There are number of correlations in play at the moment, prompting one and all to ask what is going on with the safe havens and is it all down to undeterred risk appetite. In the midst of a trade war, where there looks to be little sign of relent from either China or the US, we continue to watch the price action in USD vs CNY and CNY, waiting for pundits to start calling this not only a trade war, but a currency war. Naturally, using the phrase 'currency manipulation' is a murky area in the geopolitics, so for now, pundits are citing easing measures in China as the primary driver of Yuan weakness with anticipation of fiscal stimulus also on the way. Credit pressures are widely acknowledged, so the indications are that supply will be increased further still to address the pressure of financing costs.
That USD/JPY is following higher has prompted a range of theories, top of which is obvious BoJ policy backdrop, but following on from this, Japanese appetite for Treasuries as yield seeking drives capital out of Japan. With US stocks on the rise also, the Wall St indices are pushing new highs with the NASDAQ setting fresh records last week and again this.
All the while, USD strength is feeding through to the major pairings and for all our assumptions that exhaustion is setting in, there seems to be no sign that the DXY is giving up on the upper limit at 95.50, testing this level as I write. Technical traders may look to buy on the break, but looking at the individual currency pairs, we can see that EUR/USD is a full cent off the key 1.1500 area which has provided strong congestion in recent weeks, but this is not stopping the market from testing towards here again. Real money flow? Again, no one can confirm or is reporting this, but the price action suggests this is more than just speculative activity. This our assumption only.
Consequently, the move under 1.1600 may have legs to take us through to 1.1500 again, at which point a breach could send us down to 1.1400 (or just under) pretty quickly assuming large stops under here. Naturally, speculative USD buyers have strong US economic fundamentals behind them and there is no arguing with this.
Cable has now taken out the psychological 1.3000 level, and with soft data through the week capped off with a miss in Jun retail sales this morning, Brexit uncertainty makes the Pound a clear target for USD bulls. Valuation was the basis on which the spot rate last managed to hold the upper 1.20's, so we will see it this shines through again. The US economy was not as strong as it is now, so there is some 'slippage' to factor in here.
Strong Australian job gains in the Jun report have done little to support the AUD as the USD tide sweeps all away without differentiation it seems, though we have seen AUD/NZD higher today, but is weaker everywhere else including the CAD.
USD/CAD is right back at the highs after dropping back under 1.3200 last night, and at this point it seems irrelevant to point out the inflation data tomorrow as well as retail sales, which based on the overnight evidence will have a temporary impact at best.
From here, we are watching USD/JPY has a major indicator of when (or if) the USD turns, and in the 113.00-113.50 area we note a strong band of resistance, which will count for real if our assumption of real money USD buying is correct. 114.25-30 is the next level through here on a clean break.
When will the market throw the towel in on the USD? Clearly the economic backdrop supports a stronger greenback in the current climate, but little attention is being paid to valuation - something which is a regular occurence in the present market composition. We persistently point back to the start of the year when current accounts were playing a key part in currency valuation, and as such, the US deficits were a huge drawback with which prompted significant offloading of Treasuries. Since then the data tide has turned in favour of the USD and with the prospect of 2 more rate hikes to come from the Fed, everyone is focusing valuation on short and mid term rates.
As in the title, the USD index is again trying to make progress towards and potentially through 95.50, a ceiling which has firmly asserted itself on a number of occasions. The dip buying mantra however is continuously putting this under pressure, but challenges are looking tired on subsequent tests. Are we to assume a top has been reached? Based on exposure, in certain pairs we would argue yes, and in EUR/USD, we look to have a holding pattern developing with the market now looking sheepish once we approach the 1.1600 level, let alone 1.1500. Detractors will argue that an ECB rate move is way out on the horizon and policy divergence has and continues to widen, but we also have to consider that the market has priced this in aggressively and in record time. Hence the near term stalemate.
Similarly in GBP, we see 1.3000 having contained the sell off today. Weighed by scepticism over the BoE's level of urgency on normalisation as well as the dark clouds of Brexit, we are relentlessly pursuing the downside. 1.3020-50 was a key support point, which was breached this morning, but there was no momentum to carry this through below the figure level. Some will argue that some much welcome solidarity within the cabinet is what has cushioned the fall. We would argue that just as valuation become a growing narrative in the recovery through the 1.3500-1.3600 - en route to 1.4000+ - it is once again playing a role despite the plethora of headwinds which lie ahead for the UK economy.
With the EU still seen to be holding the cards in the negotiations, EUR/GBP has pushed higher to reflect some of the negative sentiment. Whether we push on to 0.9100 or 0.9200 from current levels, there is every reason to expect a significant reversal even if the talks do result in a no deal outcome, as the consquences will be costly for Europe as well as the UK, though naturally the overall impact looks more severe for the latter due to the reliance of the financial services industry. EU wide exporters will suffer also, so it is not just a matter of considering the disruptions of the supply chains on the UK, though divestment from the likes of Airbus and BMW Mini (as they have effectively threatened) are a worry for UK based investors and investment.
This brings us onto the subject of tariffs worldwide, and naturally the commodities based economies headlined by Australia have been hammered since their introduction on steel and aluminium imports into the US. The AUD has been under intense pressure against the USD, as has the JPY for that matter, with stock market gains pressing on the latter but allowing little upside for AUD despite the traditional correlation with risk appetite. It is now widely acknowledged that the links between the various asset classes have all broken down, and it is no small part due to the resilience of US equities and the impact of QE thereon.
