Saxo Bank: Deleveraging screeches to a halt

Markets have been responding to every recent deleveraging move by buying the dip, and the current one is no exception, explains John J Hardy, Head of FX Strategy at Saxo Bank…

Saxo Bank: Deleveraging screeches to a halt

Global markets have a very hard time sustaining any deleveraging move as dip-buyers have been rewarded time and again by diving in to scoop up risky assets on the least spike in volatility. So far, this week’s brief, sharp risk-off event has proven no exception to the rule, even if it is too early to signal the all-clear.

But the lines in the sand are rather clearly drawn now if we use USDJPY and US Treasuries as our twin benchmarks. The 110.50-00 area is the critical pivot zone after yesterday’s action and for US Treasuries, the importance of the range lows in the 10-year benchmark just above 2.15% are the focus.

The European Central Bank faces a very tough task in more clearly signaling an unwinding of its hyper-accommodative policy stance, and since the April meeting, this signaling has become even more difficult in light of the advance in the trade-weighted euro to near its highest since 2014.

Reuters has an excellent run-down of the bank’s dilemma. In the meantime, European peripheral spreads are considerably tighter at the extremes (Greece and Portugal) and fairly static, if at the tighter side of the recent range, for Italy and France. The 10-year yield differential remains near the tightest of the cycle as US rates will need to pull back higher for that indicator to support the US dollar.


Sterling trying once again to get something going yesterday in the wake of a very strong April retail sales report, but the poke above the 1.3000 level in GBPUSD was quickly reversed later in the session and EURGBP remains uncomfortably close to the 0.8600 area upside pivot zone, so sterling is far from a rally stance after yesterday’s action.

Source: Saxo Bank

The G10 rundown

USD – the greenback has bounced off the panic lows of yesterday, but too soon to call the all-clear as the market gets nervous on how the Federal Reserve treats the political turmoil in Washington at the June Federal Open Market Committee meeting. The market is expressing better than even odds that the FOMC will have only hiked once more through the end of this year.

EUR – the euro remains strong after the ECB minutes did little to move the debate on the timing of an eventual ECB taper or rate hikes, but observers are clearly getting impatient for forward guidance as the EU economy is performing well in most regions (save for Greece and Italy…).

JPY – the JPY providing the bulk of the drama as risk sentiment has been the chief focus over the last couple of sessions. We have our line in the sand to the downside in USDJPY in the 110.00-50 zone after yesterday’s bounce.

GBP – sterling unable to sustain its latest rally attempt, and EURGBP remains close to the important upside pivot zone around 0.8600. GBPUSD gently rejected at 1.3000, underlining the importance of that psychological level.

CHF – EURCHF slipping through 1.0900 and 1.0875-1.0900 looks like an important zone if we want to call the recent rally off the sub-1.0700 lows a trend. Monday’s sight deposit data from the SNB could provide the next impulse of action. USDCHF, meanwhile, is slipping through the 0.9850-00 zone, but the chart of the last 18 months or so has been a mean-reversion trader’s wonderland.

AUD – AUDUSD beating back marginal new highs yesterday on the general USD comeback, underlining the importance of the 0.7450-0.7500 if we are to call this a downtrend. Elsewhere, AUD relatively supported as fairly strong support has come in for AUDNZD and iron ore had a strong session in Asia overnight.

CAD – Canadian data could spark volatility as we watch whether 1.3500 can save the uptrend after the last couple of weeks of choppy range trading.

NZD – action looking tense for NZDUSD in the tight range, as the 0.6950 area held once again.

SEK – EURSEK working into the final retracement area of note above 9.800 and ahead of the big 10.00 level.

NOK – the marginal new highs in crude prices and news of increase Norwegian output not doing NOK much of a favour, and EURNOK bottled up in a tense range between about 9.45 to the upside and 9.32-30 to the downside.

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