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FX Update: Passive FX as CB's stagger towards tightening pause.

Forex
Strats-Hardy-88x88
John Hardy

Head of FX Strategy

Summary:  Yesterday largely saw classic risk-on developments across G10, with the USD on its back foot and AUD leading the charge ahead of that country’s Q4 CPI data tonight, with New Zealand also reporting CPI data. EURSEK is also trying to tilt lower as the normally risk-sensitive SEK is finally picking up a bid on the strong resurgence in sentiment as US corporate earnings season kicks off in earnest today. The market mood has soured a bit today in Europe and US data and leading indicators are patchy at best.


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FX Trading focus: Classic risk-on, risk-off patterns across FX with uncomfortable backdrop. Bank of Canada up tomorrow. Sterling wobbling again.

Yesterday saw a further squeeze higher in risk sentiment on no notable news flow, a move that saw the usual suspects of market regimes past, as the US dollar was weaker, while the smaller G10 currencies like AUD and SEK charged higher, AUDUSD challenging the recent pivot highs above the significant 0.7000 level and EURSEK pushing down on range support and needing more to the downside to reverse its persistent uptrend there. Most of the market action, outside a meandering JPY, had a classic, highly correlated and passive risk-on, risk-off vibe as we await incoming data and incoming news.

This morning, we got the flash January. Given the enormous relief on the gas and power front in Europe after absurdly mild winter weather in December helped crush prices lower, the modest improvement in the surveys perhaps undershoots relative to the recent news flow on Europe and the scale of ECB hawkishness (both Eurozone PMI surprising modestly on the upside, but not shooting the lights out with 48.8 on Manufacturing and 50.7 on Services). The euro took a stab at 1.0900 but couldn’t sustain and the price action is awfully sluggish after hitting current price levels in the 1.0860’s eight trading days ago. Yesterday I pointed out that it may be difficult for EUR to find upside on the USD due to forward rate expectations for the ECB relative to the Fed, given that the 2-year yield, two years forward has risen as high as -15 basis points.

The UK PMI’s were a different matter, with the Services survey coming in at 48.0 vs. 49.5 in December and vs. 49.9 expected, a sour data point possibly suggesting a retrenchment in consumer behaviour after the holiday season. Sterling has traded to the soft side today, with GBPUSD down close to 1.2300 after 1.2400 earlier in the session and EURGBP rallying back into the range above 0.8800.

Data later today from the US is third-tier stuff as we await Thursday’s GDP print and Friday’s PCE inflation data (with inflation off the menu as a concern for now, it’s rather where we are in the recession cycle that grabs market focus). The greenback is more likely to get energy from the equity market keying off important earnings reports as the earnings season kicks in with full force today and through next week. GE has already been out spooking the market a bit with its forward guidance, with earnings guidance for the coming year significantly below analysts’ estimates.

The Bank of Canada is the next central bank meeting up tomorrow, but as I discuss below, surprises will likely be hard to find unless Macklem indicates that the BoC is ready to abandon the tightening ship already now rather than hiking the 25 basis points the strong majority expect at this meeting, or as most assume is the most dovish case, at the March meeting. We are at BoC peak rates, essentially, leaving CAD’s fate up to the direction of oil prices and risk sentiment from here.

Chart: USDCAD
USDCAD has traded somewhat heavy in the range here ahead of tomorrow’s Bank of Canada meeting, which looks entirely unlikely to deliver any hawkish surprise, and with a well-flagged deceleration to a 25-basis point move expected tomorrow, followed by a significant pause to assess the impact of the blistering pace of tightening last year. CAD bulls will likely have to hope for a further melt-up in risk sentiment and sustained rise above 85, if not 90 dollars/barrel in crude oil (WTI) to find significant further upside versus the US dollar. Levels to watch include the local lows in the low 1.3300’s followed by the 200-day moving average rising toward the mid-November low of 1.3226, but currently nearer 1.3200.

24_01_2023_JJH_Update_01
Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Few shifts of note since yesterday, but the Aussie’s rise has become significantly more pronounced as it gets a leg up more broadly, and SEK is attempting a revival, with some interesting levels approaching in key pairs, as noted below. Note that Australia reports Q4 CPI tonight, with the market looking for one or two more 25 basis point hikes from the RBA from here (Feb. 7 meeting priced at 50-50 for a move) and it feels like Philip Lowe and company would appreciate any excuse to do less rather than more.

24_01_2023_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
SEK working into some interesting with this latest rally, as a major pivot low in USDSEK approaches near 10.15, while EURSEK has poked below local multi-week lows just below 11.10, but needs to take out at least 11.00 to suggest a more significant reversal.

24_01_2023_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1300 – Hungary Central Bank Rate Decision
  • 1330 – Philadelphia Fed Non-manufacturing Survey
  • 1445 – US Jan. Flash Manufacturing and Services PMI
  • 1500 – US Jan. Richmond Fed Business Conditions
  • 1800 – US Treasury auctions 2-year notes
  • 2145 – New Zealand Q4 CPI
  • 0030 – Australia Q4 CPI

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