John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 16 April 2018 at 13:08 GMT

House View: USD and EUR trading sideways while geopolitics still nag

Your Next Trade
USD and EUR refusing to move. GBP, CAD and JPY in focus this week

  • USD: potential movers are retail sales data today, and voting FOMC speakers out all week 
  • Risk appetite: specific EM's showing extreme strain (RUB, TRY) but the broad picture is mixed and CNY supports Asia 
  • FX volatility: low vol could contract further if equity volatility resolves lower after recent nervous churning. 
  • Headline risk: still very strong on the geopolitical front as US promising further Russia sanctions. 
  • US CPI: first 2.0%+ reading for the year-on-year core expected since early 2017 
  • CAD: big week head with Bank of Canada Wednesday and CPI on Friday. Low odds for hike, but inflation pressuring 
  • JPY: risk appetite and US yields curve shifts the key drivers, and technical situation for USDJPY pivotal 
  • GBP: post-Brexit trade negotiations start today and UK CPI is up Wednesday, earnings/employment data Thursday 
  • NZD: rare important data point up on Thursday with Q1 CPI. Key for broad NZD status/AUDNZD rally status check

Tech levels on watch for developments
  • USDJPY: 107.00-50 zone pivotal after weak attempt above late last week didn't convince 
  • EURUSD: seven weeks of closing at nearly unchanged levels. Close this week >1.24 or <1.22 a start… 
  • AUDUSD: still hasn't fully resolved higher after wobbly close on Friday. Close above 0.7800-25 bullish, below 0.7700 bearish 

Trade themes
  • EURGBP continuation lower: key break last wk below 0.8700–0.8500 potential if Brexit talks / UK data cooperate 
  • USDJPY resolution: 107.00-50 area is pivotal for USDJPY – bearish on daily close below this range… otherwise waiting to sell closer to 109 
  • EURSEK downside via options: 1-month 10.30 put as steep rally extension suggests this is a blowoff top?

Q1 earnings season kicks into gear this week

  • Remain neutral on US equities unless S&P 500 breaks below February low; we do not see any positive catalysts around the corner 
  • Remain positive on EM equities as long as the MSCI EM Index stays above the 1,150 level 
  • Remain negative on UK equities due to vulnerability through mining and banking exposure; technically there is resistance at current levels 
  • Remain neutral on European equities as long as STOXX 600 Index remains above the 360 level; growth is topping out this quarter 
  • Remain positive on Hong Kong equities but key risk is adverse development over China trade policy with the US  
  • Remain negative on Japanese equities as momentum has stopped and JPY is bid 

  • Credit spreads are slowly beginning to widen which means capital intensive industries and high leverage companies should be avoided 
  • Preferred industries: semiconductor, retailing, software, automobile & components, technology hardware 
  • Least preferred industries: media, telecom, beverage & tobacco, food retailing, energy 
  • Banks continue to be the worst segment the last month and Friday's US banking earnings did not help 

  • Disappointing sentiment across US banks last Friday despite good earnings from JPMorgan Chase, Citigroup and Wells Fargo 
  • G10 macro surprise index is now barely above the lows from June 2017 with Europe leading the macro disappointment 
  • The technology sector will continue to be plagued by negative sentiment and especially firms using personal data could see repricing 
  • Q1 earnings season accelerates this week with 112 companies reporting earnings; next is the big technology week 
  • Global equities remain expensive in a historical context and long into the expansion the risk/reward ratio begins to look bad 

US yield curve flattest since 2007; sell-off of Russian credits may intensify

  • The spread between 2-year and 10-year Treasury bonds yields has hit a new low making it the yield curve the flattest since 2007. There is more room for flattening as the Fed continues to be hawkish and the Treasury increases the supply of short-term bonds as it has to fund its rising deficit.
  • Moody’s has upgraded Spain credit rating to Baa1. Fitch and S&P already are rating Spanish debt A-, a notch higher. Spanish 10-year government bond yield closed at 1.24% on Friday, 32bps down from the beginning of the year. 

High Yield
  • US Corporate High Yield credit spreads continue to be stable since the beginning of the year. As we are seeing more signs of stress in the credit space, a catalyst may provoke a selloff in these assets. 
  • The Libor-OIS Spread is at its highest since 2009 signaling an increase in funding costs which combined with an increasingly flat US yield curve, can quickly become a liquidity trap for capital intensive businesses. 

Investment Grade
  • US BBB/Baa corporate spreads have widened faster than US high yield spreads showing that there is a gradual deterioration of credits within the lower investment grade rating. 

Emerging Markets
  • Russian Credits are under pressure as Russia-US tension escalates. The US might impose more sanctions which include new Russian sovereign debt, which may cause volatility in other weaker emerging markets.
  • Regardless of a possible trade war, foreign investors continue to buy Chinese debt for the 13th consecutive month, provoking a rally in this space.


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