US asset purchasing by the Fed started off the recovery, but with the BoJ still printing at a rate of knots, stocks and fixed income have been a staple diet for Japan having seemingly turned the flow around since the start of the year. This is why we are seeing USD/JPY pushing higher and higher, and with little care for any of the negative dynamics which may evolve from the trade wars. USD/JPY is finding USD/CNY, which has again pushed up to the highs, and is now potentially a trigger for USD buying across the board.
AUD and NZD have managed to recover today to some small degree and this has coincided with a move lower in USD/CAD. The latter has rejected a move on 1.3300 as seemed to be the intent this morning, with AUD/USD finding buyers just under 0.7350 as did NZD/USD comfortably ahead of the 0.6725-30 lows seen last week.
Clearly there is a point where the market says enough is enough, and there is growing sense of frustration over the one dimensional aspect of a market persistently looking to buy USDs on every perceived dip. A much healthier dip would be to 93.00-92.00 or so, from which the the USD could manage to generate a little more steam in order to make better progress on the upside. We've been here before though!
There is distinct apathy in the market at present, with tight ranges being held across the board as markets seem to be waiting for a major catalyst, though we are not sure what. Later today we get the first of the semi annual testimonies from Fed chair Powell on Capitol Hill today, though quite what he can add to the current positive dynamic on the US economy is a struggle to work out.
Fed members are leaning towards 4 hikes this year, but we know this due to the published dot plot. If however, we start to see the US data start to come off the boil, the Fed chair will be the first to rein his upside bias (on rates), though this is unlikely to be reflected in today's communique. On Monday we got a healthy set of spending data out of the US, though largely off the back of the revisions in May. Jun was a little more tepid, yet still positive. In a market looking at the finer details, we may start to get a sense that the best of the US data is moving behind us. Given that the focus is on economic divergence, this is little reason to turn tail on the USD at the moment, but there is a clear case of exhaustion in the USD upside story, with some viewing the level gains as excessive in as far as the have stretched already.
Looking at the specific data metrics is now (in our view) a little redundant, so when looking at the direction of the FX pairings, we should be considering the positioning a little more, and there is a potential wash out in the making. From the mid 88.00's, the USD index has torn a path through to 95.00 and a little over, and despite a number of rejections, we are still holding ground against the majors.
This is where a little differentiation is likely to pay dividends and natural instinct will be to look at the weakness in GBP (Brexit), EUR (political divisions and negative rates) and AUD (weak commodity prices).
The signs are there however, and we have already noted the reaction in USD/SEK after the Riksbank tried to prep the market for a rate hike later this year. The spot rate sank to 8.70 after piercing the 8.90 level, with the return towards the highs after the minutes revealed a possible delay in a rate move since retracted also.
As such, we can expect to see EUR/USD behaving in a similar fashion if the ECB rhetoric bends towards some of more impatient members of the governing council looking for rate normalisation ahead of H2 2019. Hopes could underpin the 1.1500 level which has held well in recent weeks; enough to return the lead rate back onto a 1.1700 handle which is where valuations are a little more realistic based on PPP as well as the respective current accounts - it is not all about interest rate differentials!
GBP weakness is hard to ignore as the UK struggles to find common ground within government on how to present their view on a post EU exit relationship. Theresa May had to yield to the pro Brexit camp last night in a number of amendments, so now we await the response from the EU which is not filled with hope, that is clear.
Whether the BoE hike in August feels academic to us, and if there was ever the prospect of a dovish hike, then we expect this will be one - if at all. There are plenty of calls for the BoE to do nothing until the Brexit mist clears and earlier today, governor Carney admitted that a cliff edge exit would force them to consider their stance.
The data in the meantime is holding up. Earnings growth may have softened a little, but unemployment is still at 4.2%, so if inflation continues to return towards the 2.0% level, household (disposable) income will be less of a concern. Debt is a notable concern for rate setters here, as it is in Australia and Canada - the latter having some of the highest rates per capita as a percentage of GDP. The BoC have felt comfortable to hike again in the meantime, so perhaps the BoE feel vindicated in their view.
The RBA are happy to keep their rates where they are, but the cash rate is at 1.50% in Australia, which is where the BoC has adjusted their rate. Not that we are comparing interest rates between nations rather broader levels of what is considered a reasonable buffer on interest rates for when the next economic downturn comes.
In each case, the bearish take on GBP, AUD and CAD is given a large helping hand by USD strength, and speculators cannot look past this at this point despite the longer term risks and potential shift sentiment. Lest we forget, the US mid terms are coming up later this year, and even though president Trump's popularity is of little consequence to USD performance, we expect profit taking/risk trimming to have a larger impact in the months ahead.
Where we see the largest risk is in USD/JPY. While pundits across the industry are happy to cite the obvious driving factors lifting the (current) ultimate carry trade to ever higher levels, they do seem rather oblivious to general USD positioning, stock market risks from a developing trade war, but more importantly any potential stealth tapering from the BoJ.
Recent comments that they are losing the war on inflation could be a sign that a policy rethink is in order. It is about time if they do as debt to GDP is now well over the 250% mark, and at these levels it would be naive to think that they are not considering the eventual unwind when it comes - and it will.
We expect to see the JPY at much higher levels towards the end of the year, and we are more than comfortable to believe the spot rate could visit sub 100.00 later this year, if not early next.
