The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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Recycled message from FOMC sees fresh USD bids
John Hardy
Head of FX Strategy
Summary: The Fed’s almost entirely recycled new monetary policy statement last night kept US yields at the highs of the recent range and keep odds high for a December hike. Meanwhile, long US bonds have bounced back and risk appetite has soured a bit, which has seen the USD and JPY both firming today.
The latest Federal Open Market Committee statement provided no fresh angle on the Fed’s policy intentions, which sends its own message by supporting the market’s assumption that the odds are as good as ever (still curiously only about 75% according to Bloomberg’s assessment) for a December rate hike. The only real change was a tweak to the language describing the current state of fixed business investment, which is now seen as having “moderated from its rapid pace earlier in the year”.
We take the reaction at face value, i.e., that this is USD supportive at the margin. There are a few USD pairs that are now nearing pivotal levels, including EURUSD, which we discuss below, and USDCHF and USDJPY. The yen is clearly marching to the beat of a different drummer than the rest of the non-USD as the yen bid outpaced a strong USD bid this morning as US treasuries bounced and risk appetite soured again.
The Swedish krona finally caught a solid bid yesterday and took EURSEK down through the range lows and the 200-day moving average. The trigger was the Riksbank Governor Ingves telling the Swedish parliament that if the economy continues on the expected course, “it is appropriate to start increasing the interest rate at some point over the next few months, in either December or February.” This isn’t exactly new information, but the market is taking it as raising the odds of a December move.
Not so great timing for these comments, by the way, as Swedish average home prices are starting to show consistent year-on-year declines and the latest in the data series was printed yesterday morning around the time of these comments. It is likely that the Swedish economy will be slowing down or even moving into a recession before the Riksbank ever gets appreciably above zero. If this EURSEK move lower doesn’t hold, expect an ugly squeeze risk.
CAD relative weakness late yesterday to the FOMC really stood out, and may be partially related to story earlier in the day yesterday that 2015 and 2016 Canadian GDP data have been revised sharply lower, even if growth is strong at present (the spin is the collapse in oil prices in 2015 and into early 2016 was a larger negative drag than previously thought – somewhat magnifying the import, perhaps, of the recent large slide in oil prices). Overnight, a headline that the Keystone XL pipeline project has been halted by a US federal judge in Montana pending environmental investigations didn’t exactly help CAD’s cause. Further delays in this project are CAD negative as the inability to get oil efficiently out of Alberta means that many Canadian crude grades are priced with massive discounts.
Charts: EURUSD – Weekly
We’re back to the “how low can it go” question here for EURUSD and would suggest that new uncomfortable headlines on Italy’s budget issue or even just bad EU data (notable deceleration has been consistent, with increasingly widespread awareness that the EU, and Germany in particular, is poorly positioned for a global trade war or even just a global slowdown, given its large current account surplus. First objective lower if 1.1300 is taken out early next week, as we have argued before, would be the 1.1186 Fibonacci level for the entire rally sequence from the early 2015 lows to the highs early this year, and then the round 1.1000 level.
USD – the US dollar is on its back foot suddenly after the recent run higher that faltered right at the range support level in EURUSD. The next key for the greenback is the jobs report tomorrow
EUR – the euro bouncing off the last change support near 1.1300, with the weekly close after the US jobs report as the next key test.
JPY – this is not an environment (improving risk appetite, bond yields picking back up) that favors JPY outperformance – next major test of USDJPY is tomorrow’s US jobs report and whether US yields pick back up sharply on a new high for the cycle in earnings.
GBP – the UK bank access news is a breakthrough and the next step is the actual announcement of a Brexit summit, which is only likely if the two sides are moving toward an agreement. The sticky bit will be the terms and whether the deal is palatable to all Tories, and if not, whether a sufficiently large minority of Labour votes can be put together when Parliament votes. Bank of England Up later today – latest inflation data muted, but UK austerity is ending and BoE ready to hike if Brexit uncertainty lifts.
