Head of FX Strategy
Summary: The FOMC brought as little impact as possible and did so by design, as the statement downshifted forward guidance on further tightening without any pre-committing to a policy pause. The press conference saw Fed Chair Powell studiously avoiding sending signals on policy guidance. The jump in the JPY and lurch lower in risk sentiment and US yields in late trading was linked to sudden new concerns for the US banking sector. Elsewhere, NOK jumped as Norges Bank highlights the weak NOK, with ECB out just now.
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FX Trading focus: FOMC defers to incoming data for next steps. JPY rips higher again as treasury yields plunge on fresh US regional bank concerns. NOK kneejerks higher on Norges Bank. ECB incoming.
Bias shifts today:
The FOMC brought as little drama as conceivable, perhaps slightly on the hawkish side relative to market positioning and expectations, but it was clear from the statement and the Powell press conference that the Fed is attempting to deliver as little forward guidance on policy as possible. In the statement, the language pointing to further tightening was softened to indicate that incoming data will determine whether any further tightening is necessary. Powell’s press conference saw the Fed Chair studiously avoiding sending anything that could be mistaken for pointed guidance. Some observers, like Bloomberg’s John Authers, did pick up on some nuances that were arguably dovish, but pulling away any message was all in the inferences. One of those, as Authers argues, is that Powell’s lack of greater concern expressed on the regional bank issue helped spark an ugly slide in regional bank stocks late in the session yesterday, even before the press conference was done. And after the close, PacWest announcing that it was “reviewing its strategic options”, including a sale, spooked sentiment thoroughly and sent US yields lower still.
The particularly are extremely different, but this feels a lot like Bernanke not having a sufficient grasp of the dangers of the leverage in the US housing market back in 2007. Could we be looking at another weekend sale of a bank and at what point does this situation become systemic until the Fed and other regulators provide a blanket approach to the issue – when two more banks go the same route, or ten or twenty? And can they do so with a dysfunctional Congress sidelined by the debt ceiling stand-off?
This Fed is in hot water for having gotten the banking sector in this situation in the first place with its slow start to the tightening cycle and steep pace of rate increases. At the same time, inflation has not yet fallen sufficiently to justify the scale of rate cuts the market is pricing in for later this year (75 basis points of cuts priced through the December FOMC meeting) or next year unless this banking turmoil hits hard and fast and shows signs of tanking the economy inside the next three months. In reaction to last night’s market developments, the JPY benefitted the most as poor traders are suffering whiplash after having sold the yen on last week’s Bank of Japan meeting. In the wake of the ECB (more below), will be watching whether EURJPY also reversed back lower through perhaps 148.00, making the JPY reversal more or less a clean sweep.
Chart: USDJPY
USDJPY has now backed out nearly all of the sharp rally that came on the heels of the Bank of Japan meeting last week as US treasury yields and a massive downdraft in crude oil prices are offsetting the yen-negative implications of the Bank of Japan taking a very slow approach to reviewing policy over as much as the next eighteen months. Still, for the JPY to generally head higher still (And USDJPY and other JPY crosses lower), we will likely need for US treasury yields to head lower still and possibly for other central bank expectations to begin flattening out and turning lower as well, so the ECB today will have a role to play (not yet out as I am writing these observations on USDJPY. In the specific case of USDJPY, this reversal means traders will likely prefer trading for more downside as long as the 136.50-137.00 zone continues to cap the action, with further confirmation of a more significant downtrend developing if we can start adding some weak US data into the mix (tomorrow’s US jobs report, for example) and the price action pushes down through the 132.50 area, indicating a challenge of 130.00 eventually.
Early today, Norges Bank raised its deposit rate 25 basis points and guided for another hike in June. Short Norwegian rates were little changed on the day, but NOK put in a solid rally, likely on the indication that the Norges Bank gave that it is watching the currency, clearly suggesting that some appropriate level of concern on that front, which will mean further aggravated weakness could elicit a response. This may be the beginning of a far more two-way market in NOK and NOKSEK is perhaps a better way to start fading further NOK weakness from here than EURNOK. Oil is an important coincident indicator and note that is has poked at cycle lows after yesterday’s fresh downdraft.
ECB decision: The ECB decision is out just before posting this, with the announcement of a 25 basis point hike (as 90% or so expected) and guidance to “ensure rates are brought to sufficiently restrictive levels”. The euro is down slightly, which makes sense given it was bid to the top of the range in EURUSD ahead of the meeting and that we had to price out the minority view of a larger hike. Guidance for a cessation of reinvestments of the Asset Purchase Program as of this July was also in the statement. Short EU rates took this as marginally dovish, with the German 2-year knee-jerking several basis points lower. Watching that EURJPY for a possible bearish reversal if we close back below 148.00.
Table: FX Board of G10 and CNH trend evolution and strength.
The weak AUD may be on the soft Caixin Manufacturing survey out overnight and the weak tone across commodities, though CAD and NOK deserve the most negative focus on oil prices (though do note the Norges Bank discussion above – NOKSEK and EURNOK are at such remarkable extremes). Elsewhere, note the massive momentum shift in JPY, which will take some time to result in a positive broad trend reading because the moving averages need some time to respond. Curious if USD gets upper hand on the Euro and sterling if risk off deepens.
Table: FX Board Trend Scoreboard for individual pairs.
Note comments on specific pairs above, including AUDNZD lurching lower again. And after both FOMC and ECB last couple of days and then tomorrow’s US jobs data – a EURUSD status check on the Friday close important.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
