The story making the headlines in the currency market is the follow-through weakness in the US Dollar, exacerbated by yet another round of poor US economic data, this time the goods orders series was the culprit behind the sell-off last Friday. Movements in the Forex market are expected to come to a halt for most of the day with the two financial centers injecting the most currency vol closed due to public holidays this Monday. The rest of the currencies, with the exception of the Sterling, attracted tepid flows. Remember, most of the gains seen in majors is a function of the USD weakness we are seeing across the board vs fundamentally-backed bullish moves outside the USD.
The market is set to come back to life after the respective holidays in the UK and the US. Currency movements have been quite subdued, with the Sterling and to a lesser extent the Euro, finding minimal extra stimulus on the back of the fragmented election results out of Europe. The risk dynamics remain quite suppressive, an environment that tends to benefit the likes of the Japanese Yen, while flows into the USD remain largely limited as the market comes to terms about the risk of a US economic slowdown on recent poor data.
Safe-haven bids into the allure of the Japanese Yen and fixed income markets are the name of the game as the markets gradually come to the realization that the global economy is about to enter a period of subpar growth as the US and China drag on the trade strifes. The behavior of risk-sensitive assets is finally revealing that the market is buying into the notion of a protracted trade war with no end in sight, and as such, leveraged-seeking strategies are on deleverage mode. The USD received a better bid tone as US consumer confidence held firm, while the Aussie also found significant interest even as Aussie yields in the 10y maturity fall below the official cash rate of 1.5%, which communicates the market is overly confident that the RBA will cut its benchmark rate in June. The Canadian Dollar has been the most unloved currency as the market prepares to adjust the currency valuation based on today’s BoC policy meeting. Lastly, the Euro has traded on a softer note as the fragmented EU parliamentary election results feed through and Italy makes headlines once again for the wrong reasons. The Pound is finding a better footing so far as traders await the transition away from PM May at the helm of the UK government starting next week, a period where GBP vol will be subject to which candidate is ahead on the bookies.
The ebbs and flows in the forex arena have resulted in the Japanese Yen taking a step back late in the day, while the US Dollar makes another one forward. A poor bid to cover in a 7y auction in US bonds managed to mitigate the prevailing risk-off flows, as it implies the bearish momentum in bond yields may be exhausting. Let’s not forget, fixed income has been on the driving seat commanding what’s ultimately permuted into broader risk-off dynamics as global growth expectations are dramatically readjusted amid the hostility in trade relationships between the US and China. The more risk assets sell, the more convinced the market is of a protracted trade war, that’s the bottom line. The Aussie has been holding surprisingly steady even as the 10y Aus bond yield inverts against the official cash rate, implying next week’s RBA rate cut is baked in the cake. Surprisingly, the Kiwi has detached from the valuation of the Aussie as the market turns more dovish on the RBNZ after an underwhelming BNZ business outlook report. Shifting gears to North America, I’d characterize the movements in the Canadian Dollar as ‘uneventful’ as the BOC kept the ‘status quo’, clearly aiming to sound non-committal as the US-China trade situation definitely justifies to stay cautious until further clarity. Lastly, the European currencies kept trading weak on the back of the EU election results.
The main take away from the last 24h, even if sadly not translated on a pick up in currency volatility, is the notion that the Fed may be preparing the market for a potential shift in policy. That’s the only sensible conclusion if one listens to what Fed’s Vice Chair Clarida, the most important voice at the helm of the Fed after Chair Powell, had to say. The policymaker opened the door for the Fed turning more accommodative if certain pre-conditions are met, which on its own, is a strong statement of intentions. The fixed income market was again a sea of healthy buy-side volatility (lower yields), translated in the recovery of the Yen from the lowest levels it’s traded this week. The USD, surprisingly, was rather unperturbed by the dovish remarks from Clarida, and with month-end FX hedge rebalancing skewed towards moderate to strong USD buying due to the underperformance in US equities as the trade war escalates, the price action in the EUR/USD is already acting as a precursor of the combatant stance by the DXY into Friday. Interestingly, even as Crude Oil keeps selling off, the Canadian Dollar has followed in locksteps the USD as the currency managed to navigate quite successfully the BOC test after the Central Bank sounded quite neutral, which by default should be interpreted as rather positive in a world of dovish Central Banks. Along these lines, the next one set to bite the bullet, especially after the latest Capex reading, is the RBA, an outcome the market has fully priced. The Aussie is still putting in a fight. With regards to the European currencies, the Euro enjoyed firmer pockets of demand, while the Sterling is still on selling mode as Germany mulls a veto on extending the Brexit process beyond October.
