- No New Year cheer for the dollar as the freefall continues
- No obvious reason for the tumble which started last week
- Should know where we're going from here by the weekend
By John J Hardy
The USD tumbled sharply in the final week of 2017 and is opening the new calendar year on its back foot as well. There were no obvious drivers of the move last week, as end of year liquidity and perhaps even a desire to front-run the anticipated developments in 2018 were the possible drivers. The quality of the move and whether it will sustain at these levels and lower for the greenback will be evident by the end of this week, as we round off the week with the latest US payrolls and earnings data on Friday. If there is any headline issues that may be driving USD weakness, it may be the US fiscal picture, especially post-tax reform, as the US budget deficit is set to widen drastically this year under the new year on top of an already deteriorating picture that is set to get worse due to the Fed’s quantitative tightening plans.
While the Eurozone economy may be humming, 2018 is likely to see existential questions shifted forward from the back burner again as Italian elections have now been called for March 4, though it appears a hung parliament is the likely scenario, bringing a general muddled uncertainty rather than any clear scenario. The Germany-Italy 10-year spread has moved about 20 basis points wider over the last few weeks and the rate of ECB purchases has now been chopped in half. As well, the recent Catalonia election result keeps the situation in Spain simmering as Catalonian separatists, even if a fractious lot, maintain a majority in the regional parliament. Finally, the EU has invoked Article 7 against Poland, weighing in against the Polish government’s interference with the judiciary. PLN has most certainly taken this development in stride as it ended 2017 on a high note against the single currency – but this will be a dramatic showdown in 2018 for all CEE currencies, especially if EU funds (Poland the largest net receiver of EU funds) are withdrawn.
While negative USD drivers are not entirely obvious here, there are certainly clear positive AUD drivers behind the recent rally, including multi-year highs in copper, a rally in iron ore and new multi-year highs in the Australian mining giants’ stock, not to mention a positive China Caixin Manufacturing PMI overnight. The last major Fibo retracement is coming into view just ahead of 0.7900, a key level for bulls looking for a full reversal and prospects for 0.8000+.
Source: Saxo Bank
The G-10 rundown
USD – the greenback looks very weak, suggesting the market feels there is nothing positive to wring from the new tax reform, where the focus may be on the negative fiscal/current account implications. We still have budget ceiling issues dead ahead as well. A better feel, however, on where the USD stands will be evident by the end of the trading week as liquidity returns to the market.
EUR – the euro is opening the year on a strong note back above 1.20 against the USD – this may be more due to the latter’s weakness. We expect a strong year for the euro, but we’ll keep a close eye on peripheral bond auctions and political developments this year for signs of existential worries creeping back into the picture, though this is more likely a problem for 2019 or the next recession.
JPY – the Bank of Japan put its foot down at its December meeting, indicating no change of course on its massive QQE with YCC programme, leaving the JPY almost as weak as the US dollar. We still suspect there are asymmetric risks for JPY appreciation this year if the BoJ is forced to shift its “ceiling” for the 10-year JGB as rates rise elsewhere.
GBP – sterling suffering Brexit uncertainty and hard to see where we get clarity on this side of the coming trade talks.
CHF – the franc keeping a low profile, but remaining relatively weak versus the field – a bit more momentum to the downside likely requires long yields to pick up.
AUD – AUD has been the most aggressive in rallying, supported by commodity developments and a recovery in the rate outlook. AUDUSD has worked close to the last major Fibo just below 0.7900.
CAD – The move in CAD strength is impressive as 1.2500 comes into sight in USDCAD – the 1.2390-1.2500 zone is the last notable retracement zone before the range low into 1.2062.
NZD – NZDUSD has vaulted above the 200-day moving average again on the weaker USD, with the last Fibo of note still far off at 0.7265 before the bears are forced to strike camp. AUDNZD is pivotal in the 1.1000 area, with a rally significantly above granting the Aussie the upper hand.
SEK – EURSEK is back in the 9.80-85 pivot zone as we watch whether the return of liquidity can bring some mean reversion back into the lower range.
NOK – NOK looks too cheap, given the recovery short rate outlook in Norway and the much higher oil price, even if all of the housing bubble concerns remain. Perhaps the return of liquidity sees EURNOK finally pushing back into the 9.25-50 zone.
Upcoming Economic Calendar Highlights (all times GMT)
- 0815-0900 – Eurozone Dec. Final Manufacturing PMI
- 0930 – UK Dec. Manufacturing PMI
- 1430 – Canada Dec. Manufacturing PMI
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank