FX Update: What Can Stop The USD Juggernaut?

By John J Hardy
The US Dollar rally ended last week with a bang after a reasonably strong US employment report for September, as EURUSD executed a perfect touch of the 1.2500 where it found the latest low for the cycle. Elsewhere, GBPUSD came unglued on the drop below the 1.6050 range support and managed a swoon well through the 1.6000 level in impressively ugly action.

As I speculated in Friday’s FX Board post, the next target there may be the 1.5720 level. By the way, it’s important to underline that while the USD may reach a top soon, I mostly mean soon in time terms, not in potential price terms. Moves like these can climax spectacularly before they exhaust themselves.
As for the US employment report itself, it was impressive that the headline rate dropped below 6.0%, but not impressive that this came on a new modern new low in the participation rate.

And while headline payrolls gains were solid and well above expectations, especially given the positive revisions (+69k), it was also a bit of a downer that average hourly earnings showed zero growth for the month. Recent noise from Swiss National Bank President Thomas Jordan that negative policy rates on sight deposits are a possible policy tool finally had EURCHF shying well away from the recent lows for the cycle on Friday and rallying back above 1.2100. Option volatilities and skew have been showing lately that the market is getting restless and is expecting something to happen eventually there. I tend to agree – but the timing could be unpredictable.

Looking ahead

We have a thin economic calendar rather typical of a Monday after the big early-month data week, but do note that the Reserve Bank of Australia is set to meet tonight (Tuesday in Asia). The RBA has done everything to talk down the Aussie, and I wouldn’t expect anything but an expression of satisfaction on the implications of the exchange rate drop, which hasn’t been violent enough to trigger any sense of concern yet. But also watch for how the Reserve Bank discusses risks to the domestic housing market and whether there are any new signals on the macroprudential front aimed at tempering further price gains. It could prove a busy week for the Aussie as we also have Australia’s latest employment report up on Thursday.

AUDUSD
AUDUSD is certainly a focus this week as the pair has dipped to the lowest level since 2010. Technically, the chart looks ready to collapse toward 0.8000/0.8100, but let’s see if anything from the RBA or the Australian employment report later this week can throw the bears of the scent for a round or two.
Is it not remarkable to consider that as of last Tuesday, US futures speculators have just barely turned net short the Aussie? The last time we were near these levels, they were short more than 50k contracts.

Source: Saxo Bank
It’s a rather quiet week on the economic calendar besides the RBA tonight. We do have a Fed FOMC minutes on Wednesday, but this is from three weeks ago, before the bulk of the recent USD move and its possible implications were on the radar. There are a number of Fed officials out throughout the week, so watch for whether the stronger US dollar pops up in their comments. I expect it to be the USD move itself that serves as the tail that wags the future of Fed policy. It could be as soon as the next Federal Open Market Committee meeting that we see the Fed start to climb down from its commitment to actually hike rates, though it may be too early for this prediction. If the Fed doesn’t wave the white flag, it’s hard to see what stops the USD juggernaut for now.
Economic calendar highlights (all times GMT)

• Eurozone Retail PMI (0810)
• Canada Sep. Ivey PMI (1400)
• New Zealand Q3 NZIER Business Confidence (2100)
• Australia Q3 AiG Performance of Construction Index (2230)
• Australia RBA Cash Target (0330)