Mr. Market made one of the most commanding moves as part of the month-long risk aversion chapter we are so deeply entrenched into by sending the Yen sky high in response by yet again more retaliatory soundbites by US President Trump, this time announcing that Mexico is next up to be taxed on all imports. In a matter of days, with both sides scheduled to meet this Wednesday for talks, we will find out if Trump is bluffing or he really means it, as you never know what to expect. Nonetheless, the latest Mexican developments acted as the nail in the coffin in the terrible performance in risk-sensitive assets such as the S&P 500 or US yields during May, the latter signaling the Fed should start to seriously consider accommodative policies as we head into H2, a scenario Fed Vice Chair Clarida gently hinted on last week. But leaving Mexico aside, the dominant driving factor continues to be the escalating US-China trade tension, with the latter making its posture even more explicit after the publication of a White Paper, essentially telling the US that they are ready to have a long fight if necessary. A game of chicken with no end in sight. After all said and done, the crosscurrents in the currency market saw the USD hit the hardest in the G10 space (aside from MXN and CNH), while the CAD also suffered equally harsh selling pressure on mounting negative inputs (GDP, Oil …). The Euro showed a combatant stance as did the AUD, with both currencies facing its respective Central Bank policy meetings this week. The AUD will garner most of the attention as the RBA is set to finally end its long-held thoughtful wait by announcing its first rate cut in years while the ECB is set to stay cautiously sidelined on new measures.
If there was any doubt that we are fully entrenched in a broad-based dovish outlook for Central Banks around the globe as trade disputes intensify and inflation is nowhere to be found, the official commencement of the RBA easing cycle is yet further evidence of such well-telegraphed thesis. Moreover, judging by the violent selloff in the DXY, the market is clearly growing convinced of the premise that the Federal Reserve might be the next Central Bank to bite the bullet. Remember, sellers in risky assets are still exerting complete control in fixed income and equity valuations, which makes the recent pullback in the Japanese Yen an attractive proposition upon one’s strategy agreeing. The hammering of the US Dollar has, by default, led to the Euro capitalizing the most, while the performance of the Sterling continues to underwhelm. The Aussie, meanwhile, has managed to navigate the RBA rate cut with a firm stance, as there were no signs of a dovish cut, with the Central Bank hinging its next call on rates to labor conditions.
The US Dollar regained its mojo as the market took most notice of a very strong US non-manufacturing ISM survey, even if traders had to previously contend with the lowest US ADP employment report in over 9 years. This mixed bag of economic indicators has led to confusing signals heading into Friday’s US NFP report, which is going to be cardinal to re-assess the chances of the Fed cutting its interest rate in the July to Sept window. Before the US NFP lottery event though, traders will be fixated on two fronts. Firstly, the ECB policy decision, set to release updated forecasts on inflation and GDP. Secondly, the market needs clarification on whether the US will impose tariffs to Mexico as Monday’s deadline set by Trump approaches. Overall, the risk environment has been friendly once again, especially in the volatile equity market, supported by the notion of a dovish Fed in coming months, as the 69% pricing of a rate cut by the July 31st FOMC meeting clearly depicts. The Yen seems to be defying this rationale by still finding strong demand, which comes to show that the current risk rally is limping of one leg as one would expect Yen selling as part of the ‘risk on’ procedures. The Kiwi, meanwhile, was the only currency that managed to challenge the pick up in USD demand, spurred by the neutral tone by the RBNZ assistant governor against dovish expectations. The behavior in the Kiwi comes in stark contrast with the poor performance of the Aussie, as the market remains of the belief that there is more easing ammunition to be utilized by the RBA. Ahead of the ECB, and in anticipation of Draghi striking a more pessimistic message that may reinforce their existing dovish stance, the market has been selling Euros. Sandwiched in between the currency crosscurrents we find the Canadian Dollar and the Pound, unstimulated by the absence of fundamental developments.
