JPM G10 FX Daily

EUR: USD Re-Rating Has Legs, But Headlines Still Matter

Nothing really changed over the weekend.

Long ends remain under pressure globally, equities are feeling the weight, and the market is still trying to price the implications of an extended Strait of Hormuz stasis: higher energy, sticky inflation and a resilient US economy.

The key shift is psychological. The uneasy Middle East equilibrium has lasted longer than most investors expected. Many assumed some form of deal would have been done by now. Instead, the lack of resolution is beginning to weigh on the optimists.

That spillover is now visible in FX. The dollar is seeing a re-rating, and last week’s flows were a fair reflection of that. The sustainability of the move is still the question, especially with negotiations ongoing. Strategy expects any knee-jerk positive reaction to a deal to be faded, but tactically you still need to be wary of a positive headline shock.

Having flipped long USD in the middle of last week, and with several technical levels now broken alongside good weekly closes, I am happy to keep the bias for now — while tightening stops.

Favoured USD longs remain versus:

GBP: still politically fragile, though reduced a touch.
EUR: technical breakdown and deteriorating relative macro.
CHF: still the favoured funder, especially if positivity returns.

I have also added to AUD longs on the dip and restarted selling EUR/HUF, with patience for better levels finally rewarded.

EUR broke down last week as the weight of a persistent Middle East problem added to already-negative European growth implications. Relative rates and equity performance are also moving further in favour of the US. Investors had been hiding in EUR crosses, but weekly closes below key moving averages have now added momentum to EUR/USD selling as well.

PMIs later this week will be the next gauge of how the European growth story is unfolding.

Trade bias: Stay short EUR/USD.
Stop: 1.1710.
Target: Drift toward 1.1500 if pressure persists.
Catalyst: PMIs later this week.
Risk: Positive Middle East headline that sparks a temporary USD setback.

GBP: Burnham Risk Is Real, But Streeting Complicates the Path

There were several important weekend developments.

Fresh from news that he has NEC blessing to run, Burnham gave a major ITV interview. He said he was committed to the fiscal rules, but it was also clear that his policy agenda would likely mean a bigger public balance sheet and more debt, including nationalisation plans. He also tried to put his Europe views on the back burner.

That leads directly to the next development: Wes Streeting announced on Saturday that he will run in the next leadership campaign on a pro-Europe stance.

This puts the cat among the pigeons for Burnham. It likely injects Brexit into the Makerfield by-election, where the constituency voted roughly 65/35 Leave in 2016. That is exactly the issue Burnham would have preferred to avoid against Reform.

Streeting sticking to his guns makes me marginally less worried about an outright Labour lurch left. His decision to throw the Brexit grenade also makes Burnham’s path harder, as shown by the outcry from Burnham supporters.

Add Burnham’s vague attempt to sound fiscally responsible, and there is room for some sterling relief today.

I have reduced some sterling shorts this morning and will look to optionalise another portion to cover the by-election, which is expected around 18 June.

Flows remain important:

SHF sold GBP again, around 2.5z, putting them on a four-day selling streak.
Unlike DHF, GBP was not the top sold currency on the week for SHF — EUR took that title.
Real-money net flow was much lighter, but will be a focus going forward, especially after the Aberdeen gilt headlines.

Trade bias: Still cautious GBP, but reduced shorts tactically.
Cable resistance: 1.3390/1.3430, including 50dma and 200dma.
Cable support: 1.3160/80.
EUR/GBP levels: 0.8680/0.8750.
Key risk: Burnham wins Makerfield and becomes politically bulletproof.
Relief scenario: Streeting gains traction and complicates the leftward shift.

JPY: 159 Is the Danger Zone

JGBs had a spicy overnight session, with yields reaching fresh multi-decade highs after reports that Takaichi is set to announce an additional cost-of-living budget.

There are reports this will be funded by fresh JGB issuance. Given recent JGB moves, it is fair to ask whether that funding plan is truly set in stone. Could FEFSA talk make a comeback? Possibly.

