Is the Goldilocks trade back on? While longer-term global growth and macro trends argue otherwise, a dovish FOMC and a dip in 10-year US yields has sentiment on the rise in the short term.
Article / 10 October 2016 at 8:11 GMT

FX Update: Negative sterling spiral set to continue? —#SaxoStrats

Head of FX Strategy / Saxo Bank
  • Friday's mediocre NFP lacked impetutus for USD
  • Market expectations of Clinton victory firm up
  • US 10-year yield flirted with the critical 1.75% level
By John J Hardy

The Friday US jobs report was scant on takeaways, not strong enough to spike interest in the possibility of a November Federal Open Market Committee rate hike, but not weak enough to deserve much negative spin either. The market reaction echoed all of the recent inability to sustain directional interest in the big USD pairs: after EURUSD had dipped to the critical support area in the low 1.1100’s ahead of the report, the market was caught the wrong way around and zoomed back higher into the close. Likewise, the USDJPY rally, which impressed last week with a break above the Ichimoku cloud, showed signs of wobbling after Friday’s US jobs data. 

This week, the greenback could get a considerable sentiment boost if Friday’s US retail sales shows a bump after a couple of very weak months, although the US data is second fiddle to the big themes of the moment and the general uncertainty on the greenback until we’re to the other side of the election, with the market getting fairly aggressive now in leaning for a Hillary Clinton win. The more interesting development Friday was the US 10-year yield flirting with the critical 1.75% level, which has been pivotal support for the bond market. A bigger move higher in US yields has enormous consequences across markets and that US yield should be on the radar of every currency trader.

Elsewhere, this week will be about watching whether sterling sentiment can recover from last week’s flash crash, watching European Central Bank speakers this week for any further hint on the QE taper (more likely to them seizing every opportunity to underline a commitment to the existing plan), the FOMC minutes midweek (a very divided FOMC already evident in the three dissenting voices at the September 21 meeting), and then, as mentioned above, whether US retail sales recovered in September after an apparent dip the prior two months.


The GBP “flash crash” garnered plenty of attention last week, but the experience has proven that the pound’s weakness is more profound than we had previously assessed. Were the issue merely one of a large order triggering a one-off, resting order-driven meltdown, sterling would have quickly recovered back to the levels it was trading prior to the crash. But the bounce was only partial and sterling remains significantly weaker than it was prior to the crash. Without a change in the rhetorical tone from the UK or the EU, it is tough to see where sterling finds support and EURGBP could continue spiraling higher in the weeks ahead.

 Source: SaxoTraderGO

The G-10 rundown

USD – relatively stable after the market tried to put a more negative spin on the Friday jobs report, but economic data may prove less consequential than usually as bigger themes are pushing market action, like the shift to a fiscal focus and possibility of both weak bonds and weak asset markets on the anticipated withdrawal from the QE punchbowl. On that note, the most USD supportive developments would be a rise above 1.75% yield for the US 10-year, a pivotal level.

EUR – The euro is rebounding from the downside tipping point on Friday, but there have been no takeaways from technical developments lately on the futile churn within the range. A couple of ECB speakers this week could move the euro either way, depending on how vigorously the eventual taper is denied.

JPY – USDJPY flirting with the Ichimoku cloud – a close below the lower bound (currently just below 102.50 would suggest that the rally potential is fading again, while the bulls will hope for more if US yields head higher again this week.

GBP – brutal action and could continue to spiral lower, though it wouldn’t take much of a rhetorical twist from PM May or one of her EU counterparts to trigger an epic short squeeze in a very heavily positioned group of speculators.

CHF – the Swiss National Bank’s Jordan talking up the ability to cut rates further, but this seeing no real reaction in the market – the CHF downside story likely need higher bond yields.

AUD – China fixed the CNY lower versus the USD – above 6.70 for the first time since a flirt with that level over the summer – after the week-long Chinese holiday and this may have offered AUD some support, though AUDUSD is drooping a bit today – where is the trigger for AUDUSD after over three months in a choppy range?

CAD – CAD gapped stronger to open the week on the apparently foundering Donald Trump campaign, but this is a one off and widening yield spread in favour of USD and a correcting oil price could see us clearing the resistance in the days ahead finally after multiple tests of the 1.3250 area.

NZD – Weakening apace and the downside could accelerate from here if risk appetite softens and bond yields rise later this week.

SEK – EURSEK pulling higher and could continue to the upside if we see a combination of risk off and higher yields. The CPI release tomorrow from Sweden is the key event risk of the week for SEK.

NOK – EURNOK charging hard toward 9.15+ resistance as oil consolidates after its rally and the NOK overshot. Risk of a full reversal back into the higher range if oil corrects further and risk appetite weakens. A big drop in the core CPI in September could mean the inflation highs are in.

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank

Teofilo Teofilo
Dear John, Do you not feel the BoE is letting the GBP to weaken as a medium term plan in order to export its way out of the structural change (and negative grow) that will occur due to Brexit?
John Roberti John Roberti
Dear John, It took me quitte some time to find reports on internet indicating that, in fact, the data on employment for Canada were somewhat faked in the sense that the reported partial work time figures covered a lot of new self starting job supported partially by unemployment benefits which then explained why usdcad went back up so quickly But for the USD, I am still at a loss, particularly after the batch of FOMC members declaring the data good for a December rate hike? May I receive your opinion?
helicongrowth helicongrowth
The point for the BoE is - will they lose control. If the £ goes again, then CPI gets too high for comfort (I know they said they would look through it), then they may have to hike rates (small probability but not 0%) and then the housing mkt falls and the £ weakens - the point is they are playing a dangerous game. Which makes OTM put option on gilts and back end short sterling futures a compelling risk reward - vol is also low.
Hence why gilts are weak, SS is breaking down and utility stocks hammered,
Juhani Huopainen Juhani Huopainen
While the threat of stagflation and housing market crash are potential threats, it is good to remember that the UK leadership has been worried about the real estate bubble earlier. That is one of the reasons why the real estate tax on speculative/investment ownership was introduced earlier.

Sure, speculative flows were slowed down by Russian sanctions (slowdown) and the lower oil price (less purchases from oil-producing countries). But it was apparently not enough.

The real issue could be the current account deficit, and how UK could continue finance it if the real estate- and other "euro crisis safe haven purchases" are paused.

Weaker pound and higher inflation also help the BoE - for all other major central banks the worry has been that there is little room for further easing and inflation targets have still not been reached. Maybe the BoE is actually happy that they will not have to worry about how to ease further.


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