FX Update: A USD reversal or a red herring?

Forex
Picture of John Hardy
John J. Hardy

Chief Macro Strategist

Summary:  Yesterday offered up a wild ride across markets after a hotter than expected US core CPI print spooked sentiment, only to see the action yielding to a wild rally that took the USD back down after a spike higher, though the action was very mixed across USD pairs and USDJPY remains pinned near multi-decade high. Elsewhere, has sterling wrung about all that it can to the upside for now? Certainly an important test for the gilt market and sterling if the BoE’s emergency QE is halted on schedule today.


FX Trading focus: US CPI on tap. GBP focus early next week.

Fair to say we saw a crazy day yesterday, particularly for equity markets and the USD pairs, like AUDUSD and USDCAD, most correlated with swings in risk sentiment of late. The trigger was of course the hot core US September CPI data, out at +0.6% MoM vs +0.4% expected, with the YoY figure of 6.6% representing a new high since the early 1980’s. Arguably, the core CPI figures may prove stickier here at high levels in part on the owner’s equivalent rent (OER) measure that is an artificial construct and was notoriously slow to pick up in the early part of this inflation cycle and may now be lagging in mean reverting back lower, as we know that a massive weakening in house prices is in the forward pipeline and will eventually work into this measure as well. Specifically, the OER measure, which has a 24% weight in the US CPI calculation, rose +0.8% in September.

Regardless, the task now is judge whether yesterday’s back-up in risk sentiment and risk-correlated USD pairs are a sign of a turn higher for sentiment and lower for the US dollar. Too early to tell, but USDJPY blasting to new highs above the 1998 mark of 147.66 today despite the retreat in long US treasury yields from new highs yesterday speaks volumes, as does the quick reversal of this morning’s attempt to take the USD a bit lower still. The reaction at the shorter end of the US yield curve, which took the peak Fed rate to the 4.75-5.00% area, has held up today.

A close below 0.9700 in EURUSD suggests that yesterday’s reaction to the incoming data was so much derivative-driven noise. Retail Sales are unlike to move the needle in any way resembling what we saw yesterday unless we see an enormous miss in either direction. Note that three voting FOMC members are out speaking today, with little anticipation of any rhetorical shift. Otherwise, a huge focus on sterling into early next week as noted in the GBPUSD chart discussion below.

Chart: GBPUSD
Things are moving fast in UK politics, as the press is abuzz with claims that Chancellor Kwarteng is set to get the axe and that PM Truss will back-track on the “mini-budget” the Chancellor announced, purportedly the proximate cause of the melt-down in the UK gilt market and sterling. But in reality, while there is plenty of blame to be placed on Kwarteng’s shoulders, the universe of factors certainly included Truss’ over-generous energy subsidies and the Bank of England’s foot dragging on hiking rates, not to mention pension funds hedging their exposures using “LDI” principles (akin to the “portfolio insurance” that drove the crash of the US equity market in 1987. There is still plenty that can go wrong for sterling, simply from the ongoing need for funding of external UK deficits and still very higher energy prices. We’ll have to check back in on the gilt market early next week as the Bank of England is supposedly set to wind down its emergency operations today. As for chart levels in GBPUSD, watching the 1.1000 area on daily closes as a potential downside trigger and the 1.1500 resistance to the upside. The key areas in EURGBP include the 0.8575-0.8625 zone and to the upside, the 0.8800-50 zone.

14_10_2022_JJH_Update_01
Source: Saxo Group

USDCNH is trading above the pivotal 7.200 level ahead of Chinese leader Xi Jinping’s speech to the party congress on Sunday, a key step in his “election” to a third term. Besides the focus on well-known policy principles like “common prosperity”, “dual circulation”, focus will be on any change in the commitment to zero Covid tolerance (doubtful) as well as the general tone toward the US and its allies after the recent moves to limit Chinese access to semiconductor technology.

Table: FX Board of G10 and CNH trend evolution and strength.
Sterling has posted an enormous comeback - is it’s near term potential maxing out here, given that structurally, nothing has changed for the better in the UK? After all, we are merely set to see the government eliminating the last couple of hubristic policy moves. Elsewhere, note AUD still struggling, the back-up in NOK probably set for a strong challenge next week if sentiment rolls over, and the JPY just accelerating lower again – 150 in USDJPY the next level for the Bank of Japan / Ministry of Finance to put up a fight?

14_10_2022_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Not wanting to jump on the flip to a positive trend reading in GBPCHF, at minimum due to the difficulty of establishing risk/reward levels after the recent volatility. Similar on EURGBP. Also note EURCHF looking at that interesting 0.9800-50 resistance zone – has this recent rally been about the relief trade on sterling?

14_10_2022_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1230 – US Sep. Retail Sales
  • 1230 – Canada Aug. Manufacturing Sales
  • 1400 – US Fed’s George (Voter 2022) to speak
  • 1400 – US preliminary University of Michigan Sentiment
  • 1430 – US Fed’s Cook (Voter) to speak on economic outlook
  • 1615 – US Fed’s Waller (Voter) to speak on central bank digital currency 

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.