FX Update: USD pushed lower after treasuries shrug off hot CPI print.
Head of FX Strategy
Summary: The US CPI print for March came in hot yesterday, but by the end of the day the market has shrugged off the development and a firm 30-year US T-bond auction sent the longest US yield to close to the lowest level in a month, weakening the US dollar and beginning to make its recent reversal back to the downside look decisive if current levels stick. Commodity currencies have jumped the most as risk sentiment welcomed the development.
FX Trading focus: USD rolling over after hot CPI ignored
The hottest month-on-month US headline CPI reading since 2009 and inflation for both headline CPI measures and both core CPI measures beating expectations by 0.1%? Naturally that is a signal to buy treasures, right? No, of course it isn’t, but it just goes to show the difficult nature of markets and the interminably difficult task of figuring out where expectations are versus reality and how much is already in the price on different time horizons.
A slightly complicating factor, as pointed out in John Authers’ Bloomberg column on yesterday’ rally in treasuries despite the strong US inflation data, is that we also saw a recommendation to halt use of the Johnson and Johnson vaccine, one that is critical for completing the vaccine effort in many regions, particularly for Europe, as long as the AstraZeneca drug is on hold there in particular. The numbers of complications with the Johnon & Johnson vaccine look so vanishingly small that we might expect that it is cleared for use again soon – let’s certainly hope so. But as well, a reasonably firm US T-bond (30-year) treasury auction also helped to support treasuries and the US dollar rolled over as one would expect. The twist this time is that the traditional risk-sensitive currencies outperformed on the development, rather than the lowest yields like EUR, CHF and JPY that performed the best once US treasury yields stopped rising a couple of weeks back. The move is beginning to look decisive in places, but we need to see a more
Inflation is always a tricky beast, and some of the inflation we are seeing is from supply chain disruptions brought about by the pandemic itself as well as bad guessing on the future shape of demand in a world where too many operators are working with just-in-time principles. Some of these issues will inevitably ironed out, but much of the policy response is likely providing the foundation for long term price rises, like stimulus that brings little or no productivity with it, especially helicopter cash drops, but also the green transformation focus and a drastic reduction in investment in still-important fossil fuel energy. Besides the headline oil price, traditionally the most important, as an input for future inflation, I would also focus on US petrol prices at the pump, especially as a psychological factor that can affect sentiment, because the move prices so much there relative to elsewhere, where taxes are generally a far higher percentage of the end-price. (Here in Denmark, over the last 10 years the retail price has stayed within 15% to either side of the average price whether crude oil was 110 dollars a barrel or 25 dollars a barrel.) We are looking at the highest prices at the pump in the US since 2015, but round levels are that will have impact probably don’t arrive until 4 dollars per gallon (highest range during 2011-14 high oil prices for regular gas was 3.50-4.00). With regular gas sitting just below 3.00 for the national average, this metric has some way to rise before making an impact.
The next macro data of interest from the US will be the US March Retail Sales release tomorrow as we measure the combined boost from the latest round of stimulus checks as well as the more widespread opening up across the nation (though some areas – notably California - only likely to become more or less fully normalized in another two months) .
As mentioned in this morning’s Saxo Market Call podcast, another issue issue that is likely important for the US dollar, treasuries and therefore the broader market is the US Treasury’s drawing down of its funds held at the Fed, currently around $925 billion, but the Treasury has said it will draw that general account to $500 billion by the end of June. That’s a solid chunk of liquidity and sets up that time frame as a focus.
The AUDUSD chart is making an effort at resolving to the upside, with today’s break of the recent high of the range around 0.7650-75 area the first key, but further progress above perhaps the 0.7700-50 area needed to keep the prospects for a reversal back higher in place, as it wouldn’t take much weakness here tactically to suggest that we remain stuck fully in limbo. Chinese markets are not supportive and the key Australia linked commodities are elevated, but still within the range. AUDUSD bulls and bears should also keep an eye on gold, where a more full-fledged recovery back through the next key layer of resistance (1750-1775) would help provide a coincident indicator suggesting the USD is on its way down and out again. Note that tonight sees the release of Australia’s latest jobs data, after the Westpac consumer confidence gauge has soared to new highs.
Odds and ends
TRY is enjoying the backdrop ahead of Turkish Central Bank rate setting meeting tomorrow. The new central bank chief Kavciouglu is still getting his sea legs and will have an interesting task ahead of him if he wants to open up the idea that rates are too high and must come down. Turkish credit spreads have stabilized considerably since the original shock move by President Erdogan to boot former central bank head Agbal. There is perhaps a small window for more TRY appreciation in the near term if rates are kept unchanged, but the market has been forced to slap a semi-permanent “unpredictability” discount on TRY on the risk of political interference. Turkey is also in the throes of another pandemic outbreak.
RBNZ keeps it easy, also on the macroprudential message -a long statement from the RBNZ overnight, mostly accommodative and cautious sounding, but the kiwi perhaps got a slight boost overnight (if any – most of it probably from the lower US yield effect) because the RBNZ is taking it easy with its new mandate to focus on housing affordability as it merely said it would like to see the effects on housing from the Ardern government’s recent raft of measures aimed at restraining speculation in the housing market and the RBNZ will develop a series of indicators for including in the next Financial Stability Review next month.
Table: FX Board of G-10+CNH trend evolution and strength
The US dollar reversal lower is seeing it poking into a negative trend reading on our FX Board showing trend evolution, but all of the new trend shifts are rather fledgling affairs, so let’s see if yesterday’s interesting developments stick and extend.
Upcoming Economic Calendar Highlights (all times GMT)
- 1400 – ECB President Lagarde to speak
- 1430 – US Weekly DoE Crude Oil and Product inventories
- 1600 – US Fed Chair Powell to speak
- 1800 – US Fed Beige Book
- 1830 – US Fed’s Williams (Voter) to Speak
- 1945 – US Fed’s Clarida (Voter) to Speak, with Q&A
- 2000 – US Fed’s Bostic (to peak)
- 2100 – New Zealand Mar. REINB House Sales
- 0100 –Australia Apr. Consumer Inflation Expectations
- 0130 – Australia Mar. Employment Change / Unemployment Rate
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