Monday's are never the best day to gauge sentiment in the market, though today we got the latest release of the US Jun retail sales numbers which saw both the ex gas and auto's and control group missing on expectations while the headline number came in as forecast at 0.5%. US data are never an easy read these days, and with some notable revisions higher in the May readings, any weakness was easily offset and the market duly ignored the stats. It was though a convenient dismissal as few want to go against the USD steam train at present, despite a number of rejections at key levels in recent weeks.
This is ultimately what could derail the USD. We cannot see any material progress being made at the present time, and as such, consolidation is the more likely outcome in the next few weeks, especially with holiday season upon us. Was there a case for some retracement? If you believe the US data is set to take a dip, this is the perfect opportunity, but led by a buoyant USD/JPY rate, the greenback has yield on its side and its digging in hard.
EUR/USD is fighting the move however, and is arguably the weakest of the bunch when considering the political divisions within and between member states. Fresh from the summit which covered immigration, Italy is sounding off warnings to the EU over its current status within the single currency zone, though comments from Salvini were walked back a little as he maintained that it was not his government's policy to engineer an exit of the EU. Markets were little impressed either way, and we saw EUR/USD pushing above 1.1700 today, but again facing resistance into the mid 1.1700's. There can only be so many times to test the downside before shorts begin to throw the towel in, and we sense this is coming soon.
More US data out tomorrow, but as with today's release, it will have to be categorically weak to see the market turn tail on the USD, with participants still loading for further gains on every modest dip. USD/CHF has struggled above parity again and we are now back under the figure, and a similar fate awaits USD/JPY if we cannot put in a sustained move through 113.00. Dip buyers are coming in ahead of 112.00, with the backdrop of stabilisation on Wall St amid some decent earnings release early this week and last. Stocks stay up, so does USD/JPY and it is as simple as that, with Gold as the leading safe haven still looking the other way. The yellow metal is now back under $1240 and looks pretty intent on testing the next support levels which lie in front of $1200.
For GBP it has been a mixed session but the relief over the soft Brexit proposals did not last long as Brexiteers within parliament managed to get enough votes for their White Paper amendments. It is hard to see just how the government can face the EU given the divisions within the Tory party let alone parliament as whole with the upper house pushing for closer alignment (with the EU) along with the gaggle of Remainers, who are being out-voiced by the pro Brexit camp spear-headed by leading names including Jacob Rees Mogg.
It was and is a pretty tame reaction from GBP as yet with the spot rate dipping towards 1.3200 but with very little purpose. For all the stubborn bidding seen in EUR/GBP ahead of 0.8800, 0.8900 looks to be out of reach for now. Dare we say, the market is getting a little fed up of this ongoing saga and is happy to sit it out until the UK and EU actually meet! Dominic Raab, the new Brexit Sec is in Brussels this week.
Notable today was a steady to slightly positive CAD, and all the while Oil price taking another dive lower. We recall this time last week when NY traders went with the traditional correlation, but there is little sign of this today. No doubt the market will point to extenuating circumstances such as a hesitant USD, but what we are really seeing is a USD/CAD rate which may well have reached its limits- unable to break back above 1.3200 either side of this weekend. It has to be said that the upturn from the mid 1.3000's post BoC looked a little forced, with markets convinced we were going to get a dovish hike. Instead, gov Poloz relayed a pretty calm wait and see approach, which as ever is and should be data dependant. Markets tried to call his bluff, but only got so far as we now eye a return below 1.3100 again.
AUD also completely ignored the slower of growth in Chinese industrial production overnight, which lent on base metals. Currencies are now switching all too freely between the 'designated drivers', though it has to be said that the sell off in AUD and NZD has been relentless and some form of moderation was due at some point. Limits look to be set here in the low to mid 0.7300's and traders seem reluctant to retest these as much as they do in NZD/USD which has shied away from the lower 0.6700's again. NZ CPI due out overnight.
Assuming the week ends with the major spot rates at current levels, we are now looking at the 7th consecutive week when the DXY has failed to hold above the 95.00 mark. There is no disputing the clear economic divergence between the US and the rest of the world, but in pricing this in to the USD, price action shows we have hit some limits.
EUR/USD and Cable led the charge lower this morning, but we saw the former stopping short of the 1.1600 mark, while Cable hit a large bank of bids just ahead of 1.3100 and has now tentatively recovered back above 1.3200. There is however little conviction in today's activity either way, but it does say that USD longs are building up and that progress is proving elusive for now.
USD/JPY has been the major force however and this pair is fighting tooth and nail to maintain upside momentum, but we note a heavy layer of resistance ahead of 113.00 and we can only assume this intensifies the higher we go. 113.50 and 115.00 are also of significance, but in JPY selling, the market assumes the BoJ will keep printing money at the same pace and there are suggestions of stealth tapering - marginal as it is. The market also took little notice of source reports that the BoJ is losing faith in its attempts to lift inflation, which is stubbornly flat-lining. Asset purchasing is clearly not going back into the economy - rather into overseas investments as we can see with spot and cross JPY higher across the board. How long until they lower their inflation forecast? Can they keep buying assets and increasing their debt to GDP? This should be the question on JPY traders minds at the present time.
This assumes that current account surpluses will again drive trade in currencies. If this was the case then we would see EUR/USD much higher also, but as mentioned above, EUR/USD is still angling for another test of the mid to low 1.1500's, but it is not proving easy.
As such, we are in a holding pattern with a view to testing higher again at some stage. We continue to see 1.1800-50 set to limit the upside, but the longer we continue to falter ahead of 1.1500, the sharper the reversal will be once the European data starts to improve and US come off its current pace. It will happen at some point.
We get consumer spending data on Monday next week so we are straight back into the action as soon as the week kicks off, with manufacturing data out the next day.
