- Clinton and the Mexican peso emerge as victors
- FX moves show that this market entirely lacks conviction
- Uncertainty will remain extremely high until US election is over
By John J Hardy
Amid a lack of conviction after last week’s key central bank meetings, the market picked up on the presidential debates as a temporary focal point. Markets fretted a strong Trump performance that would add to his recent momentum, but the consensus takeaway was that Clinton had the upper hand with a sharp performance and the concern in asset markets yielded to a relief rally.
The Mexican peso reacted the most strongly, though USDCAD also pulled through key resistance (fears of Trump protectionism weakening CAD, etc..) before dumping back lower overnight. Indeed, the action over the last 24 hours suggests two things: first, that this market entirely lacks conviction and second, that uncertainty will remain extremely high until we get the US presidential election out of the way in just over forty days.
A completely different issue may offer its own timeline entirely outside of the US presidential election anticipation as European markets have been roiled by the situation with Deutsche Bank and its steep stock price declines yesterday, as well as German Chancellor Angela Merkel’s declaration that there is no state commitment to a bailout if that is where the situation leads.
The calendar is quite thin today, but we have key technical considerations in a number of pairs that simply must be resolved soon. For USDJPY, a close above 101.25/50 today could set in motion a squeeze, while 100.00/99.50 is the downside break focus. AUDUSD is another one pulling into a key range, as the 0.7700/50 looks like an upside pivot zone.
USDCAD was briefly through the 1.3255 resistance overnight on the flurry of activity around the first presidential debate, but this proved a treacherous squeeze/running of stops as the action was quickly back lower overnight. This pair could remain beset with uncertainty until the other side of the presidential election, though CAD fundamentals have been eroded by a drop in yields after the very weak CPI data on Friday.
USD – no consistent picture for the US dollar, which appears adrift without much conviction – weaker against risky currencies when risk appetite surges, but stronger against the JPY overnight on the same.
EUR – the euro not showing any signs of weakness from worries about key German banks, though any further deterioration there can hardly escape negative attention in currency terms.
JPY – USDJPY back higher on the relief rally in risk appetite after the conclusion of the US presidential debates. This is a sideshow and the overarching issue here is the lack of follow-through after last week’s key central bank meetings, and we are running out of room to maneuver. Note that if yields continue to plunge (note Bunds, for example), the JPY could find support if long Japanese yields remain stable on the Bank of Japan’s new yield curve focus.. Of course, if bond investors plough into long JGB’s and driver the yield curve flatter, would the BoJ actually sell some of its holdings? Doubtful.
GBP – there may be a weak correlation with general risk appetite and GBP at the moment – watching EURGBP with interest after the action yesterday was taken all the way to the final resistance area at 0.8725. But it was also the very weak Aug. Mortgage Approval numbers that impacted sterling yesterday. The EU is laying down a hard line ahead of Brexit invocation, an approach that could backfire.
CHF – nervousness about European banks could keep EURCHF depressed within the range.
AUD – AUDUSD gunning for the critical 0.7700/50 area as Australia rates remain stable and on a surge in mining company equities. A pull through here suggests a test of the 2016 highs above 0.7800. A Reserve Bank of Australia meeting up next Tuesday.
CAD – CAD back stronger as Clinton seen the winner of the first presidential debate overnight, but fundamental concerns continue to weigh over CAD.
NZD – NZDUSD has refused to resolve lower, keeping the outlook in limbo. Meanwhile, the AUDNZD rally has also paused – probably leaving the market looking for either an acceleration of volatility or fresh incoming NZ data to drive the action.
SEK – for the longer term implications, watching the household lending survey today with interest as Sweden’s economy is entirely reliant on credit expansion that is multiples higher than the actual growth rate and lending has been slowing in recent months. If the Fed is thought to be at a bad policy starting point for a recession, we don’t envy the Riksbank should Sweden show signs of slowing. EURSEK needs to make a decision this week about the 9.60 level.
NOK – watching for follow through in EURNOK lower after a textbook test of the resistance/former support at 9.15 yesterday. 9.00 is the next downside focus.
Upcoming Economic Calendar Highlights (all times GMT)
- 1345 – Markit Flash Sep.US Services PMI
- 1400 – US Sept Consumer Confidence
- 1515 – US Fed Vice Chairman Stenley Fischer to speak
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank