FX Update: Overbaked expectations for imminent Powell put?

FX Trading focus: market nerves fraying ahead of Powell appearance

Later today Powell is set to appear at an event hosted by the Wall Street Journal, one that will include a question and answer session. It is difficult to read if the market is concerned that the Fed is unwilling, this early in the game, to signal any willingness to signal an eventual easing if the “treasury beatings don’t stop”, so to speak. As I have outlined before, a yield-curve-control policy has profound implications, as it would see the Fed effectively losing control of its balance sheet and be seen as a blank check for the government to spend at will with “no consequences” save for a likely mess longer term for the Fed and the government to both deal with as inflation soars and the US dollar tanks. I was set to write further on this when our CIO Steen Jakobsen weighed in with a comprehensive Macro Digest on this very matter – with which I fully agree – please have a read.

So tomorrow I will offer a post-Powell wrap, while today I would just like to point out that the chief thing going in FX, as per Steen’s article above, is the drop in Gold, as well as the drop in the Swiss Franc and Japanese Yen, both of which sold off further today. Clearly there is a link between their very low policy rates and yields in general, and gold and real interest rate rises of late. In FX, the JPY and CHF are likely to serve as coincident indicators for concerns that real yields are set to rise further from here. We’ve certainly seen a considerable repricing of CHF that may be over-baked short term if yields consolidate, but has reset the EURCHF and USDCHF charts to strategically neutral at minimum.

Graphic:
The graphic below is from my old FX Tradeboard, which shows the trend strength in the G10 currencies (a proprietary measure of the strength of the short- to medium term trend and scaled to an exponential moving average of the recent trading range). Many FX pairs have traded in both directions recently, showing less pronounced trend signals for the majority, but the weakness in JPY, CHF and Gold really sticks out!