It is a bigger week for the UK, with retail sales due out alongside the employment report and inflation. Brexit issues have dominated this week, but we have yet to get a response on the UK White Paper presented to them yesterday. PM May has softened some of the red lines at the cost of 2 key cabinet ministers, though the departure of Boris Johnson is unlikely to have been too heart churning given his combative and at times, disruptive influence.
As mentioned above, 1.3100 has held again in Cable, and may well mark another base at which point speculators may start to feel that all the bad news is priced in. If not then a move towards 1.2500-1.2700 is not out of the question though at these levels people will starting thinking of under-valuation and just how much lower can it go. For this reason, it is EUR/GBP which is holding all the cards and here we see a distinct reluctance to revisit the 0.8800 level. We have been testing towards here through the Friday session, and a break lower will only run into more demand from the mid 0.8700's, so it is a stalemate here at best for now.
The CAD looks to be ending the week a little lower, but after the BoC raised rates by 25bps. The market was looking for a dovish hike, but the statement was a little more optimistic than traders had hoped for. We then tested back towards 1.3200, but sellers have contained this well and there is a sense that the market was forcing the issue with the backdrop of the USD, which is ultimately what is driving all the majors at present.
The Riksbank minutes also suggested that the rate hike under consideration may have to be delayed a little, so there was not hesitation in pushing USD/SEK higher. We hit a base just under 8.7000 at the start of the week, but has traded over 8.9000 to reverse much of the losses seen last week.
AUD and NZD are moving in tandem, and have both fended off a move back to the lows seen last week. Whether this is all part of the price action which suggests the USD is over-done remains to be seen, but it does show that we are running out of steam on the downside. A stronger pull back would have been healthier for momentum, but impulsive traded re-entry has again stifled fluidity.
Currency markets are slowly but surely tightening up into a potential logjam, where we are seeing little momentum for a USD which continues to find support on the positive outlook on the US economy. Given the Fed are now widely expected to raise rates 4 times this year, some (and we are among them) that this now largely priced in and the greenback is in a period of consolidation - at best. Once again we have seen impulsive buying at the lower end of the DXY range, which now seems to covered by the 93.50-95.50 area. Should we fail to close above 94.80 again this week, it will represent the sixth attempt to push higher and build on the rampant gains seen since the end of Q1.
We therefore see heightened risks of a sharp USD reversal. Fundamentally there is little reason for this, but exposure levels are getting stretched again and we know how these instances play out. A quick look back to the first few months of the year and long EUR/USD was one of the most overcrowded trades in the market. We have since turned tail to the tune of some 10 cents, with larger losses suffered in percentage terms in the AUD and NZD, due to the USD impact on commodity prices.
GBP has also corrected after a hugely premature bout of optimism over the Brexit negotiations, and we now find ourselves wondering whether Cable can hold its ground above the 1.3000 mark.
Little sense of measure or valuation as a result and case in point is the USD/CAD reaction to the BoC rate hike and statement. It was clearly stated that the next rate move will be data dependant, and as we saw in 2017, exchange rate weakness aided the economy greatly and may be doing so again. Naturally the NAFTA negotiations add a severe weight around the economy's outlook, much in the same way as Brexit does for the UK. However, the currency weakness will aid all exporting countries in the current climate and the manufacturing industry in the UK was testament to that in the 3-6 months when Sterling took a dive post referendum.
Any NAFTA breakdown is seen impacting more so on Canada and Mexico, but the evidence suggests that the US and Canada have gained in equal measure over the years the pact has been in place, so markets may be overstating this concern. 1.3380-1.3400 has held firm in the meantime and even at this early stage, still contend that this could represent a longer term peak.
Later in the year we have the US mid term elections which should see some pressure coming back on the USD, and by that stage we may have seen some ramifications of trade policy should president Trump continue to raise tariffs on imports around the world. China has other sources for things like soya beans - from Brazil for example - and the creation of bilateral trade deals cutting out the US should not be ignored even at this stage.
Finally when looking at USD/JPY, we are of the assumption that renewed Treasury buying is the major driving force here, and as a function of heavy QE in Japan, some of the selling earlier in the year may have been reversed. That the cross rates are also on the up suggests there is a fair amount of diversification going through, with EUR/JPY rising above 130.00, and GBP/JPY showing designs on 150.00 despite the market concerns over Brexit.
China's currency weakness has also had part to play, with the DXY moving much closer in line with USD/CNY, with price action practically identical since the start of the month. Allowing the CNY to weaken may be part of China's plans to offset the impact of tariffs, but we are delving into the unsavoury realms of politics here and let's just say we don't go there.
Currency markets have been in a real bind these last few days, with traders attempting to push the USD correction a little further on Monday. Naturally, wage growth in last Friday's employment report was a disappointment and provided the perfect excuse to rein in some of the (USD) buying which has produced lows around 1.1500 vs the EUR and just shy of 0.7300 in AUD. In the respective pull-backs, notable levels have held firm, with EUR/USD stalling well ahead of 1.1800, while AUD/USD has been curtailed pre 0.7500. The latest bout of risk off sentiment has pulled down a range of risk assets led by commodities, while stock market losses have had mixed results in FX world.
One would expect the JPY and CHF to have gained a little ground under the circumstances, but with the Chinese Yuan pushing higher and Gold lower, we have a reversion to last week's dynamic as US Treasuries seem to be the primary destination for safety in the current climate.
