Article / 19 June 2017 at 9:17 GMT

FX Update: Volatility keeps slip-sliding away

Head of FX Strategy / Saxo Bank
  • Post-FOMC USD rally was a flash in the pan
  • US 10-year yield has gone sideways at indecisive levels
  • US political news at the weekend slightly USD-supportive
  • Macron's mandate from weekend legislative election a bit weaker than expected
  • EURUSD bounced back to middle of recent range on Friday
  • Few potential catalysts for EURUSD on economic calendar this week
Euros and dollars
 What could shake this market out of its complacency? Image: Shutterstock

By John J Hardy

The USD rally after the Federal Open Market Committee meeting has so far proven a flash in the pan, as Friday’s session saw mean reversion back into recent ranges in most of the major USD pairs. Our key coincident indicator, the US 10-year yield, likewise, failed to confirm the rejection of the recent lows in yields and has gone sideways at indecisive levels. 

Equities, meanwhile, steadied after a white-knuckle session or two in mostly tech stocks. The US political news over the weekend was slightly supportive for the greenback, as it appears that President Donald Trump is not (yet?) under investigation for obstruction of justice by special counsel Robert Mueller. But the "Trump trade" is still dead in the water, while a debt-ceiling showdown possibly looms after the summer.

The second round of French legislative elections handed President Emmanuel Macron a strong mandate for change – potentially administering a much-needed boost to France’s long-underperforming, if rapidly improving, economy. Yet the mandate was somewhat weaker than expected, with Macron’s new party taking 350 of the 577 seats in parliament against some estimates of between 400 and 450 seats. This and record-low voter turnout could mean stiff resistance on the ground to new pushes for labour reform.

The hope for longer-term euro longs — besides European Central Bank policy normalisation, and evident in the lowest Italy-Germany yield spread since very early this year — is that Macron’s pro-EU stance will eventually lead to a more integrated and sustainable EU framework. But one thing is clear – everything is on hold until after the German elections as Germany’s chancellor Angela Merkel will not want to jeopardize her election chances with generosity to the periphery.

The recent Greek funds disbursement proved this, as the International Monetary Fund signed on despite no new debt relief (were they promised something down the road behind closed doors?). The “conspiracy among the elites” scenario would be that sometime after the September 24 German elections, Merkel may be willing to address real debt relief and a comprehensive reform of the EU with Macron, including a path toward a more integrated Europe. Until then, volatility could continue to slip slide away unless we get a meltdown in risk assets or firmer signs of a recession risk building in the US, or both.


Friday saw a bounce back to the middle of the recent range for EURUSD, and we have very few potential catalysts on the economic calendar this week and an increasingly crowded long euro positioning. Tactically, there is still perhaps some more risk of USD consolidation on the lack of new inputs.

EURUSD back in the middle of the range
Source: Saxo Bank 

The G-10 rundown

USD – the FOMC rally hardly amounted to much as of Friday’s close, but nothing decisive has occurred so far in the price action, and USDJPY looks a bit peppy as the week gets under way. So let’s see if last week’s reversal amounts to something there for starters for the greenback.

EUR – the euro is back to the middle of the recent range. Long euros are increasingly looking like a crowded trade if we use US EURUSD futures as our guide. If last week’s lows are taken out, we could be looking at a test of the pivotal 1.1000 area.

JPY – the Bank of Japan on Friday clearly wanted to avoid the impression that it is considering altering policy (likely they have taken note of the market’s treatment of the euro as the ECB has started its ponderous shift into more neutral stance). This leaves JPY vulnerable if risk appetite remains robust and especially if bond yields pick up again.

GBP – it won’t take much upside versus the euro for EURGBP to look like it wants to stay in the range. The spin, as Brexit negotiations get under way today, is that both sides want to start on friendly footing.

CHF – a CHF 1 billion build in the Swiss National Bank’s sight deposits keep the upside pressure on the franc.

AUD – breaking this morning, Moody’s has downgraded Australia’s big four banks, citing housing risk. This is the key risk, in fact, for Australia’s economy and not sure we understand why AUDUSD trades here – mostly about negativity on the USD side.

CAD – the Canadian dollar has adjusted justifiably to recent Bank of Canada comments, including from governor Stephen Poloz himself. But is there more meat on the bone there? CAD looks a bit rich relative to oil prices if interest rate spreads don’t extend further.

NZD – AUDNZD continues to look heavy after the Moody’s downgrade story. Reserve Bank of New Zealand meets later this week, and Wheeler and Company will do what they can to avoid looking hawkish.

SEK – EURSEK can’t stay within 9.70-9.80 forever, but it seems to be trying.

NOK – Norway short rates are picking up, and a recent Norges Bank regions survey was positive, but oil is a negative and so is the CPI outlook, so not sure how much anticipation we have ahead of th Norges Bank meeting on Thursday, even if EURNOK is at historically extended (to the weak side) levels.

Economic Data Highlights (all times GMT)
1200 – US Fed’s Dudley to speak at roundtable
1300 – ECB’s Nouy to issue statement
2300 – US Fed’s Evans (FOMC voter)

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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