FX Update: What could go wrong for USD bears?
Summary: The best scenario for USD bears would be one in which the positive growth outlook elsewhere picks up relative to the already white hot US economy, especially now that the biggest US fiscal impulse is a done deal. But there are a few factors here that should make USD bears uncomfortable, and only one of those is the implications of not yet having seen peak Covid cases globally.
FX Trading focus: USD broke lower, but…what could go wrong for the USD bears
A look at recent chart developments firmly suggests that the US dollar is on its back foot and headed lower until proven otherwise, supported by the notion that the growth outlook is likely to pick up elsewhere in relative terms, and by the related fact that US stimulus does a great job of stimulating the rest of the world as much as it does the US economy (similar was the case back in the response to the global financial crisis – at that time most dramatically via monetary policy easing, and this time more directly through fiscal cash drops, which stimulate production in China and elsewhere and aggravate the yawning twin US deficits).
I noted a couple of concerns yesterday about the medium term risks for USD bears, including the eventual risk to global sentiment as the covid case count continues to reaching new highs (depressing the outlook, etc.). But there is another clear and present danger here for USD bears, and that is simply that USD downside tends to need (and often reflexively drives) a very supportive backdrop in overall risk sentiment and we are on incredibly extended according to a number of technical, valuation and sentiment measures in equities, both in the US and globally and it is hard to conjure up a notable extension higher here.
One additional possible source of concern that has been too ignored except in the specific case at times of the Russian ruble is the risk of the need to price in a geopolitical tension premium as Russia has massed troops on the Ukrainian border and the US-China tensions remain high, particularly in the wake of the recent joint US-Japan statement on the Taiwan Strait, their first joint statement on the issue since 1969.
This isn’t to say that the US dollar can’t go lower in coming days to a couple of weeks, but I am not wholeheartedly in the USD bear camp here and happy to jump ship at any sign of trouble. Even today, some of the price action in today’s trade is not what the USD bears are looking for, especially the price action in AUDUSD this morning and arguably UDSCAD – and if any of the above concerns deepen, the G10 smalls could prove particularly vulnerable, even versus all of the G-3 currencies (USD, EUR and JPY).
Chart: AUDUSD
Technical developments are perhaps most difficult to interpret when the different time frames offer different interpretations, as here in AUDUDS, where recent tactical developments are bullish (strong rejection of the recent downside sequence) while arguably, we are still in a range and have yet to more firmly re-establish the uptrend, which requires a solid close north of perhaps 0.7800-25. Too early to tell if today’s rejection of the overnight rally extension is hinting at a bearish tactical reversal, but certainly, a move back toward 0.7700 would throw the bullish case back into tactical disarray, and any deepening of the concerns noted above (Covid, global growth concerns, risk off from geopolitical developments, etc.) could flip the script suddenly to a more bearish outlook, although that would require a retreat back below 0.7650 to start.
Loud signals on inequality, social stability in Canada’s budget
Canada announced a new budget yesterday that will see a somewhat more generous fiscal impulse of an additional CAD 101.4 billion, much of it on pandemic-related spending for businesses and healthcare, but other significant priorities include spending on national child-care, green transformation, and the federal minimum wage will be raised. These priorities fit with the increased focus on “social stability” we noted in our Q2 outlook, and this is underlined further in the tax side of the budget, which will limit some interest rate deductions for businesses and bring a new luxury tax on boats and expensive cars. Most interesting of all are a 1% tax on all unoccupied real estate owned by foreigners as well as a tax of 3% of revenues for “digital services” companies (clearly the infotech giants Facebook, Google, etc.) that will be assessed as of January 1 and “until an acceptable multi-lateral approach comes into effect”. Such an approach is likely to be Yellen’s idea of a global minimum tax and the next few years will be critical for whether the US can help lead a multilateral approach on that front or a more confrontational, unilateral Trump-style leader emerges again that encourages a crazy quilt of tax regimes and tit-for-tat trade/tax policies. A Canadian election is possible for as early as this year.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
FX Trading focus: USD broke lower, but…what could go wrong for the USD bears
A look at recent chart developments firmly suggests that the US dollar is on its back foot and headed lower until proven otherwise, supported by the notion that the growth outlook is likely to pick up elsewhere in relative terms, and by the related fact that US stimulus does a great job of stimulating the rest of the world as much as it does the US economy (similar was the case back in the response to the global financial crisis – at that time most dramatically via monetary policy easing, and this time more directly through fiscal cash drops, which stimulate production in China and elsewhere and aggravate the yawning twin US deficits).
I noted a couple of concerns yesterday about the medium term risks for USD bears, including the eventual risk to global sentiment as the covid case count continues to reaching new highs (depressing the outlook, etc.). But there is another clear and present danger here for USD bears, and that is simply that USD downside tends to need (and often reflexively drives) a very supportive backdrop in overall risk sentiment and we are on incredibly extended according to a number of technical, valuation and sentiment measures in equities, both in the US and globally and it is hard to conjure up a notable extension higher here.
One additional possible source of concern that has been too ignored except in the specific case at times of the Russian ruble is the risk of the need to price in a geopolitical tension premium as Russia has massed troops on the Ukrainian border and the US-China tensions remain high, particularly in the wake of the recent joint US-Japan statement on the Taiwan Strait, their first joint statement on the issue since 1969.
This isn’t to say that the US dollar can’t go lower in coming days to a couple of weeks, but I am not wholeheartedly in the USD bear camp here and happy to jump ship at any sign of trouble. Even today, some of the price action in today’s trade is not what the USD bears are looking for, especially the price action in AUDUSD this morning and arguably UDSCAD – and if any of the above concerns deepen, the G10 smalls could prove particularly vulnerable, even versus all of the G-3 currencies (USD, EUR and JPY).
Chart: AUDUSD
Technical developments are perhaps most difficult to interpret when the different time frames offer different interpretations, as here in AUDUDS, where recent tactical developments are bullish (strong rejection of the recent downside sequence) while arguably, we are still in a range and have yet to more firmly re-establish the uptrend, which requires a solid close north of perhaps 0.7800-25. Too early to tell if today’s rejection of the overnight rally extension is hinting at a bearish tactical reversal, but certainly, a move back toward 0.7700 would throw the bullish case back into tactical disarray, and any deepening of the concerns noted above (Covid, global growth concerns, risk off from geopolitical developments, etc.) could flip the script suddenly to a more bearish outlook, although that would require a retreat back below 0.7650 to start.
Loud signals on inequality, social stability in Canada’s budget
Canada announced a new budget yesterday that will see a somewhat more generous fiscal impulse of an additional CAD 101.4 billion, much of it on pandemic-related spending for businesses and healthcare, but other significant priorities include spending on national child-care, green transformation, and the federal minimum wage will be raised. These priorities fit with the increased focus on “social stability” we noted in our Q2 outlook, and this is underlined further in the tax side of the budget, which will limit some interest rate deductions for businesses and bring a new luxury tax on boats and expensive cars. Most interesting of all are a 1% tax on all unoccupied real estate owned by foreigners as well as a tax of 3% of revenues for “digital services” companies (clearly the infotech giants Facebook, Google, etc.) that will be assessed as of January 1 and “until an acceptable multi-lateral approach comes into effect”. Such an approach is likely to be Yellen’s idea of a global minimum tax and the next few years will be critical for whether the US can help lead a multilateral approach on that front or a more confrontational, unilateral Trump-style leader emerges again that encourages a crazy quilt of tax regimes and tit-for-tat trade/tax policies. A Canadian election is possible for as early as this year.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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