Overnight news that the US is going to publish a list of Chinese goods for the imposition of tariffs is a softly softly approach by the administration, who now seem to be recognising the impact on the consumer at a time with economic momentum is in its favour. We do not necessarily feel this is the fuel for the latest USD recovery rather the correlation with the USD/CNY rate which has pushed back up towards the highs as we have mentioned already.
Later today we get the US PPI stats which are unlikely to elicit much response from the markets. Perhaps manufacturing stocks should heed the data given the potential impact on baseline profits, but from a currency perspective, none of these future headwinds seem to be having a negative effect as we continue to eye ever higher levels.
Specs continue to argue the case on widening yield differentials across the curve, but with the 2yr-10yr spread narrowing to sub 30bps, upside projections may have to be reined in.
USD/JPY is now currently grappling with the bank of offers sitting in front of 111.50, and this should hold as long as Wall St follows the mood established today. If we get another relentless bounce bank then we see no reason why USD and cross JPY would not do the same. The BoJ are maintaining their asset purchases and this is feeding into the indices away from Japan - hence no inflationary pick up.
GBP looks comfortable in the mid 1.3200's for now after a hectic start to the week. In the wake of the high profile resignations, fears of a leadership challenge have abated for now and Theresa May lives to fight another day. This could again turn on its head when the EU receive the latest White Paper covering the Brexit proposals agreed on Friday. One piece of commentary of was that of the Irish PM Varadkar yesterday that it was perhaps time for the EU to become a little more flexible and this is the first time we have heard of any compassion towards the UK approach.
Even so, EUR/GBP is sticking to the task of attempting a breach of the 0.8900 level. We saw this tested and rejected on Monday, but since then the market has tried to push back towards the 0.8800 mark but is making a series of higher lows to suggest another test higher is imminent.
From the EUR perspective, few can pinpoint the resilience of the single currency other than exhaustion on the downside. This week's ECB minutes may reveal some less dovish sentiment than seems to be the party line as it were, which could prompt a sterner test on 1.1850-60 in EUR/USD, dragging the GBP cross rate in its wake.
For today, the BoC is the primary focus in the currency markets, as for one we wait to see whether the odds for a rate hike at 85% will be materialised. Secondly, with markets still pricing another hike later this year, the accompanying statement will be scrutinised for clues on this and it is shaping up for a busy session for USD/CAD. We can see a range test close to limits which we will widen out to 1.2900-1.3300 given the volatility in the past. Markets seem ready to pounce on the prospect of a dovish hike, but we maintain that 1.3380-1.3400 higher up is a step too far at this stage, and we can see this with USD price action elsewhere with the exception of the JPY.
We have entered into a tight consolidation phase across the FX markets, with some notable risks ahead. So far this week, GBP has taken the limelight with a number of high profile resignations from the UK cabinet in response to Theresa May's new Brexit proposals which clearly do not sit well with the hard line Brexit camp. The departure of David Davis and Boris Johnson had initially sparked fears that a vote of no confidence was in the offing, but with some key names downplaying such a move, calm has been restored and the Pound is enjoying some stabilisation.
Cable is locked into a tight range which now sees 1.3100-1.3400 in play, though 1.3300 looks well offered in the meantime. Tuesday's data run out of the UK revealed some softer than expected manufacturing stats, but the newly introduced monthly GDP read saw a gain of 0.3%, while the building industry looks positive with a marked jump in construction output. Trade in May saw little change to the overall deficit, though non EU exports looked to have offset some of the shortfall with Europe.
On Thursday, the government present the Brexit plans to the EU, so we will have to see how this is received. We did however hear from Irish PM Varadkar who suggested it was time for the EU to be more flexible. Not would not be a bad time to mend some of the bridges given trade tensions with the US. Meanwhile, the EU's chief negotiator Barnier continues to peddle familiar lines that the EU will have to prepare for a no deal scenario and that single market integrity cannot be compromised. Same rhetoric, different day.
The EUR managed to survive a scare from comments from the European Affairs minister Savona that it was up to Europe to decide whether Italy would stay part of the EUR. Italy is on a collision course with the EU bloc on funding which could spark fresh fears of fresh disunity in the union, but once again, this has been brushed off and the EUR rate is holding its ground pretty much across the board. All is not well and but for some excessive USD buying against the single currency, we could have seen a little more downside on this. Markets look relatively thin today however, with minor levels holding fast and 1.1680-85 is one we have pinpointed today as we now head back into the mid 1.1700's. EUR/GBP has made another attempt on the low 0.8800's but to minimal effect. Here it seems, traders want to put in a sterner test of the 0.8900 level which held firm in Monday's GBP panic selling.
Equity markets are having a good day, so it stands to reason that the risk related currencies get some relief. AUD/USD tried to push back below the 0.7440-50 area, but stopped around 10 ticks below here before tentatively moving higher again. Until we get some concrete USD data, we will see a little more differentiation, and along with the NZD, the positive tone is allowing for some modest upside though in both cases we are well within ranges which maintain an overall bearish bias.
Naturally the JPY starts to weaken and here we see USD/JPY pushing towards key trend line resistance at 111.50 or so. Price action suggests this could hold on first test, with sellers coming in ahead of this to keep the high at 111.35 for now. Pressure coming through the cross rates, with GBP, AUD and NZD vs JPY showing the stronger gains on the day so far.
CAD tried to recover back to 1.3150, but has backed off a little. There is very little in it as the market awaits the BoC meeting tomorrow where OIS swaps suggest there is close to an 85% chance Poloz and Co hike rates by 25bps. Focus will then switch to the MPR to assess the stance thereafter and the likelihood of another move this year. If not, we expect the market will test back towards 1.3200-1.3300, but we continue to view 1.3400 as a potential top and are not convinced we are destined for a move above here and onto levels we saw back in early June last year.
