Steen Jakobsen
The Bank of Japan has abandoned quantitative easing and the European Central Bank may taper its bond-buying programme, so what is the role of central banks in 2017, asks Saxo Bank’s chief economist Steen Jakobsen.
Article / 12 October 2016 at 7:38 GMT

FX Update: Sterling relief rally as May’s stance softens – #SaxoStrats

Head of FX Strategy / Saxo Bank
  • UK MPs likely to have more input in the Brexit process
  • Softer UK-EU divorce terms would be bullish for GBP
  • USD needs broad recovery to confirm recent strength
UK  PM pledges an "open and transparent" Brexit debate but dark clouds still hang over sterling.
 Pic: iStock  

By John J Hardy

A story overnight from Bloomberg indicates that UK prime minister May will allow more parliamentary involvement in the Brexit process, which is seen as a softening of her prior stance and could alleviate the market’s currently intense fears. It’s tough to know how quickly we should grab at this for signs that the UK and EU are headed for a softer tone from here. But for the most sterling-bullish spin on this, do have a look at Polemic Paine’s blog post on the possibility that we could be headed for a far “softer” Brexit scenario than the market currently fears. It’s a compelling scenario, but will the market pick up on it? 

Elsewhere, the focus for USD traders is on the EURUSD breakdown through the range, discussed in the chart below, but unfortunately for USD bulls, also accompanied by indifferent action in a number of other USD pairs overnight – particularly USD/commodities, etc. Are we waiting for tonight’s Federal Open Market Committee minutes to make a decision on the greenback? I certainly hope not, as it is hard to drum up a potential takeaway from the Fed’s internal policy discussion, which is riven with divisions and which the market has mostly been ignoring anyway. For the USD rally to gain further credibility, we need a broad rally to reignite in the coming session or two – perhaps against the quartet of AUD, CAD, EUR and JPY.

And helping to drive that potential move might be US interest rates, where we continue to focus on the 10-year yield marching above the key 1.75% level. Additionally, yesterday showed risk parity portfolios under pressure as the ugly downside in equities saw no pick up in bonds, with yields remaining high. This is the nightmare scenario for VaR assumptions for very large funds and could drive further volatility and USD strength.

EURUSD is finally breaking down through the local support and has also taken out the large-ish rising trendline of the last many months. Next is the psychologically important 1.1000 area and the nominal lows that came after Brexit, which were focused around the 61.8% Fibonacci of the rally off the December 2015 low near 1.0525 just below 1.0950.
 Source: SaxoTraderGO

The G10 rundown

USD – probably little anticipation around this evening’s FOMC minutes release as it is clear from the three dissenters that there is considerable disagreement on the timing of the hike and the market has increasingly ignored Fed guidance anyway. More important to see if the USD can continue to press stronger after the important break of EURUSD support yesterday.

EUR – weaker versus the USD and JPY at the moment – do we finally get something bigger going in EURUSD or do we have to wait until after the US election?

JPY – was broadly firmer yesterday on the weak risk appetite, but USDJPY may be quick to find support if yields remain high. The top of the Ichimoku cloud for USDJPY has risen to the 103.50 area today.

GBP – so far, the news that May will allow more parliamentary involvement in the Brexit process has reversed yesterday’s further weakening in sterling, but only back to the levels we were trading yesterday morning – it’s an either/or setup for a squeeze or continuation of the weakening, depending on how sentiment swings.

CHF – little focus here in EURCHF terms, though due to the USD firming, we have USDCHF plowing into the interest zone of resistance from 0.9900 up to parity that will coincided with a EURUSD test of the critical 1.10/1.0945 (see chart above) area if the USD continues to rally.

AUD – once again, we have the inability for AUDUSD to sustain two consecutive days in the same direction as the new local lows yesterday failed to lead to new lows. There may be a focus on the 100-day moving average, currently near 0.7530.

CAD – still finding support on high crude prices, even as we prefer to focus on the potential for USDCAD to run higher if/when the oil rally fades.

NZD – the kiwi remains weak in the crosses and the risk off/higher yields/risk parity under pressure theme could continue to provide pressure on the currency – next focus is on 0.6950/0.7000 in NZDUSD and the 1.0700/50.

SEK – new lows for SEK against the euro after a very weak CPI print from Sweden yesterday. USDSEK is likewise not far from its highs for the cycle. SEK likely to remain weak if risk appetite suffers further and the weak CPI keeps thoughts of a Riksbank taper far off in the future.

NOK – EURNOK found resistance head of the key 9.15 level, but NOK looks fairly priced relative to oil prices and may be vulnerable to heading back up into the old range if we dive back into the range.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0900 – Eurozone Aug. Industrial Production 
  • 0900 – UK BoE’s Cunliffe to speak 
  • 1100 – Norway Norges Bank’s Olsen to speak 
  • 1200 – US Fed’s Dudley to speak 
  • 1340 – US Fed’s George to speak 
  • 1800 – US FOMC minutes 
  • 2301 – UK Sep. RICS House Price Balance 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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