Article / 15 August 2017 at 7:38 GMT

FX Update: USD bears feeling the squeeze — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • N.Korea's deescalation of bellicose rhetoric has wiped away risk premium
  • Fed’s Dudley said news of balance-sheet reduction could come next month
  • RBA minutes sounded caution on exchange rate and rise in household debt
  • USDJPY playing catch-up higher after drop inspired by N. Korea fears
 Feeling the squeeze. Photo: Shutterstock

By John J Hardy

The North Korean leadership has de-escalated the confrontational rhetoric with the US overnight, as plans to attack Guam were moved to the back burner. This effectively removed the North Korea risk premium that was already rapidly receding as the week got under way. At this point, it might take an actual commencement of a hot military conflict for this particularly source of market concern to re-emerge.

A hawkish tilt came from the New York Fed’s Dudley, who said yesterday in an interview that it isn’t unreasonable to expect the announcement of reduction of the balance sheet in September. He also spoke in favour of another rate hike in December if the economy evolves as expected and claimed that the next four to six months are pivotal for whether the recent softness in the CPI is merely due to one-off factors. The market is incredibly ill-prepared for a return of inflation, so this is indeed a critical point.

The Reserve Bank of Australia minutes sounded caution on the exchange rate and on the build-up of Australian household debt, despite hopeful and positive language on the prospects for the Australian economy. Australia’s latest jobs report comes on Thursday. Given the importance of Australia’s resource extraction industries, concerns over how China balances the need to deleverage with its desire for continued growth are rightfully given prominence in the RBA’s assessment.


USDJPY has played a bit of catch-up higher as the last extension lower was mostly North Korea-inspired. The apparent removal of that particular cloud, together with rising US yields, could boost the pair well back into the range – with the first pivotal level at the bottom of the Ichimoku daily cloud around 111.60 and then the top of the cloud and the 200-day moving average.
Source: Saxo Bank
The G-10 rundown

USD – US retail sales will be watched today, and a strong report could extend the squeeze on USD shorts as the market is poorly positioned for positive US data. The turnaround in US yields is helpful at the margin as well.

EUR – Germany's second-quarter GDP this morning was solid, though the quarter-on-quarter growth of 0.6% slightly missed the 0.7% expected. Momentum has come out of EU numbers, which likely reached maximum potential recently. There's risk toward 1.1600 in EURUSD if the 1.1700-50 zone can’t hold into mid-week.

JPY – The yen is highly reactive to the apparent de-escalation in North Korea and the turnaround in the bond yield picture piling it on. There's likely more catch-up to do on the upside for JPY crosses on this theme. The next objective in USDJPY is the daily Ichimoku cloud around 111.60.

GBP – Given the Bank of England’s express willingness to shrug off uncomfortably high inflation, the market may not be very reactive to today’s UK CPI release.

CHF – EURCHF is pulling back toward 1.1500 as yields rise again and risk appetite has wiped away the North Korea-inspired nerves.

AUD – The relative performance of AUD is a bit weak in the crosses, and AUDUSD is pushing lower and needs to find support before crossing the 0.7800-0.7700 zone or we have a full reversal of the previous rally.

CAD – Oil prices have come tumbling off recent attempts at a cycle high, and USDCAD may be able to consolidate further into 1.2900-1.3000 territory before finding resistance. The latest positioning report showed CAD-speculative longs getting rather stretched by historical standards.

NZD – AUDNZD is not playing ball for the bulls, and the return of strong risk appetite is a boost for the kiwi. Let’s keep in mind the Reserve Bank of New Zealand’s recent broadside on intervention before believing that the kiwi can spread its wings anytime soon. NZDUSD an interesting one for a possible further breakdown – watching 0.7250-00.

SEK – It's an important day for SEK with the release of the July CPI as traders have been sitting on their hands in the EURSEK range below 9.65. Given the trend in rate spreads and the return of risk appetite, EURSEK should be pushing on support, so we see an in-line or higher-than-expected CPI release supporting a run lower below the recent cycle lows, possibly setting up a test of the 2017 lows into 9.41 eventually.

NOK – A chunky correction in the oil price and the weak rate outlook could keep EURNOK stranded and leave NOK perhaps notably weaker against SEK today (see above).

Upcoming Economic Calendar Highlights (all times GMT)
  • 0730 – Sweden July CPI 
  • 0830 – UK July CPI 
  • 1230 – US August Empire manufacturing 
  • 1230 – US July retail sales 
  • 1400 – US August NAHB housing market index 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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