Fears that the latest Brexit proposals would have repercussions have materialised today in what have been a series of resignations, starting off with Brexit minister Davis Davis. Junior minister Steve Baker was next up, though reports that Suella Braverman had joined the exodus were wide of the mark. Later in the day however, it was the exit of Boris Johnson which hit the headlines and Sterling, which up to that point was relatively buoyed given a seemingly easier path to a softer Brexit, no matter how tenuous the assumption.
As such, the resignation of one of the PM's major agitators has now left the market wary of a leadership contest, with Theresa May's grip on power now down to the finger nails as her cabinet gets the revolving door moving. Dominic Raab has now replaced David Davis, but a crisis of confidence is now setting in and there are shades of late 2016 flashing across the minds of traders. Cable had pushed above 1.3300 again after Asian traders closed the gap over the weekend, but it now looks likely that we may well test the lows from last week as hard or soft Brexit aside, who will be in charge to lead the talks?
EUR/GBP was already reluctant to give up the 0.8800 handle and has since made a bee-line for 0.8900, but this will require a major fallout in Cable and also a EUR/USD rate sticking its ground in the mid to upper 1.1700's. This will be a feat in itself given broader USD sentiment, and we may have taken a hit from last week, but price action here is largely corrective as yet.
Later in the week we get some inflation data which will at some point be considered in conjunction with the slower pace of earnings growth, though short term rates are running the currency market for the large part, and here the US stands out as the Fed may have no option but to firm up expectations of 4 hikes this year which should at least return some of the major spot rates back to their recent extremes.
As we saw with USD/SEK, the Riksbank have suggested that rates could start normalising from later on this year, and traders have taken rate path differentials into account accordingly. This may be have been short lived with the SEK rate now back over 8.7000 again, but it was a sharp reversal seen last week and one which suggests the USD is not as resilient as we saw a few weeks ago. This is largely down to the acceleration of gains throughout Q2, but as above, the downturn looks corrective as yet.
EUR/USD is behaving in a similar fashion as certain ECB members are now set to argue against the timing of the next rate hike. President Draghi's comments earlier today seemed to downplay such fears as he reassured markets there would be little movement until after next summer, though he did acknowledge confidence in a pick up in inflation as well as sound economic fundamentals in the Euro zone.
1.1850-55 is still major resistance on the topside, but for now, we can see cross flow through EUR/GBP keeping the pair just off these levels for now.
The CAD has also been a little more resilient, and ever since the rejection of 1.3380-00, the spot rate has been trying to grind lower but for specs maintaining support ahead 1.3050. This was the weekly trend line breakout point, and is seen as an attractive level to reinstate longs for a renewed test on the upside, where 1.3500-1.3600 looks to be a popular target in the face of USD dominance and trade risks which could hurt the domestic economy.
Later this week though the BoC are due to meet and potentially deliver another 25bp rate hike. The jobs report was healthy as per the release last week, but comments from gov Poloz that the economy is running close to full capacity suggests there is room for further normalisation without hindering expansion.
Should USD/CAD break under the support mentioned above and 1.3000, stronger support levels in the 1.2950-1.2850 lies in wait, and seems to be encouraging buyers at these higher levels to commit despite the volatility which may follow the central bank announcement on Wednesday.
AUD and NZD have largely been along for the ride, with the former taking out a layer of selling interest in the 0.7440-50 area. Given the heavy series of losses seen in recent months, a stronger short squeeze should have been anticipated just as we have also seen with NZD/USD after the relentless push lower which only managed to dig a few ticks out of sub 0.6700 levels.
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Today's payrolls release was the key event of the week, and while headline jobs for Jun rose by another 213K, earnings growth lost acceleration printing a below expected 0.2%. At 0.3% - as we saw in May - momentum would have suggested the Fed are right to be concerned over the economy running too hot. This was revealed in the FOMC minutes on Thursday and let a potentially hawkish tint to the communique but for reservations on trade policy as well as maintaining gradual normalisation which still means 4 hikes this year, and as yet 3 for 2019.
However, this is one report, and although the USD has come off, at this stage it was nothing more than a timely readjustment to a move which has been all embracing of the US economic turnaround from the start of the year. It was less than 3 months ago the doom-mongers had resigned the reserve currency to the scrap heap as fears of the budget deficit superseded all other considerations, but this has been overtaken by economic divergence. Even so, valuations have to be taken into account, and we have clearly reached short term limits.
EUR/USD led the move against the greenback from midweek, and having stuttered above 1.1700 in previous sessions, made some decent progress towards what seems to be a potential challenge on stronger levels inside 1.1800-50. It will take further economic evidence that the pace of US growth is slowing a little to suggest a move above here, and there are plenty of concerns over Europe to discount some of the source stories that some ECB members consider an H2 hike as too late. This is not fresh news, and the key driver has been that the rate path cycle has been diverging again, prompting the mass sell off seen from the 1.2500 area. Even so, 10 cents is adjustment enough.
Highlighting this perspective was the sharp turnaround USD/SEK this week, when the Riksbank announced they are ready to start normalising their rates - which are still negative. The move front run the broader theme which has played out since, and from tipping 9.0000 either side of last weekend, we now look set to test the 8.60-65 area. At this stage, we expect this support to hold, but as with all pairs, it is data dependant so watch this space.
