The FX market got a little shake-up yesterday as EUR/USD broke lower from its recent flat trading. The US Dollar (USD) losses from the softer June CPI report have now been erased in most USD crosses, with Japanese Yen (JPY), Swiss CHF and GBP standing our as a few key winners, ING’s FX strategist Francesco Pesole notes.

Low FX volatility environment doesn’t favour carry trades

“Looking at the bottom of the FX scorecard, we sense the Trump trade is still very much at play. Scandinavian and Antipodeans are all 2.3-3.0% weaker against the dollar since the assassination attempt of Donald Trump on 13 July, and that’s despite some currency-positive news like above-consensus non-tradeable CPI in New Zealand and strong employment numbers in Australia.”

“This appears more an adjustment to the Trump re-election risk rather than the start of a multi-month trend. The Federal Reserve story remains negative for the USD and should ultimately put a cap to dollar gains short-term. Yesterday, a robust two-year Treasury auction drew the lowest yields from January, and we think that a BoC cut today can help further cement Fed cut expectations.”

“The FX market defaults to focusing on domestic stories while the currencies sensitive to the Trump trade struggle to recover in the near term. The low FX volatility environment is clearly not favouring any rotation back to carry trades. On the contrary, markets appear to be unwinding positions in some selected high-yielding currencies like MXN and ZAR, while the funding JPY continues to perform very well.”