Article / 27 May 2016 at 7:48 GMT

FX Update: USD sideways ahead of pivotal US data week

Head of FX Strategy / Saxo Bank
  • Greenback gallop fizzels ahead of big data week
  • Yen stubbernly firm following ambiguous G7 statement
  • Lacklustre market scratches around for a catalyst or new theme

By John J Hardy

The yen was a bit firmer overnight and USDJPY still below 110 overnight as the G7 statement was not seen as giving Japan a diplomatic carte blanche to intervene in the market, though the statement is sufficiently two-sided (disapproves of competitive devaluations while also warning against excessive moves) that Japan can point to the latter language as it did once recently if it feels its back is up against the wall on JPY strength. Reuters sources indicate as well that the Abe government will look to once again delay the planned sales tax hike that was set for April of next year. 

Elsewhere, the action has been lackluster, and we note the falling intraday volatility in many pairs recently as a possible sign that the market has gone into “theme hibernation” mode, scratching around for a catalyst or new theme that can hold water and not finding any. This also means that trending moves are likely to lack persistence and backfill constantly even if they do persist for a time. 

Possible triggers from here to shake away some of the complacency? A new big sell-off in crude oil – possible technical setup for that and of course shocking data either way from the US next week. But it’s also possible that we ease into a summer of no lovin’ for trend traders if US data shows no acceleration and the Brexit vote comes and goes with the Stay vote prevailing and the market quickly absorbing that development which it has already perhaps 75% priced in anyway, in our rough estimation.

Locally, we’re stuck in neutral area, with 1.1225/50 resistance still in place, but downside momentum fading after the mid-week new lows were rejected. Next week’s US data is the obvious catalyst for whether we can plow lower toward 1.1000 and even 1.0950 or if a tepid batch of US numbers delays the downside prospects with a detour back higher to 1.1300/50. Note the ATR indicator we have included showing a constricting daily trading range as this market lacks conviction. 

A look at 3-month implied option volatility in EURUSD shows a similar development, as despite the UK referendum next month, these have fallen to new one-year+ lows at 8.5% even with the recent increase in Fed hawkishness and the fairly chunky move from the attempt above 1.1600 recently.
Source: Saxo Bank. Create your own charts with SaxoTrader click here to learn more 

The G10 rundown – express version

USD – slight consolidation respecting the importance of next week’s full menu, but still looking broadly firm.

EUR – interested in EURJPY direction as USDJPY stubbornly refuses to take out 110, but EURUSD remains the focus, even as volatility declines. Anticipation around next week’s ECB meeting is minimal at best.

JPY – broadly firm and possibly firmer still if the risk rally shows the least signs of cracking here. Risk toward Fibo retracement levels in USDJPY if the pair dribbles lower, starting with 38.2% at 108.66. A firm rally and close well above 110, meanwhile, needed to take the tactical focus back higher.

GBP – recent enthusiasm for sterling was overwrought. First support area in GBPUSD looks like 1.4600 and EURGBP resistance at 0.7650.

CHF – lack of focus on carry despite risk-on stance in asset markets is a conundrum here. USDCHF bull trend, meanwhile, nonetheless looks convincing if the pair can maintain above 0.9800/50

AUD – an outside day reversal yesterday in AUDUSD, but lacking follow through today. 0.7250 is the key tactical resistance zone

CAD – looking at crude oil techs today and wondering if we have an ascending wedge on our hands, with potential for steep downside higher for this kind of formation. The USDCAD pivot area looks like 1.3000 here locally for a shot back to the recent highs above 1.3180 and eventually 1.3350.

NZD – NZDUSD bears’ hopes dashed again as new lows once again rejected, but on all previous occasions recently, this has likewise failed to point to notable rallies, so the choppy descent may continue to 0.6650/00 next.

SEK – as noted in EURUSD above, intraday ranges are shrinking to their lowest in a long time as we lack a notable catalyst.

NOK – note our thoughts on crude oil above – this 50 dollar level looks important for all things oil-related.

Upcoming Economic Calendar Highlights (all times GMT)
  • US Q1 GDP Revision (1230) 
  • US University of Michigan Confidence (1400) 
  • US Fed’s Yellen to Speak (1715) 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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