In the UK, cabinet talks at Chequers are under way, but this does not seem to be unnerving the market as Cable put in a healthy charge higher to try and retest the 1.3300 level. We have stalled here twice this week, though understandably so. The weekend could throw up some nasty developments, and beyond divisive disagreements on the Brexit approach to adopt, possible fall outs and resignations could make for uncomfortable reading over the weekend. EUR/GBP has pushed higher after a strong hold of the 0.8800 level, after we tested this post Services PMIs which came in better than expected.
We still see very little interest in the JPY and CHF pairs over. The latter has dipped below 0.9900 again, but ranges are tight here as the flow in EUR/USD has been mirrored in large part by EUR/CHF, while EUR/JPY has done likewise to keep the USD/JPY rate on a tight leash for now.
Last but not least, the CAD made good ground today after we saw a higher than expected rise in employment over Jun. Both full and part time jobs rose on the month, but the unemployment rate was up 0.2% to 6.0%, and there was also a slight widening in the trade deficit which took the shine off the leading numbers. Even so, the stage is set for the BoC to hike next week, as they have consistently acknowledged the economy is running closer to full capacity. Wage growth was strong in May, but a little less so this time around, so the market is erring on the side of a 25bp move.
Technically, the previous breakout point at 1.3050-65 will prompt some to fade the move lower in USD/CAD today, though this will be an uneasy hold into next week's event so we do not rule out a deeper retracement here which would still keep the medium term uptrend intact.
We may have the US payrolls ahead of us, but for all the good economic news and data out of the US, we reiterate the lack of fresh upside momentum in the USD. In the key pairings, we can point to the source stories on some ECB members viewing H2 as too late to hike rates as a key factor in the EUR rise, but resilience to the downside was already in play ahead of this.
Similarly in Cable, weighed by Brexit concerns, we have seen buyers coming in ahead of 1.3000 mark, holding key lows in attempt to redress some of the heavy losses from 1.4300+ levels.
NZD and AUD are also pulling up a little, and while this does not represent any major turn in the USD, it does reflect the lack of consideration given to valuations on time-frame and the familiar scenario of excessive positioning. No one is questioning US economic out-performance, but when enough of it is priced in to the exchange rate, then exhaustion finally sets in.
USD/CAD perhaps best reflects this has we saw the spot rate tearing towards the 1.3400 level. Strong selling interest emerged ahead of this, and here we are now trying to test back to the broken weekly trend line around the 1.3050 mark.
A Riksbank signalling the prospect of a rate hike later in the year has also given the SEK a boost against the USD, and has come right back into the mid 8.70's, but still USD buyers step in, with demand coming in ahead of the circa 8.73 low.
Looking to the data today, we focus on the headline number first, where the consensus is looking for a 200k rise. There are downside risks to this number if we consider both Jun ISMs - manufacturing and non manufacturing employment indices dropped back a little, but this will have to be taken into account with earnings given anecdotal evidence that the hiring of skilled workers is becoming increasingly tight.
With inflation on the rise, and the Fed having to consider what actions they will have to take in the event of a material (CPI) overshoot, today's earnings number has added importance.
Canada also produces its Jun payrolls report, and this ahead of the BoC meeting. Growth figures have been better than expected at the start of Q2, and with the economy seen running close or closer to full capacity, strong data today should underpin odds for a rate hike next week, with the timing ripe given recent CAD weakness.
The BoE would also do well to pay head to current exchange rates at depressed levels when considering its own gradual phase of normalisation, but naturally with so much uncertainty over the Brexit negotiations, the MPC are keen not to tip the balance of an already fragile economy.
PM May gathers her Cabinet at Chequers later today to iron out differences between Brexiteers and Remainers within her government, all the while drawing criticism from the EU for dragging her feet as the clock ticks down to March 2019. No surprise then that GBP is under the cosh again, but below 1.3000, valuation becomes a key factor where longer term buyers are ready to take a little pain based on an eventual outcome from which the UK can finally move on.
A busy day ahead, but the early signs are that the USD looks spent for all its positive fundamental backdrop. Gold prices have also stabilised, though base metals are still very heavy.
USD/CNY has also played a major part in the strong USD story, though prices have levelled off here also. The Yuan rate tipped 6.70 this week but has come off amid speculation the PBoC have stepped in, but with trade wars looming, the this may only be a temporary development. 6.60 is the weekly low here.
FOMC ahead - but few can see past non farm payrolls tomorrow
Given the US data is still coming in strong, we are seeing little fresh impetus in the USD at present, though this may be a case of sitting on the sidelines for the most part ahead of the non farm payrolls report tomorrow. We have seen instances like this before, notably in the wake of the FOMC meeting last month, when specs waited for the ECB to get out of the way before rushing in to buy the greenback.
There are slightly different dynamics now however, as the key pairs look to have hit some limits, and technically, the likes of EUR/USD and USD/CAD have hit some noteworthy extremes and continue to trade well off them for now. As above, we see this largely as a function of exhaustion more than anything else, and since dipping under 1.1600 earlier in the week, the least EUR rate has only been looking one way despite central bank divergence, which may or may not have run its course.
Earlier today, sources suggested certain ECB members consider an H2 rate move (up) as too late, and with the Fed path largely priced in (some clearly believe it is not - we do), there may be a case of tempering some of the EUR/USD weakness even if it is a tight range. Sellers are not giving up the ghost just yet though, and above 1.1700 there is a band of resistance, and more at 1.1750 which is containing this tentative wave of buying, though this may also incorporate some profit taking given we have stalled ahead of 1.1500 on three separate occasions.
