Risk sentiment is this week's focus following the US/British/French attack on Syria, with the USDJPY's tentative breakout beginning to falter as prices head into the Ichimoku Cloud.
Article / 31 August 2016 at 7:25 GMT

FX Update: King dollar continues to gain ground

Head of FX Strategy / Saxo Bank
  • Norwegian GDP release expected to be soft
  • Canadian current account shows severe headwinds
  • Blowout NFP could spark huge USDJPY rally

Montreal, Canada
Canada's Q2 current account deficit came in just ahead of record lows, pointing to severe headwinds for the country and potentially the CAD. Photo: iStock
By John J Hardy

Today we have a variety of interesting data releases as we await Friday's US jobs report, which may well test the mettle of this latest USD surge. 

First up is Norway’s Q2 GDP data, expected to be quite low. Norway is heading for an election next year and the political manoeuvring for a new budget will peak in early October. So-called “mainland GDP”, which attempts to strip out the effects of the oil and gas sector, has been kept afloat by draining some of Norway’s oil-wealth fund, currently at a rate of 2.8%/year. 

NOK looks vulnerable to a drop in oil prices here. 

Canada’s Q2 current account deficit, released yesterday, just missed its worst level in the modern era and reminds us of the remarkable turnaround in recent years for Canada’s economy, where a strong currency in the 2006-2014 period eroded its manufacturing base while the resources boom, particularly in oil, has now turned into a bust. 

On top of that, Canada has indulged in a housing boom vastly oustripping anything the US ever saw in relative GDP terms that will mean huge headwinds once prices finally turn – an inevitability as the Bank of Canada is more or less already at the zero-bound. 

Today’s Canada GDP is only for a single month, but CAD should face strong headwinds relative to its neighbour from the south if resource prices remain rangebound or lower.


Looking for levels that might hold back this USDJPY spring higher, we would point out the Ichimoku cloud bottom and 61.8% retracement coming in close to 104.50, while the top of the cloud is just above 105.00. 

But what if we get a 250,000-plus US nonfarm payrolls data point on Friday together, with a slight beat or more on earnings? Sharp moves within the 100-107.50 range in either direction are quite possible over the data.


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Source: Saxo Bank 

The G-10 rundown

USD – the action in many of the USD pairs is encouraging for dollar bulls, though for the USD to rely mostly on policy divergence (impending Federal Reserve rate hikes) to power higher, we’ll need very good data indeed through Friday’s US jobs report.

EUR – traders sitting on their hands a bit ahead of next Thursday’s important European Central Bank meeting – a bit more colour today going into that meeting with the CPI estimate for the Eurozone. Next testing grounds for a EURUSD selloff are 1.1110/00 and then 1.1000.

JPY – further noise overnight from a Japanese politician (adviser Hamada) expressing skepticism on ability of Bank of Japan to buy foreign bonds while also underlining the ability to intervene.

GBP – a solid bounce overnight in the August UK GfK confidence survey to minus 7 versus minus 12 in July, with the key for GBP mostly one of raw sentiment and positioning, as speculators are likely as positioned on the short side as they will get, while the big money has to decide whether to sell here or wait for a squeeze. That squeeze could be evident in EURGBP if we dip below 0.8500 again – not far away.

CHF – interesting to see EURCHF knocking around at the top of the recent range, which could open the doors to 1.1100/50, though we’d like to see a stronger tick-up in global yields to encourage CHF weakness.

AUD – AUDUSD pushing lower and vulnerable to further losses if this USD rally is largely positioning driven. We look toward the 0.7380 area next.

CAD – note above thoughts on CAD, with the Canadian GDP release today possibly bringing the next resistance levels into view soon toward 1.3250 on a significant miss.

NZD – the kiwi extending its outperformance as the lack of further fallout from Friday’s Yellen speech in risk appetite and long bond yield terms encourages yield chasers. Not much range left here for AUDNZD to the downside, and the kiwi is only likely to turn with the next wave of risk aversion or specific NZ catalysts, with the next RBNZ meeting on September 21 (same day as BoJ and FOMC).

SEK – SEK struggling at the last shreds of local resistance in EURSEK, though the bigger level remains the long term range cap at 9.60-plus. It seems the market has taken an aversion to negative-yielding currencies in recent sessions.

NOK – A test of the last local range resistance in EURNOK at 9.30/35 zone and the quality of the ongoing NOKSEK rally with today’s Norway GDP release if there is a big miss.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0800 – Norway Q2 GDP 
  • 0800 – Norway Jul. Credit Indicator Growth 
  • 0900 – Euro Zone Jul. Unemployment Rate / Aug. CPI Estimate 
  • 1200 – US Fed’s Kashkari to Speak 
  • 1215 – US Aug. ADP Payrolls Change  
  • 1230 – Canada Jun. GDP 
  • 1345 – US Aug. Chicago PMI 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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