The uneasy truce, for lack of a better word, between Trump and Xi at the G20 summit to avoid a potential full-blown trade war, has led to the extension of the ‘risk on’ tone with the likes of the commodity currencies, as the indices performance chart illustrates, the most benefited. The interbank adjustments in forex quotes (gaps) ahead of the retail open in Asia, do feel overstretched on the preconditions of an event largely priced in since last week, with the addition that the temporary truce, at this stage, is simply an agreement of intentions. Nothing has been achieved yet on all the sensitive issues that remain on the table even if one can argue that the avoidance of further tariffs and rolling back some restrictions on Huawei are acting as a driver. So, one must question how much fuel is left until we see a meaningful reversal? Are we in a buy the rumor sell the fact? For now, there is no reason to be too defensive if looking to exploit momentum trades intraday the likes of AUD/JPY or AUD/CHF as the trend should be your friend. It is, however, when one steps back to take a bigger view off the daily, where the overcooked nature of certain currency movements start to become more obvious, which leads me to think there are no clear cut daily signals of note. That said, I do find fading strength in the USD/JPY to offer solid merit while awaiting the market to show its hand post the G20 in the conglomerate of currency crosses. While the G20 meeting outcome is positive for the AUD/USD, the RBA must decide tomorrow if it cuts the cash rate further, and with trade strifes not really part of the RBA’s justification on its current easing cycle, there is understandably cautioun that the RBA will go for another rate cut following the June one. Pricing for a cut to 1% stands around 65%, only marginally lower than the 70% on Friday. Even if an eventual comprehensive trade deal remains elusive and a far-fetched outcome given the major discrepancies still standing in the way of both superpowers, one consideration to let it sink in too is the fact that the Fed cut expectations are likely to see a sustained trimming in the immediate future (July 31st) while the dovish prospects over the next year should barely budge. This Friday’s June payrolls (Jul 5), alongside other key releases this month such as CPI (Jul 11), retail sales (Jul 16) and Q2 GDP (Jul 26) will also be key.
The surge in US Dollar demand after the temporary truce reached between the US and China at the G20 has been the dominant theme so far. Granted, the market is still holding the firm belief that the Fed will go through an insurance rate cut by the end of July when they meet again (Fed’s Clarida gave us a clear hint on Monday) even if the S&P 500 at record highs and the softening of US-China tensions argue the risks are building up for a hold. Should this scenario materialize, it would be a major upset for the market though, the Fed funds currently price in a nearly 80% chance for a cut. Throw into the mix that the US June ISM manufacturing index came upbeat on Monday, and should this week’s US NFP post a solid number, the case would be gaining massive traction for the Fed to have a rethink over the aggressiveness of its easing cycle.
Amid such context, as the chart below shows, the US Dollar attracted the most demand with aggregated tick volume showing decent commitment by buyers, with the close near the highs by the NY close another key clue that the momentum remains strong as the market adjusts its view on the Fed and the trade war. On the flip side, there is fear that the trade war may now pivot towards the European Union, as the US proposes fresh tariffs, starting with $4bn on EU goods. With the ECB clearly on a dovish mode, the Euro is certainly not anchored by fundamentals, and the latest EU PMIs are only making it look like an even weaker currency, fundamentally speaking.
The tormented state of affairs in global bond yields just days after the US and China agreed to a trade truce is a clear indication that it’s going to take a lot more than just promises of a resumption in trade talks if the market is to keep buying into the idea of risk trades. BoE’s Governor Carney was the last key actor to warn, rightly so, that as the tactics of protectionist policies by the US pans out, the global economy not only is on tenterhooks but if tensions continue it may “shipwreck” prospects for growth. It is also clear that the reversal in global yields back in line with the main macro trend means the market has ‘moved on’ from any G20-induced paraphernalia to be fixated back to the path of global central bank easing. The Japanese Yen’s strong appreciation against most currencies is the proof in the pudding that risk is far from conducive, as is the sell-off in Crude Oil despite OPEC agreed to extend production cuts for nine months tells, which us a similar story. Meanwhile, the ballistic move back up in Gold, tells us global easing cycles remain the true catalyst to keep the bull run going strong. Interestingly, the two most heavily traded currencies, the EUR, and USD, both performed poorly, even if it was the Sterling that had the worst daily run as the market comes to terms about the pessimistic outlook by BoE’s Governor Carney. The diversification of flows favored the AUD and CAD although aggregated tick volume in both indices does not suggest further continuation with Intermarket flows not backing up the trends (Lower Yuan and Oil).