The CAD has also been a little more resilient to the USDs charms, but ahead of 1.3100, the demand continues to come in, and we expected this to continue until the low 1.3000's, at which point we will be testing some breakout levels in and around the 1.3050 area. Oil prices have been pushing higher to offer some relief, but expectations of a possible rate hike from the BoC next week are also at the back of traders' minds, with moves above 1.3200 sold into earlier this week.
Mixed fortunes for the rest of the majors however. GBP was enjoying some much welcome relief with the backdrop of another set of PMIs all coming in better than expected. BoE gov Carney also spoke of the need to hike, albeit gradually, and this gave the move a little purpose as Cable eyed 1.3300. This was cut in its tracks by what was rather an ambiguous report saying German sources believe the latest customs plans by the UK are 'unworkable'. Similar comments came from within the government, and from Brexit minister David Davis no less, and this is a stark reminder that Theresa May has a job on her hands tomorrow when she gets the cabinet to meet tomorrow to find some harmony between the soft and hard liners.
We are back at the low 1.3200's again where we saw some support first thing in Europe, while EUR/GBP also pushed higher, but is finding it tough going above 0.8850 for now.
AUD has been largely sidelined for the day, reacting to little other than flow. Positive risk sentiment argued for a push higher, but above 0.7400, specs are ready to keep the pair well contained. Better opportunities seen for AUD/JPY as a result, but this has just resulted in an eventual USD/JPY push higher, which has been marginal on the day, from 110.30 or so to only 110.70 as yet.
NZD has fared a little better, but against the USD had more ground to make up. It has been a relentless downturn here, and there is room for some manoeuvre to 0.6850, the 0.6800 figure level sees players coming in without mercy. A moderately good day and indeed week for AUD/NZD sellers as a result, having held off 1.1000 to now take out 1.0900 on the downside. Market dynamics largely at play, but the upper level has continuously frustrated buyers here on many an occasion, and is again doing so now.
It is worth noting that the SEK has held its ground against the USD today, and this in the aftermath of the Riksbank announcement yesterday where they prepped the market for a potential hike later in the year. As such, prospective rate paths are as influential as we noted above, so expect the market to react to the news wires again as it did on the ECB story overnight - perhaps with the exception of the Brexit burdened BoE!
Rather understandably, there is a hesitancy to the spot markets today, with some of the major currency pairs seeing very little movement ahead of the US ADPs, the ISM non manufacturing PMIs and then the FOMC minutes tonight. In light of the continuing strong data run in the US, few want to get on the wrong side of the USD. There is however a clear indication that there are some exhaustion points which have since held and which could suggest there is a consolidation period we have to consider before we get fresh data.
Tomorrow's official jobs report will shed some fresh light on earnings, and indeed whether job gains are continuing at the pace they are, to keep the prospect of the Phillips curve dynamics alive. Despite this, valuation levels are now coming more into focus, and with EUR/USD specifically having held off 1.1500 on three separate occasions, we have to consider how much more USD upside there is - or indeed, where to target. We are seeing a little more differentiation this morning as central bank rate paths are compared.
The Riksbank were a little more direct on their potential decision to normalise rates and we have seen USD/SEK responding in kind and pushing against the market favourite towards the bottom of the recently established range. 8.6000 is a key area to watch here, and the price action is showing all the signs that we could test this. Any hint of softness in the US data today or tomorrow and things could get interesting.
EUR/USD is now looking a little more resilient, and having rebuffed initial resistance above the 1.1700 mark, looks reluctant to pull back in a significant manner, with source stories that some ECB members see H2 2019 too late to start normalising rates. This is nothing new, as divisions within the governing council have already been acknowledged -indeed soon after the last ECB meeting in fact.
GBP has also pushed higher, and is trying to fight against the fresh tide of pessimism over Brexit, but this will be a tough ask as we have Friday's cabinet meeting at Chequers where the PM will try to find common ground on the Brexit approach going forward. It hasn't been easy up to now, so there is no reason it will get any easier now, all the while the clock ticking towards the March 2019 Brexit.
No surprise then that buyers of EUR/GBP faded the good PMI data yesterday, where services also beat on expectations alongside manufacturing and construction. This is all fuel for an August rate hike, with governor Carney speaking this morning and maintaining rate normalisation - albeit gradually - is still required. We saw GBP bid up into March expectations of a hike, so there is scope for more of the same if the Brexit can is kicked down the road again.
Little movement in the commodity currencies, though NZD is fighting back a little after the battering it has taken recently. The brief dip under 0.6700 either side of last weekend looks to have been a step too far, and again underlines the excessive nature of the USD move in the time achieved. AUD/USD is also looking a little more intent on redressing some of its recent downside, but traders here lining up to sell again in the 0.7400-50 zone. Some positive snippets of news for both Australia and NZ overnight as the RBA's Heath acknowledged some of the better data readings recently, while the NZ Treasury reports a larger budget surplus (in its 11-month statement) than previously forecast.
Finally the CAD, which has found a strong but tentative base against the USD just ahead of 1.3400. Dip buying has resumed below the 1.3150 mark, but with limited traction on the upside since. Canadian payrolls out tomorrow alongside that of the US will naturally keep the market on the defencive both ways, so near term indecision is to be expected. There is still scope to test broken trend lines ahead of 1.3000 on the downside, which will likely draw in yet more buying, but all depends on the numbers tomorrow with July's BoC meeting and another potential rate hike in the mix.
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