FX Update: USDJPY at pivotal level ahead of NFP — #SaxoStrats

By John J Hardy

The Bank of England statement and governor Mark Carney’s performance at the press conference were roundly dovish, with the clear message that Brexit uncertainty is weighing on the outlook and that the monetary policy committee members are willing to look through uncomfortably high inflation levels that they see as a temporary factor driven by the exchange rate devaluation. 

As we noted yesterday, the highest weekly close since 2011 for EURGBP was a hair above 0.9000, so we could be set for a major break. Eventually, if UK confidence and numbers break down further from here, what is stopping a run to EURGBP at parity? Recall that the financial crisis highs were near 0.9800...

The US data were mixed yesterday, but the standout number was the suddenly weaker July ISM non-manufacturing survey, which fell sharply to 53.9 from June’s 57.4 and thus registered the lowest number since August of 2016. 

As well, the calling of a grand jury by special counsel Robert Mueller in the US points to escalating political risks for president Trump – a key driver of recent USD weakness.

A reminder chart looking at the correlation between US 10-year yields (in blue below) and USDJPY, with the risk of a breakdown in the latter to the bottom of the range if a weak US jobs report sees treasuries bid/yields smashed lower.

USD – the political risks in the coming couple of weeks could overshadow US data if the latter remain indifferent. Key downside risk from the data today would be a negative surprise in the average hourly earnings.

EUR – not sure what stops the euro rally unless we get some profit-taking on especially strong US numbers. A weak jobs report today from the US could see EURUSD challenging the pivotal 1.2000-plus area.

JPY – Bank of Japan board member Kiuchi says that the 2% inflation target is not achievable and that the BoJ will reach the limit of its buying by mid-2018. That’s a fairly short timeframe and it is hard (impossible) to imagine that the bank simply stops its efforts when bonds become too scarce. Enter fiscal/helicopter money?

GBP – a clearly dovish BoE leaves sterling at the mercy of the relentlessly negative Brexit news flow. The only light at the end of the tunnel would be positioning excess at some point or the prospect for an eventual referendum to abandon Brexit.

CHF – trying to decide whether EURCHF at 1.1500 is sticky. The move is all about a reassessment of potential for the CHF to weaken.

AUD – the RBA statement was benign for the Aussie, even as it fretted the risks of a runaway currency rally and lowered growth forecasts for this year and next. Very interesting on the possible (unhealthy) source of commodity price rises that have benefitted Aussie greatly in recent weeks: links to Chinese social financing.

CAD – a fresh test for USDCAD today as both US and Canada report employment data.

NZD – the kiwi hanging in there and showing signs of bouncing versus the weak USD, though AUDNZD also posted a bounce. No NZDUSD breakdown if it can’t work back below perhaps 0.7350.

SEK – EURSEK stubborn at the top of the range, though bears remain in business as long as we are below 9.65.

NOK – the rate outlook for Norway headed in the wrong direction for EURNOK bears, even as oil prices offer NOK support.