair Janet Yellen’s speech late yesterday showed that the party line remains that interest rate hikes remain in the pipeline, though Yellen’s lack of an indication on the timing was in obvious recognition of the weak Friday US jobs report. 

Our recent assessment was that, given the ability of asset markets to overcome the Fed’s recent hawkish rhetoric, that good news would be good news and bad news, bad. That has not proven the case, however, in the wake of US jobs numbers, as the obvious dovish implications for the Fed from the weak report has sparked a general risk rally rather than concern about the trajectory of the US economy. 

This has been particularly concentrated in USD-sensitive emerging markets. It’s hard to believe that if things continue to worsen in the US, the market will continue to celebrate with further allocation to risky assets, but so far markets remain very complacent, with credit spreads contracting and the S&P closing at a new high for the year yesterday and within about a percent of its record high. 

The Reserve Bank of Australia’s statement overnight was seen as quite neutral, and therefore “hawkish” as no explicit easing bias was pronounced, and the general tone of the statement clearly put the RBA back into wait-and-see mode after easing in May. Inflation was seen as low and likely to remain that way “for some time”, but the outlook was clearly for no change unless conditions deteriorate as the statement concluded: “…the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.” 

Given the very risk-on backdrop here, this statement flashes the green light for the AUD to rally further, squeezing the shorts put on when renewed Fed hawkishness was the predominant theme before the Friday US payrolls release.

Sterling pairs suffered an apparent fat finger overnight, likely aggravated by very nervous market makers and high gamma positions and poor liquidity and reminding all of us to stay very careful with exposure to sterling ahead of and just after the June 23 referendum. Two fresh polls late yesterday showed slightly higher Stay results than the prior batch, but trading on polls is a fool’s errand.


The more hawkish than expected RBA statement overnight, combined with a lack of enthusiasm for the G3 currencies on very positive risk sentiment, has EURAUD challenging the 200-day moving average again. The current backdrop suggests further weakness back into the lower range here towards at least 1.5000.


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Source: Saxo Bank 

The G10 rundown

USD – Weak on the implications for the Fed from the Friday payrolls debacle, but may actually firm within the G3 soon as strong risk appetite perhaps yen and euro- shorts if it persists.

JPY – A negative spotlight beginning to shine on the JPY as strong risk appetite keeps the focus on BoJ policy futility at bay.

EUR – G3 currencies likely to offer varying shades of weakness in a risk-on market. Little focus on the euro, which moves passively to whatever is driving the action elsewhere.

GBP – Overnight action reminding us of the danger of trading sterling – long wait still until the referendum on June 23, but risk backdrop generally GBP-supportive.

CHF – Hard to see why market pushes further for CHF strength here given the market backdrop. Key Fibonacci retracement coming up here in USDCHF at 0.9640.

AUD – Two-year rates bounce a solid six basis points on the RBA statement and positive commodity developments also boost the AUD, which may have some more room to run to the upside here – looking at 0.7570 in AUDUSD as a possible destination.

CAD – Getting a boost from stable oil prices and the resurgence in risk appetite, though would think CAD is one of the first to find resistance if US news continues to weaken. 1.2750/25 is the last area in USDCAD ahead of the lows at the beginning of May.

NZD – RBNZ has its chance to surprise either way at Thursday’s meeting as the market thoroughly divided on the odds of a cut. Also consider the risk of a “hawkish cut” (cut but clearly upgrade of bias to neutral) or a “dovish no-cut” before following knee-jerk reactions to the headline.

SEK – Market taking a shine to the smaller currencies on the risk-positive mood – EURSEK a low beta play on this.

NOK – A lack of enthusiasm for NOK a bit surprising given the backdrop – further risk appetite here and stable/higher oil prices point to a challenge of the 9.20/15 area in EURNOK.

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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