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Article / 07 July 2016 at 8:12 GMT

FX Update: Market shrugs off positive US data

Head of FX Strategy / Saxo Bank
  • Fed minutes release almost entirely ignored by market
  • Fed message out of synch with strong ISM as NFP also looms
  • EURGBP indicators point to sterling resistance materialising


The Fed minutes were almost entirely ignored by the market. Photo: iStock

By John J Hardy

The Fed minutes were so in-line with expectations of hemming and hawing on the economic and policy outlook that the market entirely failed to react to their release overnight, even after a strong jump in the important ISM non-manufacturing survey.

We once again have tension in the market’s and Fed’s outlook and the latest data point. The narrative will become even more awkward if this Friday’s June US employment report sets a new high bar for earnings growth and payrolls spring back above their recent average.

As it is, the market feels that trying to react to Fed guidance is beating a dead horse and we have a mere 12% odds of a December rate hike and more or less 15 shades of little to nothing priced for the Fed – ever. 

The kiwi was a big mover in late Asian trading as the Reserve Bank of New Zealand’s Grant Spencer was out speaking this morning. The market had clearly backed out of long kiwi positions ahead of his speech, perhaps on the fear that a strong macro-prudential message could flag a steeper rate cut trajectory from the RBNZ going forward.

Alas, Spencer did discuss new macro-prudential measures aimed at the housing market and debt-to-income ratios, but the rhetoric was less stern than feared and the market decided that this was much ado about nothing. He noted that in the end, the CPI outlook will be critical for the RBNZ policy – which heightens our already high anticipation of the second quarter CPI data on New Zealand set for a July 17 release.

Today is a warmup for tomorrow’s US jobs numbers, with a weekly claims number and the ADP payrolls release for June on tap. The ADP number badly missed the official survey last month, so the market will be reluctant to react there. But a solid bounce in the ISM Non-manufacturing employment sub-index to 52.7 from just below 50 and a still low moving average for weekly jobless claims suggests low odds of a repeat of the weak May payrolls growth in June.

EURGBP pointers

As we have discussed in the past, the first place we like to look for sterling perking up after the Brexit-vote induced trauma is in EURGBP — and we’re seeing tentative signs of resistance developing here.

For now, traders might keep a tactical approach and look for consolidations back toward the first point of equilibrium post-Brexit vote near 0.8400.

EURGBP hourly chart showing first indications of some sterling resistance
Source: SaxoTraderGO
The G-10 rundown

USD – Yesterday’s reaction function to strong US data is a bit tough to digest – perhaps the USD is failing to get more of a bid as the bar is seen as very high for data shifting the outlook clay-footed Fed. Still, strong US data through the end of this week might at least see a preference for the USD versus rest of G3 (EUR and JPY) and CHF.

EUR – The focus for euro traders should be on political risks from here and the Italian bank/ European bank situation. A solution and at least temporary comeback for the euro would be as easy as the German political leadership suggesting a change of heart on bank bailouts that would allow, as the SNB’s former head Hildebrand recommends, a TARP-style bailout of Italian banks. But that doesn’t mean that’s what we’ll get.

JPY – Strong US data is apparently meaningless for USDJPY when there is no implication for Fed policy. July 10 upper house elections a minor test of Abe’s popularity and then we shift to a focus on the BoJ/Abe policy response to the steep rise in the Japanese yen.

GBP – Sterling momentum has eased a bit here and perhaps a two-way market is a bit overdue, as investors will require new reasons to get even shorter the currency. As indicated above, EURGBP is perhaps the first place to look. Elsewhere, the 1.3000 level in GBPUSD is a notable tactical resistance level.

CHF – CPI is up this morning and it would seem that if markets can remain relatively stable and US data comes back, CHF will weaken at the margin.

AUD – The AUDUSD chart is an exercise in trendless futility as a promising bearish reversal around a key Fibonacci retracement was suddenly erased, likely by the bounce in risk appetite late in the US session. Traders will need to zoom out and wait for stronger themes/technical action to develop. Even the overnight cut in the AAA rating from the S&P failed to have implications for more than about 90 minutes.

CAD – There was some odd action yesterday as a fresh, very bad trade deficit data from Canada and a strong US ISM non-manufacturing survey were unable to sustain a rally. The market is perhaps more fixated on risk appetite and inability to shift the Fed view despite strong US data. Today’s Ivey PMI out of Canada is the latest test for CAD and tomorrow we have both US and Canadian jobs figures for June.

NZD – It was dump and pump in NZD pairs overnight as RBNZ Spencer's new macro-prudential noise failed to alarm the kiwi bulls who gladly re-engaged in NZD shorts even as he was out speaking early this morning. NZD is overvalued, but continues to thrive on positive real rates and general complacency/plentiful liquidity.

SEK – Riksbank did not move the needle yesterday, as SEK levels are more likely a function of risk appetite. As well, Sweden is poorly positioned for economic weakness in its export markets, given the desperately overleveraged private sector and domestic bubble.

NOK – The 200-day moving average in EURNOK near 9.40 continues to contain the action after a couple of attempts above in recent weeks. It is tough to draw a bead on how traders are assessing the pair until we get a strong signal from energy markets.

Upcoming economic calendar highlights (all times GMT)

  • Switzerland Jun. CPI (0715) 
  • Norway Industrial Production (0800) 
  • UK May Industrial/Manufacturing Production (0830) 
  • US Jun. ADP Employment Change (1215) 
  • Canada May Building Permits (1230) 
  • US Weekly Initial Jobless Claims (1230) 
  • Canada Ivey PMI (1400) 

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank


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