The most heavily traded currencies (EUR, USD) remain on the backseat when it comes to its overall performance as commodity-linked currencies take commanding action to exploit the vulnerabilities in both the European and American counterparts. I’d say, there is a well-founded justification to keep pushing these currencies lower as the immediate risks suggest that the Fed is the next in line to bite the bullet and provide further easing measures, while the ECB may be one or two months behind. It is precisely for the same reasons that we find a suppressed USD that US equities are finding further buying interest at record highs. Easing by a Central Bank is the sugar hit buyers need, even if this time I wouldn’t say is different, but rather I will only suggest that the rally defies certain logic. If history is any indication as to when an easing cycle occurs in the context of weakening growth as clearly seen via the depressed US 30-year bond yield, then this is not the ideal environment for equities overall, especially cyclical sectors. That said, let’s keep moving on by highlighting one of the key triggers for the appreciation in the CAD today, which came courtesy of the first trade surplus in years, further illuminating traders that the Fed and the BoC may be headed, as the US-CA bond yield spread has been telegraphing for some time, in different directions. The AUD, with the RBA potentially affording to hold its record low-interest rate unchanged for a few months now that back-to-back cuts were delivered, is also finding solid buying, diverging dangerously from the Yuan. Lastly, the Japanese Yen and the Swiss Franc, unlike the price of Gold or US 30-year bond yields, tell us that investors have clearly reduced considerably the G20 hedges.
Powell’s statement was dominated by clear dovish connotations, reiterating that uncertainties continued to dim the US economic outlook due to trading concerns and a global economic slowdown.
The follow-through USD buying in the last Asian session, on the back of Fed’s Chair Powell cementing the case for a well-framed 25bp ‘insurance rate cut’ on July 31st, gave the impression that further pain was ahead for the world’s reserve currency this Thursday.
Until the US CPI came about with a meritorious printing in core inflation terms, at 0.3% m/m, which happens to be the largest gain in over one and a half year. A positive trend in the USD through American hours then ensued as the market was caught wrong-footed.
The recovery in the US inflation print, while it does not carry the substance necessary to shift the Fed’s narrative, it nonetheless makes the possibility of a 50bp rate, now priced at 21%, hard to imagine. Today’s print is the type of number that should solidify a precautionary approach in the Fed’s easing, read no 50bp rate cut, as it allows to buy time to gather further evidence on how the US economy fares the trade-related headwinds before using up further ammunition. The dual strong numbers in US payrolls and now core CPI, even if the relationship between inflation and unemployment is gone (Phillips curve theory), adds to the case.
The USD attracted steady buy-side flows as yet another piece of evidence via an upbeat US retail sales seems to suggest the upcoming one or two insurance rate cuts by the Fed may be the intended tactical move rather than a rate-cutting cycle. This rationale would definitely gain a larger number of supporters at the helm of the Fed if the US data continues to show stable readings as it’s been the case in recent times through the NFP, CPI or Retail Sales, all beating expectations. Amid the risk that the market has potentially overplayed the amount of easing the Fed is willing to pursue in the next year, Fed’s Dallas President Kaplan made some revealing comments in what may look like an attempt to massage the thematic and downplay the aggressive easing priced in by emphasizing that a tactical adjustment rather than a rate-cutting cycle is what’s needed. The outperformance of the USD comes in stark contrast with the price action witnessed in the Euro, finding an avalanche of sellers through Europe as the German ZEW is yet another reminder that the ECB may, after all, be inclined not to wait any further before initiating its new easing measures, judging by the state of demoralization in Germany’s economic sentiment among the rest of EU-wide poor data. However, one can only imagine the true extent of discouragement to hold Sterlings when even against a pressured currency such as the Euro today, the latter still looks relatively strong vs the UK currency as the market comes to terms that a hard-exit of the EU type of scenario is where the Brexit process seems to be headed with the soon-to-be-elected new UK PM. Still, a lot of water to go under the bridge before the deadline time though. The CAD index, meanwhile, continues to struggle at a critical macro 100% projection level, with the collapse in oil prices on Iran-US potentially back to the drawing table a key driver weighing on the currency. On Tuesday, we also learned that the NZ CPI Q2 stood steady from the previous quarter, which may not be enough to prevent the RBNZ from embarking upon more rate cuts if it aims to bring inflation closer to the mid-range of its 2% target mandate. However, the market has so far shrugged off such eventuality by keeping the NZD relatively well bid. AUD traders also saw the RBA dampening expectations for further rate cuts short term after decoding Tuesday’s July RBA minutes, with technicals in the AUD index, as in the case of the NZD index, still looking quite attractive. Lastly, a pair of currencies with erratic and non-directional price movements include the JPY and CHF indices, both trading around the 13-ema baselines, which clearly indicates a market that has taken a laxer approach towards supporting risk-off currencies yet not convinced to engage in protracted selling campaigns due to the evident risks that exist of slower global growth, trade uncertainties, hard-Brexit outlook to name the most pressing issues.
It was a hostile day to be a risk-seeker, even if one would need to check the screens twice judging by the impressive run in the New Zealand Dollar, recently supported by a higher dairy auction but paradoxically, with the RBNZ potentially readying a rate cut in August. But I digress, as one deconstructs the moves in the market, it becomes clear that there was a much higher degree of prudence all around as the S&P 500 lost nearly 0.8%, long-dated US-30 year bond yield open Asia on Thursday 0.61% lower, Gold printed a bullish engulfing bar on the daily and Oil continues to find sellers even if we are back to square one in the US-Iran hopes to bridge differences after remarks by Iran’s Foreign Minister. At the epicenter driving today’s market movements, we find the standstill by the US and China to make progress in trade ties. An article published by the WSJ highlighting the difficulties to move forward with Huawei led to the over-supply in risk to worsen. Shifting gears, when analyzing FX moves on a merit basis today, the EUR index keeps whispering that the market is in no mood to amass the currency, as expectations keep building up that the ECB may have found enough evidence to wait no longer before it introduces its new stimulus program as soon as next week. The USD, meanwhile, saw a moderate retreat, but nothing major, with today’s Fed speakers and the Fed Beige Book, reinforcing the notion that one or two insurance rate cuts are coming on the basis of 3 shaky pillars (global growth slowdown, trade uncertainty, low inflation). The JPY, as one would expect, attracted solid bids amid the shift to risk-off dynamics. The Swissy trod water, failing to attract the buying interest the Yen did. The Sterling, while it managed to stop the bloodbath in the last 24h, is still a currency with the most fragile macros, with banks such as Morgan Stanley calling for a 1-1.10 range as ‘fair valuation’ if a hard-Brexit ensues by the end of October. The CAD, meanwhile, has been trading for more than a week without the ‘punch’ it had us accustomed as a macro resistance in the index has been reached. Besides, intermarket flows, are far from ideal to be overly optimistic on the CAD heading into Thursday. Lastly, the AUD succumbed to risk-off by adjusting its valuation a tad lower even if the structure of the index is still of the most positive out there as the RBA will most likely take a pause in easing till Q4 at the bare minimum. Overall, the movements in Forex are still lagging way behind compared to the amount of vol experienced in equities or commodities.
Thursday’s price action was characterized by a USD-centric selloff across the board after Fed’s Vice-Chair and NY Fed President Williams intensified his dovish rhetoric right before the Fed goes dark until the FOMC on July 31st. The market took his comments by heart, even if he later tried to play them down by saying today’s speech was not about potential policy actions to be conducted this month, and while the USD recouped a significant portion of its US-led losses, judging by the CME Fedwatch pricing of a 50bp rate cut, last at 48% from as high as 71% a few hours later (yesterday stood at 32%), the market verdict still seems to suggest the conviction for an aggressive Fed cut is on the rise. The Euro was also knocked down against its main peers, as a report made the rounds that, in an unprecedented move, the ECB may be considering to revise its inflation goal mandate, in a sign that the Central Bank may have to resort to more stimulus for longer amid the puzzling phenomenon of low global inflation. On the flip side, the Sterling finally celebrated a positive day, and it wasn’t just a mere gain, but the largest posted in the month of July, as the UK parliament passed the Benn amendment that will block a Sept-Oct parliament shutdown in case the new UK PM had the perilous audacity of strategizing with a hard-Brexit by running out of time. The Kiwi and the Aussie, the latter boosted by the reassurance provided by today’s Aus jobs that the RBA will stay pat for a few months on rates, put on another solid performance. The same cannot be said about the Canadian Dollar, suffering an imbalance of supply as the market plays the divergence trade against intermarket flows as warned in yesterday’s report. Lastly, both the Yen and the Swissy trod water once again by trading generally flat from an equally-weighted performance view, hence capitalizing only against the weakest (EUR, USD, CAD).
The Fed has officially entered its particular blackout period and the market verdict just 9 days from the FOMC meeting is that a 25bp rate cut is likely to be the ‘insurance’ rate cut the Central Bank is seeking as a preventive measure. One that did not apply that adjective when giving his speech late Thursday last week was Fed’s NY President Williams, whose overly dovish comments on the US economy led to some USD vol fireworks, with the NY Fed later issuing a note clarifying that what Williams made sound like a 50bp rate cut message, should indeed be played down as the comments should, according to the subsequent note by the NY Fed, be taken only as ‘academics’ and not intended to relate to the Fed’s monetary policy decision on July 31st. One has got to agree that the Fed is suffering from a growing collection of miscommunications during Powell’s era. The USD bearish move pre-Willimas was essentially canceled and things went back where they were as if nothing had happened and the market sees 25bp rate as the most likely outcome now. A currency that finds no respite, as the equally-weighted index below indicates is the EUR, with the ECB mulling further easing and even a potential drop of its inflation goal mandate in light of how erroneous its model (and the rest of global CBs) has been at estimating inflationary pressures. The JPY has started the new week on the backfoot, as news that US-China may arrange in-person meetings with some ‘goodwill’ actions expected, most likely a key factor influencing the poor performance. The Kiwi and the Aussie, especially the former, remain on bullish trends as per the currency indices structures. Surprising to see the Kiwi so strong even if the RBNZ may opt to ease in August. Tells you how tough it is to find a good FX choice out there to diversify into (race to the bottom in easing cycles in full motion). The GBP has been able to find firmer buying interest for over a week as some glimpses of hopes emerge of work being done for the UK and the EU to revisit the Brexit deal once Boris Johnson is confirmed PM later this week (with all likelihood). I leave for last the CAD, with some clear cracks in its technicals, and the CHF, which shows the opposite, as the index broke out of a range.
It was all about the smart money re-grouping to push the USD higher on Tuesday, ending the day as the undisputable leader. If judging by the closing price in the USD index by the end of business in New York, looks like the market remains comfortable holding onto longs, with the impact its had on traders’ perceptions to join the trend clearly visible in the additional upside momentum vs G8 FX right off the gates on Wednesday’s Asian session. The key driver sustaining the ebullient mood in the USD but also on equities is the confirmation by official sources that a convoy of US trade delegates, including the big guns (Mnuchin and Lighthizer), is headed to China to resume in-person trade talks from next Monday. Amid mounting bids towards the US Dollar, a currency able to find back its mojo was the Loonie, which has run a fairly strong correlation against the DXY at times of solid gains from latter this year. The Euro continues to suffer after it broke a key level of support, releasing all the pressure it had managed to contain the prior day by a 20p range. The substantial losses in the single currency heading into this week’s ECB sets the bar for President Draghi to overdeliver on stimulus quite high given all the market has priced in. The Oceanic currencies, more so the Kiwi as the RBNZ hints at the study of QE down the road, were knocked down aggressively against most peers. The Sterling found little relief from the announcement that Borish Johnson has been elected new UK PM, with his speech devoid of references to the approach to get the best outcome in Brexit. The Swissy and the Yen, partly benefited by the crossfire of sell-side pressure in other fundamentally weak currencies (EUR, GBP, NZD), also put on a decent performance, even if still overwhelmed by the USD buy-side pressure.