Article / 24 May 2017 at 8:02 GMT

FX Update: USD consolidates, China downgraded — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • USD consolidates across the board, helped by Trump's relatively gaffe-free trip
  • Moody's cut China's sovereign debt rating to A1 (stable outlook) from Aa3 (negative)
  • AUD dented after failing to take out pivotal 0.7500
  • Eyes on FOMC minutes this evening

Shanghai container port
 Shanghai container port. The yuan was barely dented by Moody's 
downgrade of China's debt rating. Photo. Shutterstock

By John J Hardy

Rating agency Moody’s downgraded China’s sovereign debt a notch to A1 (stable outlook) from Aa3 (negative outlook) and expressed concern on the debt and growth outlook for the country.

The yuan hardly reacted as the exchange rate is clearly managed very tightly these days, but the Australian dollar took it on the chin just a session after AUDUSD was toying with the pivotal 0.7500 area. Given the meltdown in iron ore prices overnight (about -7% and back near the recent lows for the cycle), it’s a bit surprising that the Aussie didn’t take an even larger hit. 

This downgrade may not have immediate implications as most Chinese sovereign debt is held domestically, but it could impact the ratings of a swath of Chinese bonds from any industry or sector that is seen as state-supported as well, including financial institutions and state-owned enterprises. And in general, it’s bad PR for a country that is theoretically aiming to open its capital markets to foreign investors. 

US President Donald Trump’s so far relatively gaffe-free and successful trip abroad is in stark contrast to last week’s series of Trump missteps and actions that led to a political firestorm and a sharp decline in US yields as the "Trump trade" receded even further over the horizon. The Trump photo ops, lack of fresh tweets, and the inability to sustain the momentum of last week’s developments are the only readily available explanations for yesterday’s fairly sharp and across-the-board consolidation higher in the US dollar. That and perhaps the Federal Open Market Committee's minutes this evening could potentially remind us that the Fed remains on course to hike rates further and even flesh out the discussion of a reduction of the Fed’s balance sheet.


AUDUSD failed to take out the pivotal 0.7500 into the close after yesterday’s intraday rally extension and was socked lower by events overnight, including the Chinese downgrade and the steep fresh selloff in iron ore. The choppy rising channel soon looks in danger of falling and could extend the selloff lower from here into the lows of the cycle and possibly even form a real trend into the 0.7000/0.6800 zone.
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Source: Saxo Bank 

The G-10 rundown

USD – so far there's just been a solid bounce/consolidation in the USD’s fortunes, but if US yields have put in a low here, the weak USD move could be over for now. The FOMC minutes will be a minor test of that notion as we look for how the debate circles on the recent ebbing of inflationary pressures and anything conclusive (highly doubtful) on how the Fed plans to approach balance sheet reduction. As mentioned yesterday, Fed chief Janet Yellen could try to push a bit harder on starting to unwind the balance sheet as she may be in “legacy mode” as the (very likely) last months of her term wind down.

EUR – a couple of European Central Bank speakers are out today as the ECB faces the very difficult task of wrangling with forward guidance on how it plans to unwind its hyper-accommodation. Remember the Fed’s missteps in 2013 and 2014? 1.1100 is the first notable tactical support area in EURUSD.

JPY – Ben Bernanke was speaking at a Bank of Japan event overnight and more or less advocated fiscal and monetary policy coordination. Let’s point out that even with a very tight labour market and weak currency and the BoJ still buying assets at a blistering rate, Japan’s nominal GDP was unchanged in the first quarter, while the headline trumpeted “annualized seasonally adjusted growth of 2.2%” due to a massive drop in the GDP price index.

GBP – sterling is pulling back stronger as a function of the euro’s consolidation, but it is far from out of the woods as we wend our way toward the start of the official Brexit negotiations and whether the European Union will demand a large “divorce bill”, while prime minister Theresa May’s recent dip in the polls is also mildly sterling-negative.

CHF – EURCHF is showing signs of general correlation with the direction in other euro crosses, as the local focus on whether we can build a further rally is the 1.0875-1.0900 pivot zone.

AUD – surprised to see AUD as resilient as it has been despite the ugly developments overnight. This is possibly due to the former popularity of EURAUD longs and some unwinding of these on the euro weakness seeing a bit of AUD resilience (or at “lack of additional weakness” more than resilience).

CAD – a key few sessions ahead, with the Bank of Canada up today (suspect very guarded optimism, with concerns on housing expressed clearly) and, perhaps more important, tomorrow’s Opec meeting, which comes after oil prices have already launched a tremendous comeback.

NZD – 0.7050 is the latest line in the sand for NZDUSD after the recent strong rally, though resistance arguably stretches to at least 0.7100/10.

SEK – SEK simply looks like a neglected currency that has defaulted to passively tracking against the ups and downs in the euro after the Riksbank recently mashed its dovish foot down again, and Swedish rates are going nowhere in a hurry.

NOK – Thursday's Opec meeting is squarely in focus as we watch for direction south of 9.30 or north of 9.45/9.50 in the wake of its reaction. NOK is not putting up an impressive show given the comeback in oil as Norway’s short rates continue to dribble lower on the lack of Norges Bank policy anticipation.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0830 – ECB’s Praet to speak 
  • 1245 – ECB’s Draghi to speak 
  • 1400 – Canada Bank of Canada rate decision 
  • 1400 – US April existing home sales 
  • 1800 – US FOMC meeting minutes 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank

Fashionapolis Fashionapolis
As mentioned yesterday, Fed chief Janet Yellen could try to push a bit harder on starting to unwind the balance sheet as she may be in “legacy mode” as the (very likely) last months of her term wind down.

- well said. Legacy.
Jim Earls Jim Earls
More like "zombie mode" after almost 9 years of sub par 1% Fed Funds Rate-LOL.


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