John J Hardy
In this latest webinar, Saxo Bank's head of FX strategy John Hardy analyses the market with topics including synchronised global growth, Saxo’s global risk indicator and data surprises.
Article / 15 July 2016 at 8:14 GMT

FX Update: Summer doldrums creeping into FX

Head of FX Strategy / Saxo Bank
  • Market looking for new equilibrium level for sterling, post-Brexit
  • Mean reversion increasingly coming into play
  • Don't get carried away by Chinese Q2 GDP print
  • Unconvincing AUDUSD rally creates technical setup for downside move

Chinese workers get to work on a building in the northeast city of Haerbin, but is it a glut of government spending that is fuelling activity and keeping GDP sustained? Photo: Martin O'Rourke

By John J Hardy

EURUSD is caught in one of its tightest ranges in recent memory, despite the unresolved banking crisis in the European Union area and existential questions raised by the Brexit. And the action in AUDUSD and USDCAD is listless and lacking conviction, even as AUDUSD continues to poke at its highest level in more than two months.

The only themes going at the moment are the market trying to feel out a new equilibrium level for sterling after the Brexit shock and JPY traders trying to assess the timing of the inevitable next move. Our instinct, given general signs is that the market defaults to mean reversion, with GBPUSD turning back from the 1.3400-1.3500 zone and the JPY crosses topping out here before further damage is done to the downtrend. 

On the sidelines, the kiwi continues to provide interest after the RBNZ announcement that it would make an “economic assessment” on July 21, just a few days after the Q2. As we discussed in yesterday’s FX Board, this is finally looking like a trend change in the key NZD pairs, NZDUSD and AUDNZD.

Chinese growth data overnight was spun as positive, but a WSJ article headline said it all: “Massive Stimulus Keeps China GDP Steady in Second Quarter”.

In fact, government fiscal outlays expanded 20% year-on-year, a level that is entirely unsustainable and, together with massive expansion in credit into the economy (total social financing grew a much bigger than expected CNY 1.63 trillion in June, or about $250 billion or approximately 5% of Chinese GDP in a single month) continues to feed the pressure on the currency – not that China will lose its grip or accelerate its devaluation.

Today, we have a raft of US data, with relative heavyweights like the June Retail Sales and June CPI on tap, but we also have a market that seems unable to react to US data points for now as the Federal Reserve outlook remains more or less frozen.

Still, if we get a sufficiently strong surprise to the upside on both Retail Sales and CPI today, the sceptics might have to capitulate and buy some dollars. Otherwise, markets seem a bit adrift, and general risk appetite may increasingly set the tone after the S&P 500 hit fresh all-time highs recently, just ahead of earnings season, and either needs to follow through higher or meet rejection after this technical break.

AUDUSD capped

AUDUSD eked out new marginal highs overnight in reaction to the Chinese data releases, but was pushed back lower again.

The rally to new highs since early May has been an ugly one as attempts at the highs have lacked conviction, and it won’t take much for the bears to topple this rally and create a convincing technical setup for further downside. Still, seeing is believing, and the bears may need a helping hand from strong US data and/or weaker risk appetite.

AUDUSD rally since early May lacks conviction
 Source: SaxoTraderGO

The G-10 rundown – express edition

USD – US data risks today – can market pick up some conviction on the greenback?

EUR – European Central Bank is up next week – the banking crisis needs a political solution more than an ECB solution, although this week has seen the market entirely complacent on this issue. Watching 1.1000 and 1.1200+ for EURUSD direction, which has been lacking, save for the Brexit reaction, since March.

JPY – Is the market too aggressive in predicting helicopter money? It’s coming, but when? JPY crosses at risk of topping out if risk appetite fades as well after a blistering run post-Brexit.

GBP – Overnight pump in GBP is fading quickly, which suggests mean reversion. Preferred instrument for expressing GBP weakness is GBPUSD.

CHF – 1.0900 in EURCHF is making an effort to hang in there after slipping recently. USDCHF needs to rally soon or bulls lose their hook.

AUD – Note the chart above – high correlation with risk appetite and solid comeback in industrial metals, but longer-term story is negative as we weigh minor potential further upside risks versus major potential longer-term downside risks.

CAD – We don’t like CAD, but the market is neglecting USDCAD in a range, waiting for the interesting USDCAD head-and-shoulders neckline to trigger 1.3150/75.

NZD – Major trend change indications in recent days – July 18 CPI release and/or July 21 RBNZ report to confirm.

SEK – EURSEK is not breaking down, and keeps the rest of upside range in play, particularly if news out of the Eurozone economy takes a hit from here and/or the banking crisis smolders.

NOK – EURNOK consistent in steering away from drama.

Upcoming economic calendar highlights (all times GMT)

  • Canada May Manufacturing Sales (1230) 
  • US Jun. Retail Sales (1230) 
  • US Jun. CPI (1230) 
  • US Jun. Industrial Production/Capacity Utilization (1315) 
  • US Jul. University of Michigan Confidence (1400) 
  • US Fed’s Williams to speak (1700) 
  • US Fed’s Kashkari and Bullard (FOMC Voter) to speak (1715) 

— Edited by D. Deacon and Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank

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