Katayama was also on the wires saying he had been instructed by PM Takaichi to minimise various risks when asked about rising JGB yields.

The broader question is whether the US Treasury could eventually get involved to help. US bonds are soft, and more aggressive unilateral Japanese intervention could add selling pressure. These are valid questions as USD/JPY trades on the lower 159 handle — around where the first intervention started.

I am finding it very hard to cover even modest JPY longs here.

Flow-wise, SHF and DHF showed minor net JPY selling last week.

Trade bias: Stay modest long JPY.
USD/JPY risk zone: Lower 159 handle.
Key technical: Cloud top 158.91.
Intervention risk: Rising again as USD/JPY approaches prior action zones.
Key question: Whether JGB stress forces a broader policy response.

CHF: Haven Support Is Not Enough to Kill the Carry Trade

Global yields pushed higher into Friday’s close, and equities traded heavily as markets grappled with the potential stagflationary fallout from the ongoing Strait of Hormuz crisis.

CHF did find some support on the crosses during the risk-off move, consistent with its haven status. But the bigger picture still supports the carry thesis.

US data remains solid, with economists lifting their Q2 US growth forecast by 50bp to 2.0%. Elevated yields and resilient US growth keep USD/CHF supported.

We remain long USD/CHF and AUD/CHF while key supports hold:

USD/CHF: above 0.7750/75.
AUD/CHF: above the 50dma near 0.5581.

The data calendar is light this week, so headlines and risk sentiment remain firmly in the driver’s seat.

Flows:

Systematics have sold CHF for four consecutive sessions.
Real money has also been a better supplier of CHF.
Hedge funds were buyers.

Trade bias: Stay long USD/CHF and AUD/CHF.
USD/CHF support: 0.7750/75.
AUD/CHF support: 50dma near 0.5581.
Risk: Deeper equity drawdown that revives CHF haven demand more forcefully.

AUD/NZD/SEK/NOK: Defensive USD Longs, But Keep the RV Trades

After a week away, things have definitely changed.

Inflation concerns have reasserted themselves after concerning US data. Long-end yields are rising, equities are falling, and risk came under pressure into the end of last week.

AUD, NZD, SEK and NOK were all weaker on Friday, as expected. SHFs were aggressive sellers of both AUD and NOK, joined by hedge funds in NOK.

The key question is whether this is finally the tipping point for risk. Elevated energy prices, no visible resolution, and signs of inflation pressure showing up in data such as US PPI and Empire Manufacturing could force a Fed reassessment.

If the market starts to think a US rate hike is a real possibility, the outlook for equities and risk could change quickly.

I am not sure we are quite there yet, but holding some defensive USD longs is prudent.

On AUD and NOK longs, the logic still works:

Terms of trade support.
Yield support.
Hawkish central bank backdrop.

But neither AUD nor NOK is immune to a full risk-off event, so exposure has been reduced.

The better expression is relative value.

Preferred trades:

Long NOK/SEK: Dips toward parity are a chance to add.
Short EUR/AUD: EUR growth concerns versus AUD carry/ToT support.
Short GBP/AUD: UK politics back in play, AUD still relatively supported.

This morning’s Swedish Origo survey showed 5-year inflation expectations falling to 2.0% from 2.2%, though this should have limited impact today.

Thursday’s Norwegian inflation expectations will matter more for NOK and will be closely watched by Norges Bank.

Trade bias: Reduce outright high-beta exposure; keep RV longs.
Best expressions: Long NOK/SEK, short EUR/AUD, short GBP/AUD.
Risk: Full risk-off episode driven by US hike fears and equity weakness.

CAD: AUD/CAD Bounce From 0.98 Is Encouraging

Friday’s risk-off move caught a second wind into the close as rising global yields weighed on risk assets.

The equity sell-off dragged more on AUD than CAD, but it was encouraging that AUD/CAD bounced off 0.9800. We maintain long exposure there.

Canada has CPI and retail sales on the domestic calendar this week, but those releases are likely to be eclipsed by risk sentiment. Broader market tone should dictate price action again this week.