Article / 06 September 2016 at 7:55 GMT

FX Update: Small currencies rise against biggest currencies

Head of FX Strategy / Saxo Bank
  • USD picture is lacking
  • Main theme of FX markets is strength of small currencies vs big currencies
  • The chase for yield is the driving force
  • AUDUSD up after RBA statement overnight

Aussie dollars
 The Aussie dollar gained in a chase for yield after the Reserve Bank of Australia 
kept rates steady overnight. Photo: iStock

By John J Hardy

Today marks the official end of the market’s summer holiday, as the US returns from yesterday's Labor Day holiday. Supposedly, autumn often brings a return of global asset market volatility, with some of the worst market mishaps having unfolded in September-October. This is relevant in that the chief backdrop for currency markets in recent weeks has been a profound sense of complacency as investors see no danger ahead, assuming that the central bank put remains in full force and the only activity worth consideration is a chase for yield.

The above is the only explanation we can find for AUDUSD trading higher after the Reserve Bank of Australia's statement overnight, which was Governor Glenn Stevens’ last statement as he passes the baton to Philip Lowe this month. The RBA statement noted low inflation and suggested that it would remain low as wages show little inflationary pressure. 

On housing, the RBA noted moderation in price rises and housing supply coming on line over the next couple of years (this actually looks a bit dovish as it suggests the bank sees a lower risk of blowing a housing bubble with lower rates, although that linkage is nowhere in the statement.) Rates at the front of the Australian yield curve were unchanged after the meeting, and yet AUD jumped higher.

High-profile investment banks, including Goldman Sachs, are calling for a Fed rate hike in September, based on Fed chief Janet Yellen’s rhetoric at Jackson Hole and subsequent comments by Vice Chairman Stanley Fischer. An added twist could be Republican presidential candidate Donald Trump’s injecting a bit of extra political pressure on the Federal Open Market Committee with comments yesterday suggesting that the FOMC is holding off from raising rates to ensure that his opponent, Hillary Clinton, is elected. This angle may be underappreciated as a factor.

AUDUSD up on yield-chasing

AUDUSD higher in the wake of the RBA statement overnight – mostly due to the yield-reach backdrop rather than anything hawkish in the statement, as Australian short rates were largely unmoved after the statement. The 0.7600/50 zone looks pivot for the outlook, as a rise above might quickly put the descending trendline and highs of the year in focus.

Source: Saxo Bank 

The G-10 rundown

USD – USD bulls coming up empty as the biggest currencies are all weak in an environment of yield-chasing. Interesting to see if a better-than-expected (or even in-line) ISM non-manufacturing indicator can tilt the sentiment back in the dollar’s favour after the weak jobs report and ISM manufacturing surveys last week.

EUR – The euro is looking weak across the board ahead of the European Central Bank meeting, even as little expected from ECB president Draghi and company there. EURUSD's 200-day moving average is the local support focus post-ECB on Thursday.

JPY – Prime Minister Abe's adviser Hamada recommended that the Bank of Japan wait until after the September 21 FOMC meeting to announce anything to avoid the Fed’s decision overshadowing any new announcement the BoJ makes earlier the same day. Watching US long rates as a key coincident indicator for USDJPY (higher rates supporting weaker JPY).

GBP – sterling suffered a small setback late yesterday, but remains well supported this morning after the spate of recent strong UK data. The next area for EURGBP looks like 0.8250, while the post-Brexit vote high in GBPUSD was just ahead of the structural 1.3500 level.

CHF - a slightly stronger-than-expected second-quarter GDP print is perhaps supporting CHF at the margin, though higher rates are likely needed to get CHF back into focus.

AUD – see coverage of RBA above – the 61.8% retracement of the recent AUDUSD sell-off comes in just above 0.7650.

CAD – CAD is strong this week on the comeback in oil prices and the broad weakness in the most liquid currencies. We’ve got more range to work with in USDCAD down toward 1.2750 and even 1.2660 as the pair has been gyrating in a range for months. We prefer a weaker CAD, though there's no technical or thematic sign at the moment that a new rally is imminent.

NZD – NZD dips against the AUD once the market snapped up Aussie after the RBA's statement overnight. Watching the MACD on AUDNZD for a bullish cross in coming sessions. Elsewhere, NZDUSD continues to tease at the top of the range, seems to want to (at least) test the air at new highs.

SEK – The krona remains firm against the euro, but out of favour elsewhere, likely due to its negative yield, especially versus a resurgent NOK. The Riksbank will have a bearing on the next steps for SEK traders.

NOK – EURNOK tempting the bears once again as we approach the key 9.20/15 area, which could open up for a bigger plunge if broken after the ECB meeting on Thursday toward the next level at 9.00.

Upcoming Economic Calendar Highlights (all times GMT)
  • 1400 – US Aug. ISM Non-manufacturing 

— Edited by John Acher

John J Hardy is head of forex strategy at Saxo Bank

AlexF AlexF
Hi John could you please give your view on NZDJPY


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