FX Update: At what point is euro weakness existential?
Summary: A fresh spike in natural gas prices in Europe accelerated the relative weakness of the euro yesterday and the single currencies performance is so dire that we have to consider where to look if the market transitions to more existential, as opposed to cyclical concerns. Elsewhere, SEK has recently looked like the baby being thrown out with the bath water and the USD strength is broadening out.
FX Trading focus: The Euro in the dumps, in part as sterling mounts steep comeback.
The remarkable relative weakness of the euro has been the most prominent development among major currencies recently, accelerated yesterday by the latest spike in natural gas prices brought about by a German regulator announcing a delay in the Nord Stream 2 pipeline certification. So far, the euro weakness is arguably cyclical only (as opposed to existential – more on that below), with weakening growth prospects brought about by the ugly spike in gas- and power-related input costs clouding the growth outlook, while the ECB guidance has no relevance for addressing the situation and where the central bank forever defaults to the dovish side anyway. So far, the theme of a weakening growth outlook has played as it usually does for the pro-cyclical peripheral European currencies like SEK, which has weakened even more than the euro. But if this situation extends deep into the winter months and especially if this is accompanied by a German “stoplight” coalition that features the LDP’s Christian Lindner and his stingy stance on fiscal stimulus as finance minister, the euro weakness could begin to take on a more existential angle. What would a new “existential crisis” for Europe look like in markets and how would it differ? Likely very different, as the ECB sits so heavily now on the EU sovereign market that it would likely break every rule to keep spreads more or less in line. That leaves the currency itself as the only real speculative vehicle.
Chart: EURSEK
To a degree, the relative SEK weakness to the euro fits with past cycles as SEK traders often focus on the cyclical growth outlook, to which SEK is seen as high beta due to Sweden’s export-oriented economy. But the late squeeze is looking overdone, particularly if the natural gas price situation eases in Europe in coming days and weeks. As well, the Riksbank is priced to prove far more responsive to shifting guidance as inflation moves higher – with 2-year yield spreads at cycle extremes in favour of the SEK here. And eventually, if the euro concerns wax existential rather than merely cyclical, SEK looks very cheap indeed. Recall back in the late 2009-2012 period when the SEK traded as a safe haven relative to the euro during the EU existential debt crisis. The 10.10-15 area is the ultimate local resistance here if the market agrees…today already showing potential for a bearish reversal, with a close near or below 10.00 today an interesting setup for pressing the action back toward the cycle lows.
US jobs drastically under-counted? – The Washington Post ran an article suggesting that poor BLS data collection and other factors mean that over 625,000 US jobs were not counted for the June to September time frame. If this is the case and these revisions show up in the next jobs on top of strong new numbers for November, etc., we could be headed for a far more drastic Fed tightening than anticipated, with the December FOMC possibly bringing a doubling of the tapering rate and the market bringing forward the lift-off timing and pace of rate hikes.
USDJPY perched near 115.00 – have to watch the longer US treasury yields here, as well as oil prices, for the risk of further JPY weakness, as the JPY managed to weaken more or less as rapidly as the euro yesterday and USDJPY is near the massive psychological level of 115.00. Probably an un-moored US 10-year yield pulling above the 1.75% cycle high would be needed to sustain a major break higher for this pair and eventual attack on the 120.00 area. Note the US 20-year treasury auction late today.
Brainard or Powell? Get it over with already. This is still a significant point of uncertainty for the market and I am entirely unsure how the market will respond. Lael Brainard’s odds of getting the nod are rising and she is even favoured by bookmakers at this point, but how difficult would the confirmation hearings prove for her? As mentioned before, the path of Fed monetary policy would likely differ little whether Brainard or Powell is Fed Chair from February, while Brainard is a hawkish regulator and will likely be given a prominent new post as such even if Powell is offered a second term.
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: The Euro in the dumps, in part as sterling mounts steep comeback.
The remarkable relative weakness of the euro has been the most prominent development among major currencies recently, accelerated yesterday by the latest spike in natural gas prices brought about by a German regulator announcing a delay in the Nord Stream 2 pipeline certification. So far, the euro weakness is arguably cyclical only (as opposed to existential – more on that below), with weakening growth prospects brought about by the ugly spike in gas- and power-related input costs clouding the growth outlook, while the ECB guidance has no relevance for addressing the situation and where the central bank forever defaults to the dovish side anyway. So far, the theme of a weakening growth outlook has played as it usually does for the pro-cyclical peripheral European currencies like SEK, which has weakened even more than the euro. But if this situation extends deep into the winter months and especially if this is accompanied by a German “stoplight” coalition that features the LDP’s Christian Lindner and his stingy stance on fiscal stimulus as finance minister, the euro weakness could begin to take on a more existential angle. What would a new “existential crisis” for Europe look like in markets and how would it differ? Likely very different, as the ECB sits so heavily now on the EU sovereign market that it would likely break every rule to keep spreads more or less in line. That leaves the currency itself as the only real speculative vehicle.
Chart: EURSEK
To a degree, the relative SEK weakness to the euro fits with past cycles as SEK traders often focus on the cyclical growth outlook, to which SEK is seen as high beta due to Sweden’s export-oriented economy. But the late squeeze is looking overdone, particularly if the natural gas price situation eases in Europe in coming days and weeks. As well, the Riksbank is priced to prove far more responsive to shifting guidance as inflation moves higher – with 2-year yield spreads at cycle extremes in favour of the SEK here. And eventually, if the euro concerns wax existential rather than merely cyclical, SEK looks very cheap indeed. Recall back in the late 2009-2012 period when the SEK traded as a safe haven relative to the euro during the EU existential debt crisis. The 10.10-15 area is the ultimate local resistance here if the market agrees…today already showing potential for a bearish reversal, with a close near or below 10.00 today an interesting setup for pressing the action back toward the cycle lows.
US jobs drastically under-counted? – The Washington Post ran an article suggesting that poor BLS data collection and other factors mean that over 625,000 US jobs were not counted for the June to September time frame. If this is the case and these revisions show up in the next jobs on top of strong new numbers for November, etc., we could be headed for a far more drastic Fed tightening than anticipated, with the December FOMC possibly bringing a doubling of the tapering rate and the market bringing forward the lift-off timing and pace of rate hikes.
USDJPY perched near 115.00 – have to watch the longer US treasury yields here, as well as oil prices, for the risk of further JPY weakness, as the JPY managed to weaken more or less as rapidly as the euro yesterday and USDJPY is near the massive psychological level of 115.00. Probably an un-moored US 10-year yield pulling above the 1.75% cycle high would be needed to sustain a major break higher for this pair and eventual attack on the 120.00 area. Note the US 20-year treasury auction late today.
Brainard or Powell? Get it over with already. This is still a significant point of uncertainty for the market and I am entirely unsure how the market will respond. Lael Brainard’s odds of getting the nod are rising and she is even favoured by bookmakers at this point, but how difficult would the confirmation hearings prove for her? As mentioned before, the path of Fed monetary policy would likely differ little whether Brainard or Powell is Fed Chair from February, while Brainard is a hawkish regulator and will likely be given a prominent new post as such even if Powell is offered a second term.
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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