USD: Time for a rebound?
The dollar’s soft momentum continued this week as the narrative of a Fed pivot seems to be cementing itself among market participants, eventually triggering another round of long dollar compressions. We still caution against the sustainability of such a USD downtrend, as the possibility of further dovish revision by the Fed appears limited in our view and global economic/geopolitical uncertainty should further fuel some safe haven bets on the dollar.
Yesterday’s news that US House of Representatives Speaker Nancy Pelosi is planning to travel to Taiwan this week – she is expected to land tonight – sparked a backlash from Chinese authorities who threatened military action not specified. Should this mark a significant deterioration in US-China relations, expect shock waves to be felt in the foreign exchange market. The dollar, yen (which could already drop below 130.00 today) and CHF should be the main beneficiaries, while the CNY and China-sensitive currencies (as well as high beta currencies in general ) could come under pressure. Here, AUD and NZD mostly appear vulnerable in the G10.
It is difficult to predict how this new geopolitical thread will unfold, and for now we simply emphasize that this could be the trigger for a bullish correction in the Dollar today or in the days to come.
In the US, the first piece of labor data this week ahead of Friday’s nonfarm payrolls will be today’s JOLTS job openings for June, although the market impact should be contained. The focus should instead be on Fed speakers, as Charles Evans (dove), Loretta Mester (hawk) and James Bullard (bow-hawk) are all scheduled to speak. The move to a meeting-by-meeting approach by the FOMC should increase the relevance of members’ policy commentary, and given that we will be hearing two hawks and a dove, today’s overall message could support rate expectations and the dollar. Our base case for today is that DXY will be able to stage a rebound in the 105.50-106.00 area.
EUR: Few national drivers
The Eurozone calendar does not show any events that could influence the market today, and geopolitics (Taiwan/China and Ukraine/Russia) should be the main driver for EUR/USD. Generally, any undesirable development in China-US relations would put pressure on EUR/USD, both because safe-haven demand for the dollar would increase and because the Eurozone’s export machine is highly dependent on demand. Chinese.
Even if this specific Taiwan-related geopolitical risk were to deflate, we still doubt that the EUR/USD rally will find much more steam from current levels, both because the dollar’s additional margin of weakness appears to be narrowing and because that EU-Russia relations and the region’s economic outlook remain too uncertain to fuel a substantial return to euro bullish bets. Incidentally, further stabilization in risk sentiment could encourage a search for carry, which could see the Euro emerge even more as a preferred funding currency.
We suspect EUR/USD may not break above 1.0300 and looks more likely to re-converge towards the 1.0200 gravity line in the coming days.
AUD: RBA joins Fed’s reliance on data
This morning, the Reserve Bank of Australia (RBA) rose 50bp as widely expected by the market, but the combination of a shift to a fully data-driven Fed-style approach and the view that inflation expected to peak and moderate later this year, were interpreted as dovish signals by markets. All of this explains the Australian dollar’s negative reaction this morning, with the pair falling around 1.0% after the announcement.
We also suspect that the AUD’s fall has been exacerbated by the risk of a resurgence of Sino-US tensions. This should indeed be the main driver for AUD/USD for the coming days, and given that AUD and NZD are normally the G10 currencies most exposed to China-related sentiment, downside risks are quite important. We could see AUD/USD test 0.6900 if tensions escalate.
As in the US and Eurozone, expect RBA and AUD rate expectations to now become significantly more sensitive to data releases. Friday’s statement on the RBA’s monetary policy could have a tangible impact on the market.
ECO: floating currencies close the gap
The Polish Zloty and Hungarian Forint quickly met our targets yesterday and, in our view, closed the gap created by last week’s FOMC meeting. Conditions remain favorable for the CEE region. EUR/USD is relatively far from retesting parity, overall sentiment remains mostly neutral or slightly positive and we see rising market rates in the case of the forint. Thus, we could also see additional gains in the region in the coming days, but the additional potential is limited. The zloty could touch 4.70 EUR/PLN and the forint 397 EUR/HUF.
However, for current levels, we are seeing greater sensitivity to possible geopolitical shocks lurking around every corner these days. Additionally, the forint will see some key data releases this week, retail sales on Wednesday and industrial production on Friday, which could lead to a quick correction in case of any bad surprises. Compared to the previous days, we are therefore rather neutral on regional currencies.