John J Hardy
The British pound has continued to strengthen this Tuesday as investors contemplate an interest rate hike sooner rather than later. GBPUSD is trading near cycle highs.
Financial Calendar
Article / 28 March 2012 at 13:49 GMT

USD sell-off can’t find momentum

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank

The USD sell-off of the last couple of days is not gaining any real momentum despite the key range break of EURUSD. Aussie is the real laggard in this market as AUDUSD revisits the 200-day moving average.

The range break in EURUSD above 1.3290 from Monday is having a hard time gaining any momentum as attempts to follow through higher both yesterday and today were turned back. But the Euro is actually quite strong across the board if we have a look at the likes of EURGBP and EURAUD, as limping risk appetite is seeing the generally most favoured carry trade funding currencies (the “big three” trio of EUR, USD and JPY) perking up against the pro-risk commodity currencies. The rally in bonds is providing further fundamental support for the JPY in early US hours, though its response to this development so far has been limited (time to repeat the broken record notice that this week marks the end of the Japanese financial year).

The US durable goods orders data today was positive, though slightly less positive than expected (though revisions were moved higher, so the disappointment margin was very minimal and this is a volatile data series).

The recent challenge of the 1.60 level in GBPUSD is looking like a false break after the action so far today. With conditions for the UK and the US so similar at the moment (hopeless fiscal picture, trade deficits, dovish central banks, etc..) it makes one wonder what will get a trend going in the near term besides some significant dislocation in risk, which would generally favour the USD. The other random risk factor is a possible downgrade of UK sovereign debt from the ratings agencies, which may loom in the months ahead considering the inability of the UK to get its finances moving convincingly in the right direction. A firmer sign that the upside story is worth writing off for now would come with a close back below 1.5800 as this is further down in the range and well back below the contentious 200-day moving average (black line).


Looking ahead
Most if not all of the “Bernanke-effect” has now faded from this market if we look at the likes of AUDUSD, which is back where it came from after Monday’s big move. If we are to believe that the Bernanke speech was significant, we wouldn’t see some of the most favoured carry trades unwinding further already by mid-week, even if equities have only come a mere 1% off their recent highs. Imagine what a 5% correction would do for the greenback here.

As for the horse race of the big three, the Euro is winning out at the moment for reasons hard to discern – collapsing Portuguese long bond yields may be contributing to some measure of confidence, but the approaching French election represents a new potential risk in the political sphere that we will look at in days and weeks to come. The EURUSD needs to work back down through the 1.3290 area to show real signs of the reversal, though momentum is already fading quickly if the pair doesn’t post new highs soon.

If the JPY manages to end the week as weakly as it is trading right now given the fundamental backdrop and if interest rates stay this low, then the change to the New Year has far more potential for introducing immediate volatility for JPY pairs.

The rest of this week is rather thin on the data front, with only US Jobless Claims tomorrow and the Chicago PMI and University of Michigan Confidence on Friday for the US of note. Elsewhere, the highlights include German unemployment data (misleading or worse) tomorrow and Japanese inflation, industrial production, spending and employment data on Friday. Next week is when the economic data show really gets going with the major US surveys early and mid-week and the employment data at the end of the week.

Economic Data Highlights

  • Sweden Mar. Consumer Confidence out at 0.0 vs. -2.0 expected and vs. -3.2 in Feb.
  • Sweden Mar. Economic Tendency Survey out at 101.8 vs. 94.0 expected and 93.4 in Feb.
  • Germany Mar. preliminary CPI out at +0.3% MoM and +2.1% YoY vs. +0.3%/+2.2% expected, respectively and vs. +2.3% YoY in Feb.
  • US Feb. Durable Goods Orders out at +2.2% MoM and +1.6% ex Transportation vs. +3.0%/+1.7% expected, respectively.
  • US Feb. Capital Goods Orders Non-defense, ex-Aircraft out at +1.2% MoM vs. +1.5% expected
  • Canada Jan. Teranet/National Bank HPI out at +0.1% MoM and +6.5% YoY vs. +6.8% YoY in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Weekly DoE Crude Oil and Product Inventories (1430)
  • Japan Feb. Retail Trade (2350)
  • New Zealand Mar. NBNZ Business Confidence (0000)



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