- FX market marked by uncertainty of where we're going
- Anxiety levels are perhaps fading in places, like EM
- Markets declare that the UK will take a bad hit from Brexit
Markets are forecasting a stormy future for the British economy. Pic: iStock
By John J Hardy
We’re still fibrillating within recent trading ranges for the most part as currency and bond markets feel desperately uncertain on what comes next. The action in equity markets is an entirely different affair as global risk appetite (outside of very low sovereign bond yields) has come roaring back. We’ll find out soon enough whether this is a quarter-end rebalancing phenomenon as today is the last day of Q2. In addition, a strong comeback in emerging market currencies suggests that market concern levels are fading in places. The signal that continues to flash red is the defensive bond market, where yields remain pegged near recent lows.
What does this add up to? Markets are declaring that the UK is potentially very heavily impacted by Brexit as EU takes the hard line that the UK can’t have the EU “a l carte” (all the trade and financial market integration but sans agricultural and immigration policy, for example) as EU Council President Donald Tusk put it. Combined with this we have some fear of contagion into the euro on the fear that growth in Europe will be impacted at the margin. But elsewhere, markets have rapidly unwound a sizeable chunk of post-Brexit reaction as no one has the answer to the question of what comes next.
As long as the market is stumbling in the dark on where the Brexit vote takes us next, we should see a more prominent focus on the greenback’s fate as the key series of data lies dead ahead, starting with tomorrow’s ISM manufacturing and continuing next week with the ISM non-manufacturing next Wednesday and of course the Friday jobs report. This is a three-day weekend ahead for US markets due to the July 4 holiday on Monday.
USDCHF is back pushing on the key 0.9800/50 area resistance as the CHF safe haven trade has been one of the first to fade in the wake of last week’s shock vote. Combined with the outlook for EURUSD continuing to find resistance in the 1.1100+ area and EURCHF pulling back above the important 1.0900 area, USDCHF upside could be a notable theme within the major currencies if risk sentiment continues to improve amid a further unwinding of the reaction to the Brexit vote. Next week’s menu of US data will be critical for testing the market’s view of the USD as well.
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The G10 rundown
USD – The market probing for USD supports in the wake of the Brexit vote – as long as we’re not seeing all risk sentiment signals flashing green, the USD should maintain a bid. The only other route of USD improvement would be surprisingly strong US data – with next week the key testing ground on that front through Friday’s employment report.
EUR – continue to focus lower in EURUSD as yesterday’s probe above 1.11+ resistance saw selling coming in. We’ll have to reassess if the pair closes up above 1.1200/25 in the days ahead.
JPY – weak Japanese industrial production figures overnight but no noise worth note out of officialdom. The longer we pause in the JPY crosses, the more momentum of the prior JPY strengthening fades and we risk some significant mean reversion/range trading.
GBP – continues to feel out the post-Brexit vote range, with yesterday’s symbolic round level near 1.3500 (also close to prior multi-decade lows from the global financial crisis ) providing resistance. As long as we don’t see material developments suggesting a Brexit won’t happen, sterling risks trading lower.
CHF – general risk appetite improvement seeing CHF marginally weaker – USDCHF poking at the key 0.9800/50 zone and EURCHF looking at 1.0900. If general fallout fear levels continue to fade, CHF could prove a weak link, given the negative yield and CHF overvaluation.
AUD – a minor reversal of the charge higher overnight as we continue to see the a bearish reversal on the chart that remains unconfirmed until we start to work back down through 0.7300.
CAD – CAD gets a boost from oil snapback rally yesterday – a failure of 1.2900/1.2850 suggests we remain in consolidation/ranging mode. Canadian GDP data up today.
NZD – little to differentiate the NZD from the AUD at the moment. Next event risk out on the horizon is the July 17 Q2 CPI report as inflation has been below 0.5% YoY since Q1 of last year and the trade-weighted NZD surged sharply in Q2. The market may be too complacent on risks of Reserve Bank of New Zealand cuts.
SEK – again it’s interesting to note that EURSEK remains in the highest portion of the “perma-range” toward 9.60/70 despite the comeback in risk appetite, perhaps as Sweden’s economy is leveraged to European economic prospects.
NOK – NOKSEK the most interesting pair at the moment with the attempt at the multi-month highs and with a tailwind from improved risk appetite and the strong oil rally yesterday.
Upcoming Economic Calendar Highlights (all times GMT)
- Germany Unemployment Change/Rate (0755)
- UK Final Q1 GDP Estimate (0830)
- Eurozone Jun. CPI Estimate (0900)
- Poland Jun. CPI (1200)
- US Weekly Initial Jobless Claims (1230)
- Canada Apr. GDP (1230)
- US June Chicago PMI (1345)
- UK Bank of England’s Carney to Speak (1500)
- US Fed’s Bullard (FOMC Voter) to Speak (1915)
– Edited by Clare MacCarthy
John J Hardy is head of forex strategy at Saxo Bank