FX Update: The USD breaks higher ahead of treasury auctions

24 thg 3, 2021

Summary: The malaise in Asian markets is weighing on sentiment, but it is hard to get too down in the European session when the flash March German manufacturing PMI rolled in at a blistering 66.6 this morning. The EURUSD is mulling whether it should follow through lower after breaking below an important support this morning just before the strong EU flash PMI releases. Elsewhere, AUDUSD capitulated overnight through a local support, with another important level dead ahead.

FX Trading focus: USD breaking higher in more places

The pronounced weakness in Asian markets is likely one key driver supporting the US dollar here, together with the recent sharp correction in crude oil (now partially offset by a huge ship run aground and entirely blocking the Suez Canal – a story we cover in this morning’s Saxo Market Call podcast). The US session yesterday was intriguing for equity market watchers, as the median stock suffered an ugly sell-off while large caps were fairly resilient. This is all critical as risk sentiment looks nervy here and a proper roll-over in US equities again could support the US dollar further (as well as the resurgent JPY

For now, the key development is the actual break higher in the US dollar here – with EURUSD below 1.1850 and AUDUSD below 0.7650, for example. Holding the break is the next key and then the exercise is all about watching how far the USD can rise before it becomes too painful and must be pushed back against by the Fed or otherwise. For EURUSD, I am only willing to allow for 1.1500 for now, while higher beta currencies could move more sharply lower against the USD since they rose far more against the USD when it was weak. AUDUSD at 0.7375-0.7400 (the 61.8% Fibo retracement of the big rally wave off November lows is 0.7380) is a tempting area to make a stand, but if Asian sentiment worsens and metals correct more in a scenario with a proper global equity market correction, 0.7250 or even 0.7000 at the extreme could be possible.

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Chart: EURUSD breaking – 1.1600 possible?
EURUSD broke below the local pivot low and poked below the 200-day moving average before bouncing a bit on a very strong set of flash manufacturing PMIs for Europe this morning. If the break follows through lower, the next natural focal point is the 1.1600 pivot low, although the structural chart support in the weekly is more like 1.1425-1.1500.

Odds and ends

Bank of Canada moves to unwind emergency liquidity programs ascendant – Bank of Canada Deputy Governor Gravelle yesterday announced that on May 10, the bank will stop its term repurchase operations and another repo facility. Programmes for buying commercial paper, provincial bonds and corporate bonds will also be unwound. The main Canadian government bond programme will be retained, but Gravelle teased an eventual tapering of QE purchases. The measures in aggregate will lead to a notable reduction in the Bank of Canada’s balance sheet in coming months and this is CAD bullish at the margin, though USDCAD seems more interested in tracking the action, directionally speaking, in other USD pairs. The enormous recent correction in oil has also weighed. Although USDCAD has bounced back higher after posting new lows, it still remains in the descending channel established months ago and would need to rally above 1.2700 to begin to suggest a more profound reversal.

US Treasury auctions on tap – 5-year and 7-year auctions on tap today and tomorrow, respectively, where we will watch for overall demand and especially whether that foreign demand (in the “indirect bidders” percentage) will also be worth noting after a solid jump in US yields in recent weeks. No real headlines from the 2-year auction yesterday, which is too short a maturity for expecting much drama. Any new punchy rise in yields would unsettle markets again – while the fading yields since last Thursday, on the other hand, haven’t been any wider driver of relief – save for yen longs.

The G-10 and CNH rundown

USD – the big dollar is making its move and now, with the USD index kissing the 200-day moving average as of this writing. The tactical question is hold-or-no-hold of the break and then how high it can fly before the inevitable pushback.

EUR – trying to mull the quality of the break lower this morning in EURUSD after spectacular strength in . Also noting Germany approving large supplemental stimulus package of EUR 60 billion for this year. Willing to watch EURUSD towards 1.16-1.1500 but seeing value there for longer term.

CNH – the weak equity market weighing on sentiment in China, and a strong USD is seeing CNH consolidating with slow beta to USD moves elsewhere. Anti-trust push could continue to weigh on enthusiasm for Chinese equities.

JPY – the yen has achieved a smart consolidation and to achieve more upside in broad terms needs to see another leg lower for global yields. The consolidation in USDJPY, on the other hand, has been very tight – suggesting ready for a jump higher if US yields are not capped for now. Note the end of the Japanese financial year rolling into view next Wednesday.

GBP – sterling hasn’t followed through much lower versus the Euro, and it is tempting to get involved on the short side in EURGBP here already now rather than trying to get smart with levels to fade. The March UK Services PMI points to the kind of improvement that will be seen in services as the country can let activity increasingly rip in the months ahead.

CHF – the franc has quickly gone boring with easing yield rises keeping EURCHF bottled up in the 1.10-1.110 range, but possibly ready for new CHF strains if US yields jump higher again. USDCHF looks ready for more upside, at least, with not much to hold it back if the local 0.9376 area falls.

AUD – the 0.7565 area the next focus after 0.7620 broke in AUDUSD. To break properly badly, we probably need to see another leg lower in metals prices.

CAD – the consolidation in USDCAD looks modest, given the size of the crude oil correction, and doesn’t pose a threat for CAD bulls until we start trading north of 1.2700, as this would reverse the entire prior sell-off wave. Big picture, plenty of room for a bout of consolidation to 1.3000 without changing the status of the pair as in secular decline.

NZD – like kiwi lower versus AUD and USD after the government moved strongly against housing speculation. 10-year NZ rates falling much faster over last couple of sessions offering further support for NZD weakness. AUDNZD coming up soon on major level at 1.1044, a more than 2-year high.

SEK – EURSEK is getting up into an interesting resistance area 10.20. If markets avoid a worse downdraft in risk sentiment, it is time to get involved on the short side again in EURSEK, but price action is very rangebound and would like a bigger signal or better value for considering SEK longs.

NOK – trying to find support on oil rallying a bit this morning – a bit early to tell whether we have reached an end of the squeeze in EURNOK. Somewhat more technically interesting, NOKSEK found support ahead of important former resistance around 0.9900, while USDNOK deserves attention for triggering a squeeze if 8.70-75 comes into play.

John Hardy
Head of FX Strategy

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