Article / 15 January 2014 at 6:50 GMT

USD turns stronger again — now it’s time for follow through

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

• USDCAD action looking a bit stretched
• NZDUSD sharply lower overnight on USD resurgence
• China continues its credit markets crackdown

By John J Hardy

Yesterday’s strong US retail sales report set the tone late in the day as the greenback pulled back against most currencies, if mostly within recent ranges. The strong data saw bonds a bit weaker again after their previous two days of rallying as the market repriced its tapering odds once again on the strong consumption data out of the US. This helped the usual suspects weaken the most versus the greenback, namely the Japanese yen and vulnerable EM currencies like TRY and ZAR (though MXN refuses to break below 13.00 in USDMXN as that pair is running out of room for its recent indecision — a move above 13.20 would have interesting technical implications for a potential further rally.)

USDCAD is another pair that continues to impress after a heady cocktail of the big technical break of the 1.0700 area, a dovish sea change in Bank of Canada rhetoric, weak Canadian data, and falling oil prices helped to really pile it on the hapless loonie. But the action is looking a bit stretched, to say the least, in a few of the CAD pairs — not only USDCAD itself, but also AUDCAD and especially NZDCAD. The latter of these has to be considered the G10 mean reversion candidate of the year.

Speaking of NZD, the AUDNZD pair managed to push to new lows for the cycle yesterday after the strong New Zealand house price data, but NZDUSD is sharply lower again overnight on the USD resurgence. A move below 0.8300 in that pair would suggest the highs may be in for now — I prefer the downside, though lacking technical arguments for such at the moment. I remain convinced that the kiwi is priced for perfection, and perfection rarely, if ever, happens.

China’s New Yuan loan data released overnight was below 500B yuan for the first time since late 2012 and was near the lowest levels of the last four years. This continues to signal that the regime is cracking down on credit markets and some money market indicators continue to show signs of strain. How China deals with its massive credit bubble is one of the world’s most important questions in 2014.

Chart: USDCHF
One of the more interesting moves yesterday was the rally in USDCHF, a potential sign that the recent consolidation phase may be over with as the pair is ready to look higher again. EURCHF also snapped back sharply from its consolidation back to 1.2300. This suggests that the USDCHF pair could be a leader if the USD is back on the road to recovery after the non-farm payrolls number sowed doubt about the Fed’s taper conviction. A move back above 0.9100 here would help underline the 0.9000 level as well supported and possibly set up a break higher in the days ahead.

usdchf  
Source: Saxo Bank

Looking ahead
Today’s US data is unlikely to provide much of a market reaction, though there is some chance that an extreme outlier in the Empire Manufacturing Survey or an exceptionally low PPI could trigger some volatility (taper doubt, etc...) but the Fed’s Beige Book should get more focus as it theoretically offers a full picture of the various Fed members assessment of their regional economies across the US. The tone of the report could have a bit more impact than usual after the data mix of late has thrown a shadow over the US recovery story.

Elsewhere, I’m looking for the UK house price data to begin showing a change of direction (lower instead of higher) as the best housing indicator, the RICS house price balance (December's number is up tonight) has reached the highest levels in recent months in over 10 years. I’m beginning to consider revising my sterling forecasts lower for structural reasons, worrying that the UK’s massive current account deficit will have to matter at some point and that external demand won’t be strong enough to help trigger solid growth in the “right sectors”. More on that in the days/weeks to come. For now, the technical key would be a break of the 1.6250 level in GBPUSD, which could trigger further selling toward 1.6000. Carney is out speaking this evening and the market is rather starved for fresh rhetorical inputs from the Bank of England.

In Asian hours, we have the latest Australian employment report as the Australia unemployment rate hovers near the highs of 2009 and could be set for new highs this year. The employment change survey has a history of wild swings, though it was fairly consistently low for the latter part of last year, though November showed quite a bounce to 21,000-plus after several readings near or below zero. A weak data point could push AUDUSD to new lows for the cycle after the recent excursion above 0.9000 proved very brief indeed.

Upcoming Economic Calendar Highlights (all times GMT)

  • Norway Dec. Trade Balance (0900)
  • Eurozone Nov. Trade Balance (1000)
  • Eurozone ECB’s Mersch, Bundesbank’s Thiele Speaking on panel (1305)
  • US Jan. Empire Manufacturing (1330)
  • US Dec. PPI (1330)
  • Canada Dec. Existing Home Sales (1400)
  • UK Bank of England’s Carney to Speak (1415)
  • US Fed’s Evans to Speak (1750)
  • US Fed Releases Beige Book (1900)
  • US Fed’s Lockhart to Speak (2245)
  • Japan Dec. Domestic CGPI (2350)
  • UK Dec. RICS House Price Balance (0001)
  • Australia Dec. Employment Change and Unemployment Rate (0030)

 

 

(xcma)

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