FX Update: Powell surprises hawkish, data still in driver’s seat.

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John Hardy

Head of FX Strategy

Summary:  Fed Chair Powell surprised the market by expressing a willingness to step up the pace of hikes again if “the totality” of data warrants such a move. This triggered a fresh jump in US yields at the front end of the curve and the US dollar as the market upped the odds of a 50 basis point move the week after next. This adds further to the two-way reaction function around incoming US macro data, especially the jobs report Friday and next Tuesday’s February CPI. Elsewhere, will Bank of Canada maintain its dovish guidance today?

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FX Trading focus: Fed Chair Powell jolts USD higher with promise to re-accelerate the pace of hikes if warranted. Bank of Canada will need to tread carefully to avoid further CAD weakness after its prior guidance to pause its tightening regime starting at today’s meeting.

Fed Chair Powell was surprisingly (to me) pointed in his remarks on the likelihood that the Fed funds rate would likely have to head higher than previously anticipated and by indicating a willingness to consider re-accelerating the pace of rate hikes if “the totality” of data warranted doing so. This gives a clear sense that the Fed doesn’t trust its own models of where things are headed and was unsettled by the January inflation data (particularly the PCE core) in particularly, as well as the strong jobs report and modern low record in the unemployment rate. With that in mind, it is clearly the data itself that is in the driver’s seat for cementing the ensuing jump and break higher in the US dollar and market reset to a higher Fed terminal rate yesterday. The 2-year US treasury yield benchmark rose to a new high since 2007 above 5.00% as the terminal Fed rate by September of this year was lifted as high as 5.65%. As noted in this morning’s Saxo Market Call podcast, the market still expects about 150 basis points of cutting by early 2025 from wherever the Fed peaks its tightening cycle, suggesting that the market remains convinced that either disinflation will quickly develop by late this year and/or that a recession at some point will have the Fed easing, if from a higher level.

First up, data-wise is minor stuff today including the woefully tardy JOLTS job opening survey for January. This survey has receive considerable attention, but other private-sector services (for example: ZipRecruiter and Indeed) release their data well ahead of the JOLTS and uniformly show a steady decline in job openings, even if they are still above where they were in February of 2020. The JOLTS survey does cast a wider net, in terms of number of firms surveyed. We also have the ADP employment change data today, which did little to prepare us last month for the +517k Nonfarm Payrolls print last month when the ADP only reported +106k. Thus, the combined Nonfarm Payrolls and Household survey (which has strengthened of late – it measures the percentage of those surveyed who say they are in work) will hold the key for supporting Powell’s message and increasing the risk of a 50 basis point hike from the FOMC on March 22 (currently about 41 basis points priced in), together with the February CPI data up next Tuesday, the 14th.

USDCAD is quite typical of USD pairs here as the USD makes new highs for the year against CAD, but the pair did post higher levels back at the height of the USD bull run last fall. CAD has been relatively firm in the crosses, likely on the beta that the loonie often shows to the USD in the crosses. But the Bank of the Canada has been an early mover among G10 currencies on the dovish side in trying to pre-announce a pause in their rate hike cycle on some softer Canadian data. Despite the latest shift higher in Fed expectations, the market is expecting the BoC to make good on the guidance from the prior meeting and has priced essentially no tightening from the BoC for the next two meetings, with only slightly more than 25 bps of tightening price through late this year. We could see the market punishing CAD further here if the BoC maintains this dovish guidance, especially if risk sentiment and crude oil prices remain under anything like the pressure we saw them under yesterday. Governor Macklem would do well to roll out some more emphatically two-way guidance. As with the other small, open economies, the BoC chief is likely preoccupied with the rolling trainwreck for tight household budgets incoming as Canadian mortgage reset higher. A strong majority still take out “fixed” rate mortgages, but these roll every five years. The five-year ago 5-year rate for Canadian government bonds was around 2.00% vs. over 3.50% currently, a significant difference that only worsens from here, with the 2019 5-year yield dropping to 1.50%, and then 1.00% in 2020 and even below 0.50% for much of 2021. And there is still a large minority of mortgage holders that are on floating rate mortgages and already feeling an impact. In any case, watching the 1.3900+ highs of the cycle in USDCAD through next Tuesday’s CPI release.

Source: Saxo Group

Fed Chair Powell is out testifying again today, but we can hardly expect him to add considerable further guidance to yesterday’s developments. The risk for traders may be that the market now goes sideways or even gets choppy before reacting to each incoming data point rather than trending smoothly.

The Bank of Japan drama has picked up further ahead of the Friday BoJ meeting as the higher yields pressurized USDJPY for a break above the 200-day moving average yesterday above 137.00. A complete failure for the outgoing Kuroda to act on Friday and a simple handover to Ueda to shape policy from here could see further JPY downside pressure, while it’s hard to know how the market would absorb another incremental YCC loosening like the one in December (for example, raising the band on the 10-year JGB to +/- 0.75% from the current 0.50%) if yields are still pressing higher elsewhere. Market expectations are very modest for actual policy rate tightening through the end of this year, with the policy rate priced to only move to plus 0.14% through the December BoJ meeting.

Table: FX Board of G10 and CNH trend evolution and strength.
The strong US dollar taking control here again after Fed Chair Powell’s rhetoric, with the euro trying to hang in there to a degree on the late hawkish guidance from the ECB. Watching CAD in the crosses and in USDCAD post today’s Bank of Canada meeting. Silver taking it on the chin as gold wilted on the jump in Fed expectations and the USD, and as the copper price rolled over as well.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
GBP flipping lower in an increasing number of places. Watching NZD downside risk eventually if risk sentiment worsens as well. Note USDJPY and other JPY cross status ahead of Friday.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1315 – US Feb. ADP Employment Change
  • 1330 – US Jan. Trade Balance
  • 1330 – Canada Jan. International Merchandise Trade
  • 1500 – Canada Bank of Canada decision
  • 1500 – US Fed Chair Powell to testify before House Panel
  • 1500 – US Jan. JOLTS Job Openings
  • 1800 – US 10-year Treasury Auction

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