- USD strong, EUR strongish, JPY directionally uncertain
- Next data of note is tomorrow’s US retail sales numbers
- Trump's protectionist views make MXN an election proxy
By John J Hardy
The desperate attempt to re-engage the central bank put on Monday saw equities pulling sharply higher after the Fed’s Lael Brainard sounded (consistent with all of her past rhetoric) a dovish caution on rate hikes. Yet long bonds refused to play ball Monday and merely went sideways as the Fed is less the focus on long rates than the Bank of Japan, where there is clear concern that sustained very low long rates and a flat yield curve are bad for banks.
Then the selling in both bonds and equities picked up pace again yesterday, taking the market temperature dramatically back higher as there is nowhere to hide when all major asset classes outside of cash are tumbling. In FX land, this has translated into a strong US dollar and strongish euro, with the JPY the wildcard that can’t decide whether to appreciate because of equities are lower as a liquid safe haven or depreciate because of the tendency to weaken when long rates head higher. Elsewhere, the commodity currencies and EM have suffered mightily and will likely consistently continue to do so if we see a continuation of what some are calling a "VaR shock".
Overnight, a Nikkei story claimed that the Bank of Japan views a deepening negative rates policy as the key policy impulse from here from the BoJ in an effort to steepen the yield curve. This saw the JPY weaker again overnight, but the USDJPY rally was turned back at key levels – see the chart below.
The next data of note is tomorrow’s US retail sales data for August, as consumption is the key cylinder of the US economy that is still firing. We’ve also got the first regional US manufacturing surveys up tomorrow and then the August US CPI data on Friday as the last notable data points before next Wednesday’s Federal Open Market Committee meeting, where guidance will be seized on for clues on the Fed’s thinking.
The US presidential election is tilting back into very uncertain territory after Clinton’s recent health scare and a fresh Bloomberg Politics poll shows Trump leading by 5 points in head-to-head matchup in key swing state Ohio. The Mexican peso may be an election barometer due to Trump’s rhetoric on protectionism, and USDMXN has rallied hard on both weak risk appetite and likely due to the strongly shifting odds evident in recent polling.
The modest USDJPY rally from yesterday’s lows was turned back near the upper bound of the key descending triangle/wedge formation and the Ichimoku cloud, with the levels for that indicator particularly influential in recent months. In short, both upside and downside levels are clearly etched on the chart ahead of the pivotal September BoJ meeting.
The G-10 rundown
USD – The US dollar should remain the chief benefactor if the bond and equity synchronised selloff worsens from here, and not sure whether US data is sufficiently interesting to drive notable moves until after the FOMC meeting.
EUR – hanging in there versus the USD as the focus is on the higher beta currencies and because the non-committal European Central Bank was nominally hawkish. In a nervous environment, the most liquid currencies tend to outperform. Still, the technicals for EURUSD do start to look locally bearish if 1.1200 is slipping.
JPY – very nervous action in JPY crosses ahead of next Wednesday’s BoJ meeting as some worry that the bank will reinforce the theme that central banks are bumping up against their limits and any policy moves without more fiscal involvement will be futile. Meanwhile, whatever the BoJ does, the backdrop of higher US yields is JPY bearish.
GBP – sterling looking wobbly here after indifferent UK earnings/claims data today and in danger of a further plunge into the range in GBPUSD if this 1.3200/50 area remains broken. The Bank of England meeting tomorrow will be the catalyst either way.
CHF – our key coincident indicator for CHF remains bond yields, and as those head higher, the franc may final receive some more of the negative attention it deserves.
AUD – AUD is the weakest of the lot as fundamental signals like rate spread compression get a bit more notice now that the “reach for yield” theme has been stopped in its tracks. Australian employment report up tonight. In AUDUSD, note that the next zone into 0.7380 includes the rising trend-line (well above 0.7400 now), the 200-day moving average (near 0.7400) and the 61.8% retracement of the rallies off the May lows, coming in at 0.7380.
CAD – CAD taking it on the chin in equal measure with the Aussie, though I would think the latter has more downside potential, given the longer-term levels and potential for more policy easing in Australia relative to Canada.
NZD – the kiwi is in fantasy land versus AUD, but could either pivot lower across the board, including versus the AUD, or see another final surge if we get a weak/strong surprise on the NZ Q2 GDP number tonight. NZDUSD, on the other hand, appears finally to have turned back lower, with better confirmation through 0.7200.
SEK – surprised not to see SEK weaker as bond yields rise, but 9.60 in EURSEK has served so long to stop rallies in their tracks that no one appears ready to challenge this level yet.
NOK – EURNOK has thoroughly bogged down in the 9.15-9.35 range and may garner little focus unless oil moves sharply either way or risk appetite returns.
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank