FX Update: USD Not Yet Reaping Benefits Of Risk Aversion

Saxo Bank | Jul 09, 2014 06:08AM ET

NZDUSD pulling close to high NZDUSD has its sights set on the modern-era high around 0.8840 after yesterday when the bond-rating agency Fitch maintained its AA reading on New Zealand debt and raised the outlook to positive. This is a remarkable accomplishment for the Kiwi, given that interest rate expectations have been moving sideways for more than a week and especially given the nervousness in some of the major global equity markets. To me, it appears NZD buyers are ignoring coincident indicators like these at their peril. Then again, as I pointed out recently, CAD is entirely ignoring rate spread implications in this market. Additionally, overall complacency in the currency market is somehow relatively unperturbed compared to the pick-up in fear levels in other asset markets. Chart: NZDUSD We’re still within the parameters of the “broadening top” argument, and NZDUSD has shown a history of mean reverting to a degree shortly after posting new highs for the cycle.

Technical notes: EURUSD – having a go at three-day highs this morning. i would prefer it lower as long as we remain well below 1.3650 and I'm getting nervous that we are in for a test back above 1.3700 if we get, say, an hourly close above that level. USDJPY – needs constant pressure from weaker risk appetite and lower yields to threaten lower (100.75 is the ultimate support). It seems only an unambiguous hawkish signal from the Fed would see upside interest pick-up, so good luck with that one…. GBPUSD – traders back on a positive footing after yesterday’s new three-day low was rejected, but GBP may not do very well in a risk-off environment as it looks like a pro-cyclical currency at the moment. AUDUSD – USD is very weak at the moment – and we’re mid-range, leaving the pair to shoot either way on the Federal Open Market Committee (FOMC) meeting minutes or, more importantly, the Australian employment report, where it feels like a positive number could take the pair above 0.9500 in a heartbeat if the USD remains on its current footing. The recent bearish reversal is fast losing its significance as the risks are thoroughly two-way at the moment. Looking ahead: Even with a dose of risk-off yesterday in US equity markets, currencies failed to expand trading ranges convincingly, suggesting that we’ll need to see more volatility in the risk sentiment department to spark larger movements –that and some kind of signal from the puppeteer central banks that can jerk us forex marionettes this way or that in a pointless dance until we get a clearer picture of where policy and the economy are headed. On the economy, a picture is emerging of a Europe that isn’t recovering very well (see Marketwatch blog pointing out the weakening German numbers) and a US that appears to be doing so, though not overwhelmingly so. On the policy front, the recent strong US data has moved market expectations for the first Fed hike forward to where they were at the most aggressive side of the range (looking for a May/June timeframe for the likely first hike) since March, so we would need to see a rather unambiguous hawkish signal from this evening’s FOMC minutes release to pile into the USD from a policy perspective. The odds are low for hawkish surprises, with the only source of these from disgruntled hawks that don’t have anything approaching voting control anyway. More important will be Fed chair Janet Yellen’s testimony before Congress next Tuesday and Wednesday (the semi-annual “Humphrey Hawkins” testimony). Economic Data Highlights

UK Jun. BRC Shop Price Index out at -1.8% YoY vs. -1.4% in May

Australia Jul. Westpac Consumer Confidence Index rose to 94.9 vs. 93.2 in Jun.

China Jun. PPI out at -1.1% YoY vs. -1.0% expected and -1.4% in May

China Jun. CPI out at +2.3% YoY vs. +2.4% expected and +2.5% in May

Upcoming Economic Calendar Highlights (all times GMT)

Canada Jun. Housing Starts (1215)

US Federal Reserve FOMC Minutes of June 17-18 minutes (1800)

New Zealand Jun. BusinessNZ Manufacturing (2230)

UK Jun. RICS House Price Balance (2301)

Australia Jun. Employment Change and Unemployment Rate (0130)

China Jun. Trade Balance (0200)

Japan Jun. Consumer Confidence (0500)

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Written By: Saxo Bank

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