- USD higher on tax reform, Fed hopes
- GBP craters as Tories splinter
- Sterling 'too cheap' from a longer-term perspective
Sunset on Whitehall: Theresa May's leadership is increasingly being called into question,
causing a severe breakdown in the value of sterling. Photo: Shutterstock
By John J Hardy
The US dollar followed through higher – once again – with rather odd timing as the move unfolded in the Asian session (there was a similar move on Wednesday to new lows for the cycle that was quickly erased in the European session). Driving the enthusiasm for USD are the recent strong data, but more importantly, anticipation of tax reform and the possibility that a more hawkish profile may take the helm at the Federal Reserve next February.
While the recent leap in US yields relative to global counterparts is USD-supportive, however, from the price action and timing of some of the moves one suspects that some of this is being driven by weak USD shorts getting squeezed in a heavily positioned speculative market.
Regardless, the move through big pivots in some USD pairs – especially versus the commodity dollars and in GBPUSD – has pushed the USD into a new phase of strength that suggests more USD strength until proven otherwise (with today’s jobs data and the closing level on the week an important factor in the equation).
Sterling’s woes continue as rumours and real stories swirl of mutiny in the Tory ranks
and these may be reaching some kind of critical mass that sees a leadership change. The market sees this as a driver for uncertainty, and there could be a further capitulation in sterling if this is indeed what unfolds as it supposedly throws Brexit negotiations into further turmoil and raises the spectre of the “hard Brexit”.
For the longer-term perspective, however, sterling is getting too cheap again, and turns often unfold at the maximum point of uncertainty.
Cable has suffered a capitulation through the important 1.3250 area, which is already bringing the 1.3000 level into focus and further political turmoil could even see the pair exploring the full extent of the range back toward 1.2800, close to the 200-day moving average. But for the longer term perspective, we’ll be on the lookout for technical reversals that point to opportunities to get long the pair.
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Source: Saxo Bank
The G-10 rundown
USD – The greenback is rising to the top of the heap again – let’s see how the market greets today’s hurricane-affected jobs data, and perhaps more importantly, any surprise in the average hourly earnings data. The greenback is in rally mode until proven otherwise.
– new lows overnight in EURUSD, but we saw a similar run of stops on Wednesday that never blossomed into anything promising for the bears. Big picture, we’re looking for a turnaround and resumption of the bull trend, but the tactical waters are dicey, especially on news of the debate on US tax reform or who will take the helm at the Fed next February. The Catalan situation is headline-worthy, but so far not for financial markets – and a large Catalan bank leaving town
is a symptom of a lost cause for the separatists.
JPY – the yen has been trying to get interesting, with some JPY crosses teasing through pivot levels (GBPJPY and AUDJPY come to mind, while EURJPY has had a look at the 131.70 area without yet breaking), but the weight of the surge in risk appetite and rising bond yields are not the stuff for JPY rallies unless the BoJ finally starts to shift its policy parameters.
GBP – political turmoil driving the downside and there is further risk of one more surge in weakness if May is forced out, but crisis = opportunity as the saying goes.
AUD – the Aussie putting in a weak performance. China is back online next week and the important 19th party congress there could provide longer term signals for investors Down Under – so we’re not sure how much near-term downside potential lies below if we do drive down into the old range below the 0.7750-0.7800 pivot zone.
CAD – USDCAD has dropped the congestion area around 1.25000 and pulled higher, but let’s have a look at today’s Canadian jobs data – potential toward 1.2750 if data doesn’t shift the relative momentum.
SEK – all eyes on next Thursday’s CPI release after a 2.3% core reading in August. Another reading well north of 2.0% suggests the Riksbank needs to begin to climb down further from its dovish extremes and could drive a range break in EURSEK.
NOK – a bit more interest could pick up next week in NOK if the CPI provides any surprises, until then EURNOK stuck in range capped by 9.42.
Upcoming Economic Calendar Highlights (all times GMT)
- 1200 – UK Bank of England’s Haldane to Speak
- 1230 – Canada Net Change of Employment/Unemployment Rate
- 1230 – Canada Sep. Employment data
- 1230 – US Sep. Change in Nonfarm Payrolls/ Unemployment Rate/Average Hourly Earnings
- 1330 – ECB’s de Galhau, Nowotny to Speak
- 1400 – Canada Sep. Ivey PMI
- 1615 – US Fed’s Dudley (FOMC Voter) to Speak w- Q&A
- 1645 – US Fed’s Kaplan (FOMC Voter) to Speak
- 1700 – US Fed’s Bullard (Non-voter) to speak
— Edited by Michael McKenna
John J Hardy is head of FX strategy at Saxo Bank