- Cold turkey seems more feared than cold facts
- WSJ article indicates deep divisions within BoJ MPC
- A tough EU stance on Brexit is sterling negative
A house divided – the Nippon Ginko building in Tokyo. Photo: iStock
By John J Hardy
Yesterday’s US data releases and the subsequent reaction still suggest that the most feared thing in this market is the withdrawal of monetary heroin – not the state of the economy. That’s because the chief focus yesterday was the US retail sales number, which missed rather badly and showed an unusual two months in a row of shrinking retail sales. This was celebrated with a massive rally in equities, likely due to the implications for the Federal Open Market Committee stance at next week’s meeting.
At the same time, we have signs that the Bank of Japan is not likely to impress with new policy moves at next week’s meeting as a WSJ article
citing BoJ sources suggests a divisive internal debate within the bank’s monetary policy committee on how to proceed from here, with some wanting a focus on negative rates, others wanting to keep policy as is, and another contingent clearly disenchanted with bond buying’s efficacy and wanting to downshift to a purchase target range or even targeting an interest rate level rather than an amount of bonds to buy.
A headline from a Telegraph article
cites senior EU officials who say they believe that Britain will give up on Brexit if they make negotiations tough enough. I suspect a strong risk of backfiring if the EU maintains this stance. In the meantime, a tough stance could be a sterling negative.
One of the more straightforward charts at the moment is AUDUSD, where we’ve seen a notable bearish reversal off recent highs. We’re not quite there yet for the bears, as we’d like to see a follow through below 0.7400/0.7375 for a more decisive downtrend signal, as well as getting to the other side of next week’s FOMC event risk.
The G-10 rundown
USD – the greenback was on its back foot yesterday on the combination of weak US data and strong risk appetite – but this is all noise until we get to the other side of next Wednesday’s FOMC meeting.
EUR – the euro continues to track the USD and offer few clues. Would suspect negative correlation in the crosses with risk appetite.
JPY – stronger on signs from BoJ sources of a division on what to do, which raises the risk of little in the way of policy signals next week. If that eventuates while risk appetite continues to recover and especially if the market keeps a lid on bond yields after the recent pickup, we may get that last spike lower in JPY crosses that would also resolve the descending triangle formation in USDJPY.
GBP – sterling is churning in a range after stronger than expected retail sales yesterday but a BoE that was nominally dovish on leaning for a rate cut (why?) at the November meeting. GBPUSD nominally bears as long as we remain below 1.3300, but may not get a decent signal until post FOMC next week.
CHF – little interest here, as the rising rates theme may need to engage before we see renewed interest in the franc.
AUD – One of currencies more tightly linked to the recent hiccup in global bond and equity markets and would expect high beta to these themes. (I.e., AUD downside if risk aversion and higher bond yields return.)
CAD – Has apparently gone a bit too far too fast to the downside as the oil selloff failed to drive further CAD weakness as risk appetite recovered sharply yesterday. Still, we have a sizable move within the range for USDCAD and will look for support to come in above 1.3000 for a charge at the range resistance at 1.3250+ which is also near the 200-day moving average now.
NZD – the Reserve Bank of New Zealand meeting next Thursday is the next focus for the kiwi. The currency may have finally turned the corner back lower against the US dollar and we’ll be looking for underperformance elsewhere to signal that the weakness is broadening after the currency was too strong for too long on the prior “reach for yield” theme that we suspect is likewise finished as volatility has returned to markets.
SEK – EURSEK can’t make up its mind near the top of the range. Note that yesterday’s SEK firming coincided with risk appetite’s revival, so SEK appears correlated with risk appetite.
NOK – NOK supported on risk appetite recovery, but the EURNOK chart looks like a sideways affair unless we can threaten the 9.20/15 zone again, or above 9.35 (another few dollars lower in oil and another risk off wave likely needed for the latter.)
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – Canada Jul. Manufacturing Sales
- 1230 – US Aug. CPI
- 1230 – US Real Average Weekly Earnings
- 1400 – US Sep. Preliminary University of Michigan Sentiment
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank