G8 FX index performance last week:
CAD +2.03%
CHF +0.38%
USD +0.31%
AUD -0.18%
GBP -0.20%
NZD -0.28%
EUR -0.43%
JPY -1.27%
Broad selling of USD mostly against JPY but seeing that USDJPY closed more than a 100pips higher than it did on the 20th (prior report date), I would assume these changes has reversed along with the rest of the net USD selling for the week ending 27th April (last report date). The only noteworthy observation I see is CAD longs surpassing recent highs to levels last seen in Feb 2020 while CAD continued to rally after report date and was little impacted by the USD month-end reversal.
Weekly G8 FX notes:
USD ~ found demand at the multi-year support area once again putting in a strong reversal candle having reversed to finish positive for the week all in one day! One might favour upside on this technical view while skeptics may point to the fact that it was an idiosyncratic end-of-month move; interestingly, if we look at recent swing points in the DXY they have generally occurred around the turn of the month. With eyes on NFP this week, ISM employment components for both Mfg and non-Mfg showed a larger expansion, Jobless claims still trending in the right direction, and other activity indicators are all supportive of this uptick. Given we are still amidst a strong data rebound as well as the strong USD in May seasonal, I lean towards this reversal holding up as well.
EUR ~ surprised with a break higher in the previous week and last week’s EOM action suggests a possible fakeout. Big picture-wise I’m bearish on the EUR due to a stronger US recovery and unrivalled stimulus drive while China, having been a massive contributor to EZ growth, is tightening policy and seeing some activity slowing. Considering the points made about the USD above, I think the odds of EUR trading poorly is very high this week.
JPY ~ put in a lower low after looking like it could be bottoming in the prior week. Selling momentum has been slowing into this 2016/17 area below and while we are seeing a similar pattern in other FX indexes, charts do seem to hint risk rally could be topping out ahead of the summer months. Since Feb, JPY sell-off has tracked the rise in global yields also of which has stalled the last 2 months, and if it is believed bond markets have fairly priced in future inflation expectations, the bulk of the sell-off could be behind us…
*** Asia sessions likely to see thinner liquidity with a good number of public holidays around Asia. ***
CHF ~ notably stronger than JPY last month with CHFJPY up 2% and it appears this was driven by a significant steepening in the Swiss yield curve with a comparatively modest steepening in Japan. The rally stalled into the key 120 handle last week and should we see a sideways market from here with the added possibility of a market correction, I think it could work its way back towards 115. Having said that, my preference is for the higher beta JPY crosses if the scenario of a pullback and multi-month consolidation drops further signs of playing out...
GBP ~ continued to trade heavily despite seeing better data across the board last month which, suggests to me that a lot of that’s good for the GBP is in the price. Focus will shift to BOE this week for which I don’t believe there is enough evidence to support tapering just yet: GDP still down, inflation still low, and some uncertainty about trade relations with Europe. Compound this with some strong USD considerations, May seasonality, and recent price action, I think GBP will continue to trade heavily despite many of the banks having a more constructive view.
CAD ~ the standout performer after BOC became the first to taper among major CB’s following a very strong recovery from the pandemic — consumer sectors rebounding after weak winter months, activity indicators accelerating, US recovery also a positive as close trading partners, and labour data continuing to improve with unemployment now 7.5% after skyrocketing to 13% in May last year. The CAD index is approaching a significant area that has mostly capped upside since 2016 and I think we will push on to give that area a firm test this week. Still like the AUDCAD short theme…
AUD ~ still struggles to progress higher despite the US equity rally of which it shares (I believe) the strongest correlation in FX, and Iron Ore pushing to 10year highs. This seems reflective of downside risks to Australian commodities demand from Chinese steel production curbs and political tensions. While there are positives from labour data, inflation is still subdued and think this will keep the RBA on their aggressively dovish (yield-cap) policy. Technically, AUD index sees continued selling from the pivot level above for the 3rd consecutive week while AUDUSD is showing a head shoulders pattern. Failing to hold 0.77 would imo expose a test of 0.76 and possibly 0.75 particularly if the sell in May and go away seasonal plays out (AUDUSD averaged -3.53% in the May months from 2010–2019).
NZD ~ I’ve been favouring NZD downside for the most part this year pointing to the gaping hole in the NZ economy from lost tourism and its potential impact on local communities, but this appears to have been negated by stronger food prices. Also the fact that NZ gov has addressed the housing bubble provided some conviction that RBNZ would continue maintaining its dovish policy stance. Financial stability has been a key issue and the report will be released this Wed. Technically, NZD index sold off from the key pivot level above putting in a potential right shoulder, and while global equity (URTH) and commodities (CRB) indices daily chart is looking a tad toppish, I lean towards a deeper pullback in the antipodes generally.
