FX Daily Strategy: N America, Sep 3

Still quite a challenging environment developing which could play out a number of different ways over different timeframes amid some potentially unstable correlations. Upward pressure on yields of late was still being driven more by the real yield mark up for many and for others (such as UK gilts) in sympathy and reflecting the global real yield competition. We've seen some relent from yield resistance levels overnight (US10s just holding the test through and back from 4.8% for instance) but the broader backdrop still makes for quite a noisy and unstable picture.

Much of how this plays out bigger picture is where the ‘uncle point’ sits and just how much of the real yield mark up ultimately proved sustainable and digestible by the broader market. Near-term the danger is that risk markets have to at least have a corrective wobble before they then calibrate whether they can live with the higher yields for a longer period. Or, whether any such wobble does enough to short circuit and speed check the bond selloff and rate expectations in turn. 

The back and forth dance, yield spike and then pullback, continues for now, keeping the overall backdrop still choppy. EUR/USD itself for now remains glued impassively to the 1.16~ figure where expiries on and around the figure this week and into payrolls have been adding to the magnetic standoff there. 

During this initial market orientation and digestion phase, the initial impetus has been to focus on squeezing ‘both sides’ of the FX spectrum – shifting shorter/lighter CHF on the one side as the last of the low yielders, and some, if so far measured, risk-counter trimming on the other.

In terms of CHF, we discussed this some time back - CHF/JPY and the carry question (here). While that took a bit of post intervention breather, rotation does seem to be evident again on the cross’ move back towards the break area and fresh sellback. As the BoJ gives even stronger hints out of G20 that a hike and ‘nimble’ action is likely at the next meeting, the underlying driving shifts have picked up more momentum. 

A strong 30yr JGB action overnight has also gone with the grain of the about-face in yen sentiment too (better local demand at these yields showing if things stabilise) - USD/JPY consolidating on the steep pullback to 157~ with 156.65 area below, ahead of deeper support further out at 155. 

The CHF side got a bit oversold on the latest acceleration and is now taking a breather. Swiss CPI  actually came in firmer than expected at 0.8%y/y from 0.4% vs market of 0.5%. That’s taken a little of the wind out of USD/CHF’s sails, dropping about 20 pips, and it has pulled the pair back from the 0.8150 resistance hold of yesterday 0.8080-8050 is pullback support if the breather extends. EUR/CHF also got overbought on the push to the 0.9455 Fib and also seeing a corrective pullback

While the data is an upside surprise into a recently stretched move and CHF-JPY rotation/divergence, it still doesn’t fundamentally alter CHF’s position as the low-CPI, low-rates currency right now among the majors.  

On the flip side is the risk trim, and the equivalent example here in recent sessions would be EUR/SEK. Overbought also but 11.1700 weekly high of late-August 2025 is the next area. Just higher is congestion around 11.2000. Iran/oil and its influence through the Scandinavian cross also still remains highly influential here week to week. 

Meanwhile, we still see sterling falling down the market’s pecking order, both given the BoE remains the rate hike laggard of the majors, but also because of its risk sensitivity.

Gilt yields are being driven up by global dynamics rather than local but nonetheless to levels where fiscal binds again become a more prominent UK concern, not the easiest backdrop for the new PM.

1.3475 Fib is close below on cable now though as elsewhere the move is oversold on the short-term charts (.25 is the next lower projection). EUR/GBP has also been drifting up and has room for a later break and extension of July gains towards 0.8620, (GBP/EUR 1.1600), though as elsewhere also a bit overbought at present. 

In the US today, on the data front we expect the trade deficit to rise to $90.5bn from $73.3bn in June. 

Fed’s Waller and Hammack are also scheduled to speak.