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John J Hardy
How will US president Donald Trump’s plans to repeal healthcare legislation affect the markets in the coming week? Saxo Bank’s head of FX strategy John Hardy explains.
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FX Update: Pivotal week ahead for US dollar — #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
  • Dollar facing tough technical set up after difficult week
  • Trump trade faces pivotal Senate test as vote on Obamacare looms
  • EURUSD looking towards pivotal 1.08+ zone
  • Sterling strength could open up path to 1.27
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The Trump trade faces significant test in Senate Thursday. Photo: WikiCommonsMedia

By John J Hardy

Dollar suffered a bad week and its technical situation is looking increasingly tenuous this week, as the dollar index nears a key support and EURUSD, USDJPY, GBPUSD, and AUDUSD near critical levels for the medium-term outlook. This week’s US economic data calendar is a relatively thin one, but the combination of the pivotal technical situation speaks for itself.

Meanwhile, a critical political test for the Trump administration – and therefore the “Trump trade” – awaits this week in the form of Thursday’s House vote on the repeal of Obamacare. The particulars of that bill are not particularly important for the market, and even if it does pass, the bill could see modification in the Senate.

Rather, this test for Trump’s administration is seen as a litmus test on whether the more anticipated policy measures – tax reform in particular – have any chance of seeing the light of day in the near future and if so, how closely they will hew to the original Trump promises. 

The G20 communique produced at this weekend’s summit was thoroughly pre-advertised in the circulated draft and did see the commitment to avoid protectionist policies dropped as expected. The best spin on why this language was dropped came from Germany’s Finance Minister Schaeuble, who said “It was totally undisputed that we are against protectionism. But it is not very clear what (protectionism) means to each (minister)”.
 
Japan’s prime minister Shinzo Abe faces a scandal that could bring his future as Japan’s leader into doubt. It’s tough to gauge the seriousness of the scandal, but we should keep an eye on this as it could trigger notable JPY strength independent of other drivers should it deepen.

EURUSD looking to 1.08

Today brings the obligatory broken-record reminder that EURUSD, if it continues to rise, will soon be facing down the critical 1.0800-50 zone, arguably a pivotal area for the chart structure as it would confirm the rejection of the new lows below 1.0500 and shift the focus back on old range to 1.1500.

Beleaguered bears need a chunky selloff this week back below 1.0600 to stoke any bearish arguments.

EURUSD bubbling along towards a key zone
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Source: Saxo Bank

The G-10 rundown

USD – as indicated above, dollar is getting into pivotal territory in a number of pairs and we look for the key sentiment test of this Thursday’s House vote on the new healthcare package. Note that US Small Businesses could not be more enthused about “Trumpcare” even as others are against the measure.

EUR – EURUSD is approaching the pivotal 1.0800+ zone, but volatility is in the dumps and it is hard to look for a sustainable break in either direction until we have the French election out of the way – with the first round still more than a month away.

JPY – USDJPY is running out of range to the downside as the US 10-year yield is poised at the psychologically pivotal 2.50% level. Watching Thursday’s US political developments and whether this Abe scandal will amount to anything for next steps.

GBP – GBPUSD is pulling up above the 1.2350-1.2400 pivot area, possibly opening up for a challenge higher into the full range toward 1.2700+ if the greenback can’t find any support this week. A strong close today important to bolster the bullish argument.

CHF – watching the weekly Swiss National Bank sight deposit data for any sense that the momentum is shifting in the pressure. For now, the fact that the Germany-France sovereign yield spreads are back at their highest in over two weeks is not encouraging for shifting EURCHF expectations out of the range.

AUD – AUDUSD is pushing into the key resistance zone from 0.7700-0.7835. There is absolutely nothing from developments in rate spreads to support the move, so we cast a sceptical eye here until the other side of Thursday's dollar political risks.

CAD – CAD looking rather passive here as most swings have been induced by the USD outlook. USDCAD is still theoretically supported as long as we remain supported ahead of 1.3250.

NZD – There is a test of the kiwi this week on the Reserve Bank of New Zealand meeting early Thursday – watching 0.7150-00 in NZDUSD for signs that the bear case has been invalidated, but assuming it hasn’t just yet. AUDNZD could focus higher toward the eventual 1.1300+ area if the RBNZ is seen as dovish.

SEK – EURSEK getting bogged down again if it doesn’t continue to push into the lows for the cycle, which is the default expectation.

NOK – NOK staged a sharp comeback on Friday, perhaps more due to tactical and thematic reasons (enthusiasm for EM and riskier currencies) rather than due to any notable catalyst. It would require considerable further downside to erase the massive recent rally and would expect EURNOK to find support as long as oil prices remain under pressure due to last week’s dovish Norges Bank meeting.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0900 – Switzerland Weekly SNB Sight Deposits 
  • 1645 – Euro Zone ECB’s Weidmann to Seak 
  • 1710 – US Fed’s Evans (FOMC Voter) to Speak 
  • 1820 – UK BoE’s Haldane to Speak 
  • 0030 – Australia RBA March Meeting Minutes 

— Edited by Martin O'Rourke

John J Hardy is Saxo Bank's head of forex strategy.
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