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Article / 03 January 2018 at 9:02 GMT

FX Update: USD selloff pauses ahead of FOMC minutes

Head of FX Strategy / Saxo Bank
Denmark
  • The USD has pulled off its lowest levels versus its peers
  • Neither FOMC minutes nor ISM index expected to provide impetus
  • Friday's EU CPI and US jobs data are this week's main events

By John J Hardy

The US dollar doesn’t seem to want to give in all at once to start the New Year, as EURUSD shied away from near the highs for the cycle yesterday and the USDJPY move lower was curtailed before it could get interesting with a look below the 112.00 level. Still, it is difficult to think that the market is holding back and looking for new compelling information from today’s December ISM Manufacturing survey or from the FOMC minutes, as Fed chair Janet Yellen’s final meeting in December was seen as turning over the Fed with as neutral a policy outlook as possible. 

The Turkish lira failed to get a further immediate boost from CPI data this morning, as the CPI level came in very slightly hotter than expected at 11.92% year-on-year (11.85% expected). This is a notable decline from the giddy 12.98% print from November and the core reading actually rose to 12.3%. Much of the high inflation is from the very weak lira of late 2016 and the additional bout of weakness last fall and will inevitably fade if the lira merely stabilizes, much less rallies. Last week saw both Turkey and the US lifting the visa restrictions and this has reduced the geopolitical risk for TRY. For perspective, Turkey CDS prices have collapsed back to the lows for the cycle from the highs in November. Given these factors and maximum risk appetite of the moment, hard to see why TRY carry trades aren’t all the rage.

Chart: EURUSD
EURUSD shied away from the highs of the cycle at 1.2092, though it did manage the highest daily close in three years yesterday. Support comes in the 1.1950-75 area for a follow up move into 1.2300+ if the next bout of US-linked event risks fail to throw up any notable obstacles. Perhaps worth noting that the Bund-US 10-year spread has actually widened a bit to start the year even as the ECB is set to halve its rate of bond purchases with the roll into 2018. The spread moved about 10 basis points in Germany’s favour in late December and bears watching for more fundamental support for the EURUSD rally.
eurusd
 Source: Saxo Bank

The G-10 rundown

USD – The ISM Manufacturing surprise risk perhaps to the downside as we are still only a few months and a few points from the near-record reading last September. The FOMC minutes could reveal a surprising turn of phrase or two (on inflation, for example) from the internal debate, but are not highly anticipated.

EUR – more support for the euro if we get a more solid pull higher in German yields – and it is perhaps not helpful if the peripheral spreads blow out wider here – Germany-Italy is 25 bps above its December lows, for example and bears watching.

JPY we were hoping to get more downside traction in USDJPY yesterday on the generally weak USD and as macro traders may be trading current account dynamics in the wake of US tax reform, but hardly any traction after a bit of a dip, setting up 112.00 as the downside pivot and anything above 113.00 as the “back in limbo” level.

GBP – sterling doesn’t want to sell off to new lows versus the euro, it seems, at least until the next round of Brexit talks starts taking shape – do we risk dithering in the 0.90-0.8750 range in EURGBP for another two months. Interesting whether a technical break higher in GBPUSD (not far from 1.3657 top today) brings any new flow.

CHF – latest SNB sight deposit data up today, but a more notable rise in EU yields without peripheral spreads blowing wider is likely the secret sauce for a EURCHF rally continuation. USDCHF pushed below a local pivot yesterday but remains well above the cycle lows well below 0.9500.

AUD – AUD taking a breather after a steep rally. AUDUSD is precisely at mid-range with short-term momentum still with the bulls as long as we remain above about 0.7700, while the structural situation is in limbo.

CAD – 1.2500 is proving a bit of a sticking point for USDCAD and 1.2390 is the last major Fibo ahead of the lows well below 1.2100.

NZD – NZDUSD bears maintaining some hope here as the pair hasn’t cleared the 200-day moving average near 0.7100 as a slightly weaker dairy auction yesterday was no help for the kiwi. But we need a USD rally and a return below 0.7000 for a sense that there is any larger downside potential. NZD downside potentially more interesting via AUDNZD higher if USD remains weak.

SEK – EURSEK has been supported in the key 9.80-85 pivot zone – might require an end to the generally strong euro to see a breakdown here.

NOK – Norway unemployment in line with expectations this morning and failing to serve as a catalyst. Still, bears have an argument now that we have maintained below the 21-day SMA – next pivot area into 9.65-9.55.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0930 – UK Dec. Construction PMI 
  • 1500 – US Dec. ISM Manufacturing 
  • 1900 – US FOMC Meeting Minutes 

– Edited by Clare MacCarthy

 

John J Hardy is head of FX strategy at Saxo Bank


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