Is the Goldilocks trade back on? While longer-term global growth and macro trends argue otherwise, a dovish FOMC and a dip in 10-year US yields has sentiment on the rise in the short term.
Article / 11 October 2016 at 7:41 GMT

FX Update: USD reigns supreme as rates rise — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Focus on US bond yields as USD rally continues
  • High.yield currencies, EM under pressure
  • Oil rally failure could weigh on CAD, NOK, RUB
Petro-currencies like CAD, NOK, and RUB are the only holdouts against the ongoing dollar rally for now, but any dent in oil's good fortunes is likely to put paid to this. Photo: iStock

By John J Hardy

The USD rose again yesterday as US Treasury futures fell out of bed overnight in sympathy with the rise in European bond yields on Monday – this came after the US bond market was closed yesterday and after Friday’s failure to sustain a selloff in reacting to the somewhat weak US jobs report.

The reason this is important is two-fold: first, rising US yields are the most important coincident indicator for the US dollar rally and second, the 10-year level at 1.75% looks pivotal, both as a level that was pivotal as yields fell earlier this year and as the 200-day moving average comes in there.  

If the US long yields continue to rise, the currencies under the most pressure should be traditional carry currencies, or in other words, the highest yielders within the G10, and emerging market currencies – particularly those with current account deficits, like TRY and ZAR. We’ll be writing more on this later today.

The lone holdout currencies versus the USD at the moment are the oil-related currencies like CAD, NOK and RUB as oil has pulled to new local highs and technicians are touting the break of an upside-down head-and- shoulders neckline. 

Saxo Bank head of commodity strategist Ole Hansen and I are both of the opinion that we’re not about to launch a new era of higher oil prices as the market puts too much into the production cut talk. 

A failure of the rally from these levels in the crude oil rally could see ugly downside action as fresh longs are taken out of their positions.

In the UK, Brexit secretary Davis said yesterday that parliament will not get to vote on invocation of Article 50 and signaled that the UK will leave the customs union and hope to get trade deals immediately. 

This tough stance from Davis as he warned that the attempt by European Union leaders to punish the UK for leaving the EU will backfire. The tough stance from the May government and the EU’s stark language continue to drive the GBP-negative “hard Brexit” scenario. A rising USD and rising yields are not helpful. Sterling is to new lows on an hourly closing basis versus the USD and EUR this morning.


Finally breaking down? After a tantalising look at support on Friday that was rejected by the weakish US jobs report, EURUSD is having another look at range support and if yields head higher, seems likely to push lower and test the 1.1000 area and nominal lows just below there.


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Source: Saxo Bank

The G-10 rundown

USD – has pulled broadly higher as Friday’s reaction to the jobs report was erased, but for an across the board sweep, we need for yields to continue to run higher and probably for oil prices to falter in order to tame the petro-currency holdouts.

EUR – euro is looking lower within the extremely persistent range and looks finally ready to break into the next level lower toward 1.1000. The ECB’s Mersch is out speaking later today.

JPY – USDJPY has pulled to the key local resistance around 104.00 as the negative focus has switched over to the higher yielding currencies, which could mean JPY downside is limited for the moment. Still, if the Bank of Japan  is fixing yields at 10-years near zero, then higher US yields could support a further rally in USDJPY.

GBP – the negative spiral continues, and we’re not sure what makes it end until real flows are exhausted or we get some sense of a thaw on the one side or the other. Can that really happen before Article 50 is invoked?

CHF – we would think that higher US yields would drive a weaker franc, but only seeing USDCHF rallying on a strong USD at the moment. If EURUSD fully breaks down through the support we mention above, USDCHF will be cutting through important levels all the way to parity that could lead to something bigger unfolding.

AUD – AUD lower versus the USD even as AUDNZD ran another few notches higher. AUDUSD continues to try to hang in there, but deficit countries may find themselves under increasing pressure if US yields continue to rise.

CAD – the hopes for this oil rally now that we have broken to new local highs are keeping CAD well supported in the crosses and even against the USD – but the catchup will be very swift to the downside for CAD if the oil rally falters.

NZD – a loud dovish signal from the RBNZ overnight reminding the market of the bank’s intent to cut rates and further sparks kiwi underperformance. AUDNZD is having a look at the interesting 1.0700+ area, the next hurdle as it is possibly headed to 1.15-1.20 longer term.

SEK – watching reactivity to today’s Sweden CPI data. In general, the combination of higher rates and weak risk appetite the most negative for SEK as EURSEK tries to figure out if it wants to run to 10.00 after pulling above 9.60.

NOK – Norges Bank’s Olsen out speaking today, and the oil price in the driver’s seat as further NOK upside needs to see oil succeed in its breakout attempt higher.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0730 – Sweden Sep. CPI 
  • 0900 – Germany Sep. ZEW Survey 
  • 0900 – Norway Norges Bank’s Olsen to Speak 
  • 1215 – Canada Sep. Housing Starts 
  • 1600 – ECB’s Mersch to Speak 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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