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Article / 03 October 2016 at 7:31 GMT

FX Update: USD refuses to budge, sterling lower on Brexit talk

Head of FX Strategy / Saxo Bank
  • Deutsche Bank selloff abates on US DoJ deal talk
  • Expectations low for new governor Lowe's first RBA meeting
  • 'Running out of room to manoeuvre' in USDJPY

The resurgent risk of a 'hard Brexit' on an immigration deadlock 
has sterling underwater again today. Photo: iStock

By John J Hardy

Friday’s surge in risk appetite on news of a possible deal between Deutsche Bank and the US Department of Justice on came after a large selloff when the bank was thought to be under pressure from all directions. 

This kind of ad hoc, headline-driven market, combined with Friday being the last day of the quarter, suggests to us that the takeaways from Friday’s action will be few and far between. Residual headline risks remain on this issue, but hopefully we can transition to a focus on US data on the traditionally important first week of the month, including Friday's US jobs numbers.

UK prime minister Theresa May was out over the weekend delivering her first major speech on Brexit, indicating that the invocation of Article 50, which sets the formal exit/renegotiation process in motion, will take place by the end of the first quarter of next year. The signal from May is that she is looking for the UK to have full control of immigration, which is precisely the point that the EU is unwilling to concede and risks making the divorce so contentious. 

The talk of a “hard Brexit” has sterling on the defensive, and EURGBP and GBPUSD are running out of range to work with as sterling may be headed for new lows.

We have a Reserve Bank of Australia meeting set for Tuesday’s Asian session with a general lack of anticipation despite this being new governor Philip Lowe’s first meeting at the helm. The RBA is not seen altering the cash target for several meetings to come and Lowe has underlined financial stability risks (in Australia’s case, housing in particular) as an important focus, with the recent AUD resilience built in part on the idea that the RBA is unwilling to tread where other central banks have on zero- and negative rates. 

It will be interesting to test that theory once Australian credit growth finally rolls over, which it may already be doing as the major Australian banks have begun tightening lending standards on mortgages. 


We are fast running out of room to manoeuvre on the USDJPY chart without a technical break of some sort – either through the 100.00/99.50 level to the downside or above the descending trendline, which now coincides approximately with the bottom boundary of the Ichimoku cloud at times this week. 

The fact that the pair didn’t manage to breakdown after the initial reaction to the Bank of Japan/Federal Open Market Committee meetings last week suggests that the upside may be the softer side for at least the next directional test, even if we risk not being able to sustain any strong new trends until at least the other side of the pivotal US presidential election.


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Source: Saxo Bank 

The G-10 rundown

USD – the market is refusing to make a broad statement on the USD as it doesn’t know what to do with the currency when the Fed has lost all credibility and neither Fed guidance nor US data seem able to move the needle. But surely something gives for the near term this week amidst the key US ISM surveys today and Wednesday and the jobs report on Friday?

EUR – euro resilience may be significantly driven by the EURGBP flow as sterling suffers against the single currency. EURUSD, meanwhile, is running out of room to the upside technically ahead of 1.1300, though there are multiple layers of resistance and we wonder if the market can generate enough interest to do anything with the pair until at least the other side of the US election.

JPY – The big quarterly Tankan survey numbers were seen as quite positive, providing the yen with nominal support, though USDJPY remains in the nervous range outlined above.

GBP – sterling weakening and the hard Brexit talk could see the currency to new lows for the cycle this week, particularly if the UK PMI’s show the post-Brexit bounce flagging.

CHF – a strong rebound Friday on a sudden apparent clearing of Deutsche Bank worries, but EURCHF remains embedded in a range, and USDCHF has become an exercise in technical futility in recent months.

AUD – low-stakes RBA tomorrow as we watch for an AUDNZD rally to take firmer hold while expecting that the AUDCAD rally is soon overdone. AUDUSD has to pivot soon – with 0.7700/50 the upside pivot and 0.7600/0.7575 the initial downside pivot

CAD – oil still trading near the top of the recent range as last week’s surge in oil prices helped contain the USDCAD upside break attempt. Important US and Canadian data this week (for Canada, the International Merchandise Trade data Wednesday and jobs report on Friday) could offer directional interest.

NZD – no big data releases this week, but we suspect the broader kiwi picture has turned to the weak side and look for opportunities for this to follow through in weeks to come as we suspect volatility will generally be on the rise in Q4.

SEK – remains weak across the board as SEK is out of favour as neither risk-off or risk-on (and reach for yield in the case of the latter) favours the currency. A solid surge in the Manufacturing PMI for Sweden today, but we’re concerned about the Swedish economy once the credit growth inevitably slows further. Talk about a bad starting point for the Riksbank…

NOK – at current oil prices, this NOK move suggests a market that is over-reaching for trading themes against a backdrop of uninspiring moves elsewhere. In other words, the rally is overdone unless oil prices surge notably – watching for some mean reversion here.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0715 – 0800 – Euro Zone Final Sep. Manufacturing PMI 
  • 0830 – UK Sep. Manufacturing PMI 
  • 1400 – US Sep. ISM Manufacturing 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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