CHF – If a lid is kept on EU existential risks here and equity markets find their sea legs, a fresh rise in bond yields could make CHF one of the weakest currencies – or the weakest currency – in G10.
AUD – AUD is very bid across the board. If China is going to make a statement in defense of its currency ahead of the key Trump/Xi meeting at the end of this month, there is plenty of room for a squeeze on AUD shorts, even if our longer term concerns for the currency remain in place.
CAD – weaker link to Asian FX bounce overnight inspired by strong CNY and weak oil prices keeping CAD under pressure in relative terms, though USDCAD unlikely to escape a weaker US dollar if the latter can’t find a bid on the US jobs report tomorrow.
NZD – ditto AUD comments above, with the latest interest rate spread moves mildly favouring NZD even more than AUD.
SEK – a solid PMI this morning, but the general buoyancy in risk appetite and the strong bid in the smaller currencies a key driver here.
EURSEK suddenly staring down the range lows just below 10.30, which is also the 200-day moving average; we like it lower as long as risk appetite remains steady.
NOK – weak oil prices see underperformance versus SEK and new local lows in NOKSEK, but also constructive for potential lower in EURNOK on a longer-term valuation perspective.
Upcoming Economic Calendar Highlights (all times GMT)
• 0930 – UK Oct. Manufacturing PMI
• 1200 – UK Bank of England Inflation Report
• 1230 – US Q3 Unit Labor Costs and Nonfarm Productivity
• 1230 – US Weekly Initial Jobless Claims
• 1400 – US Oct. ISM Manufacturing
EUR – the euro bouncing off the last change support near 1.1300, with the weekly close after the US jobs report as the next key test.
JPY – this is not an environment (improving risk appetite, bond yields picking back up) that favors JPY outperformance – next major test of USDJPY is tomorrow’s US jobs report and whether US yields pick back up sharply on a new high for the cycle in earnings.
GBP – the UK bank access news is a breakthrough and the next step is the actual announcement of a Brexit summit, which is only likely if the two sides are moving toward an agreement. The sticky bit will be the terms and whether the deal is palatable to all Tories, and if not, whether a sufficiently large minority of Labour votes can be put together when Parliament votes. Bank of England Up later today – latest inflation data muted, but UK austerity is ending and BoE ready to hike if Brexit uncertainty lifts.
CHF – If a lid is kept on EU existential risks here and equity markets find their sea legs, a fresh rise in bond yields could make CHF one of the weakest currencies – or the weakest currency – in G10.
AUD – AUD is very bid across the board. If China is going to make a statement in defense of its currency ahead of the key Trump/Xi meeting at the end of this month, there is plenty of room for a squeeze on AUD shorts, even if our longer term concerns for the currency remain in place.
CAD – weaker link to Asian FX bounce overnight inspired by strong CNY and weak oil prices keeping CAD under pressure in relative terms, though USDCAD unlikely to escape a weaker US dollar if the latter can’t find a bid on the US jobs report tomorrow.
NZD – ditto AUD comments above, with the latest interest rate spread moves mildly favouring NZD even more than AUD.
SEK – a solid PMI this morning, but the general buoyancy in risk appetite and the strong bid in the smaller currencies a key driver here.
EURSEK suddenly staring down the range lows just below 10.30, which is also the 200-day moving average; we like it lower as long as risk appetite remains steady.
NOK – weak oil prices see underperformance versus SEK and new local lows in NOKSEK, but also constructive for potential lower in EURNOK on a longer-term valuation perspective.
Upcoming Economic Calendar Highlights (all times GMT)
• 0930 – UK Oct. Manufacturing PMI
• 1200 – UK Bank of England Inflation Report
• 1230 – US Q3 Unit Labor Costs and Nonfarm Productivity
• 1230 – US Weekly Initial Jobless Claims
• 1400 – US Oct. ISM Manufacturing