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Equities surged on Wall Street yesterday after Trump's tax reform package passed the first stage of the legislative process in the House of Representatives and will now proceed towards the Senate for second-stage approval. The USD, meanwhile, had a surprisingly soggy time in Asian trade overnight.
Article / 17 February 2017 at 14:54 GMT

FX4 Next Week: Calm dollar ahead of Trump speech — #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
  • The current week has been difficult for shorter term traders 
  • Next important event for USD is Trump's speech on February 28
  • Significant rally in AUDNZD through key resistance
  • Poor Australian unemployment rate should come with caution
  • Market ignored rather negative SEK-developments. SEK uptrend could continue
Fox Glacier, New Zealand.
RBNZ attempt to ice expectations for any rate moves - 
- Fox Glacier, New Zealand. Photo: Shutterstock
 
By John Hardy

This week has offered a number of twists and turns that have been difficult for shorter term traders to navigate as two way moves were common in both major USD and JPY-pairs this week. First, the USD got some support and peaked shortly after Fed Chair Yellen’s testimony to congress earlier this week, in which the Fed Chair seemed to have a more hawkish posture than the market was positioned for. But a pickup in Fed expectations didn’t build much momentum in US yields and a distraction from a wobble in global risk appetite later in the week further derailed the USD rally, though mostly only within the G3. The next important calendar for the USD and for global markets in general is Trump’s speech before a joint session of Congress on the 28 February, at which he is likely to outline more specific policy priorities.

Buying AUDNZD on dips
 
This is a repeat of one of last week’s trading themes, as there is still plenty of room for a dip without concerning bears for now, Let’s recall the argument in favour of this trade we presented last week: “the combination of a relatively optimistic RBA and also optimistic – but very dovish RBNZ [last week].” This sparked a significant rally in AUDNZD through key resistance, as the RBNZ spoke more forcefully against recent currency appreciation than did the RBA, and also attempt to ice expectations for any rate moves from the RBNZ as far out as 2019 by delaying the anticipated time-frame of reaching the 2% inflation target to Q2 of 2019 from the previous Q4 of 2018. The RBA, meanwhile, waxed mostly optimistic and its rather intense focus on financial stability risks from housing would seem to rule out any prospects for further rate cuts. The divergence in rate moves and guidance from the two central banks still looks favourably for a revaluation higher of the long undervalued AUDNZD, which is approaching an important resistance level (1.0750) that could lead to even larger gains from here.

Trading stance: Traders may look to buy dips in AUDNZD to as low as 1.0600 for a challenge of at least the 1.0750 area as long as we remain above 1.0525-50 (note the 200-day moving average near 1.0525). Longer term trade may take a strategic approach and look to hold longs for a break of that 1.0750 level and for a try toward the even bigger resistance level up at 1.1300+, though a move of that magnitude would likely require further fundamental catalysts.

Chart: AUDNZD
AUDNZD
Source: Saxo Bank
 
AUDUSD capitulation on weakness through next supports

After a lengthy consolidation period over the last couple of weeks, the AUDUSD tried powering to local new highs above 0.7700 but was met with strong resistance, likely linked to significant wobbles in global risk appetite. But Australian data has not impressed recently, and this week’s poor showing for the unemployment rate and full time payrolls growth in January should be flagging some caution in the background. In addition, a story broke in the FT this week that China is moving to block Chinese investors from buying foreign real estate, a significant driver of the Sydney property market in particular, and therefore a driver of capital inflows into Australia. It may be too early for a turnaround in the Aussie’s fortunes, but this week offered the first notable sign of weakness in some time and ate least some opportunity for further tactical weakness in the Aussie relative to the G3.  

Trading stance: AUDUSD bears will look for a close below 0.7650 to establish that the highs for the cycle may be in at least for now as we look back toward the next support levels toward at least 0.7500. A failure to ever close below 0.7650 and/or a rise and close back above 0.7700 keep the bearish scenario side-lined for now.

Chart: AUDUSD
AUDUSD
Source: Saxo Bank
 
Continued EURSEK downside
  
EURSEK downside has been one of the more persistent trends in recent months and the strength of the trend was underlined this week as two rather SEK-negative developments – a Riksbank meeting in which the bank oddly insisted that it could yet cut rates if necessary and a weak January CPI reading for January – were largely overlooked by the market. The lack of a reaction suggests that the trend could continue as the market continues to look for the undervalued SEK to gain on the single currency as the Riksbank is very likely done easing for the cycle.

Trading stance: EURSEK bears will stay short as long as the price action stays south of 9.50 for fresh lows below 9.40 and perhaps toward 9.30 in the coming weeks.

Chart: EURSEK
EURSEK
Source: Saxo Bank
  
EURJPY downside on rising political risk
 
The political risks across the EU have been an ongoing theme and this week we saw fresh worries centered on the French election as the far left may join forces in a bid to get to the run-off round against Le Pen. This is a reminder, in the era of Brexit and President Trump, that political outcomes remain highly unpredictable. As well, a key EU meeting up on Monday that should include a decision on Greece’s bailout terms reminds of the slow-burn issue with Greece’s unsustainable bailout payments and debt burdens. And then there is the weakest link, Italy. EURJPY is our favorite way of expressing rising political risks for the euro.

Trading stance: Traders may consider medium dated options strategies (perhaps 2 month put spreads) with 3 x 1 reward-risk profile, or even shorter dated vanilla puts for three weeks with strikes a figure or more out of the money, but short spots look reasonable as well for reward vs. risk, given that volatility has not risen much in EURJPY. Bears will look for fresh lows to trade as long as we continue to trade south of 121.00 – at minimum for a test of the Ichimoku daily cloud, if not the 200-day moving average toward 117.75. 

Chart: EURJPY
EURJPY
 Source: Saxo Bank

— Edited by Clemens Bomsdorf


John J Hardy is head of FX strategy at Saxo Bank

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