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The FX Trader: FOMC a modest dovish surprise. ECB and BoJ on tap.
Summary: The ECB may have more potential to surprise after a modestly dovish turn from Fed Chair Warsh at the press conference yesterday, although the market has already priced a dovish downshift from Lagarde and company and the euro is very weak. The Bank of Japan may need some support from the Ministry of Finance (intervention) if the JPY is to rally in reaction to their meeting tomorrow.
FOMC – a modest dovish surprise
The US dollar weakened slightly and the US Treasury yield curve steepened late Wednesday in the wake of the FOMC statement release and Warsh press conference, with the latter making the bigger impression. The statement was largely the same and there were two hawkish dissenters in favour of a hike. Of the changes to the statement, one was a slightly hawkish upgrade as economic was now described as expanding at a "strong" rather than a merely "solid" pace. Another change left room for interpretation: the change of the September justification for tightening was replaced with a data-dependent "The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely" (rather than timelier) return to the 2% target. Probably just revised to explain why they are waiting and not hiking at this meeting? Unknown.
In the presser, there were a few nuances that the market took as dovish. Chair Warsh pushed back against characterising the US economy as overheating, saying that productivity increases could allow faster growth without accompanying inflation. This looks like a strong "out" for not responding to higher inflation levels. He also said that the September rate hike was already working and beginning to restrain credit conditions and wanted another six weeks (time frame to next meeting) to assess what to do. He also rejected the idea that the Fed needed to engineer a growth slowdown by obstructing economic activity or causing job losses to lower inflation.
While the reaction in treasury markets (front-end coming down, long end mostly steady) largely stuck, the modest USD sell-off spent most of early Thursday hours reversing, even if the JPY comeback was trying to hold on. For the US dollar this was a largely a non-event, in short - direction of global risk sentiment and oil prices may carry more sway for now in UDS direction.
ECB today
The ECB has perhaps more potential to surprise today given the pricing of the December rate hike (still high odds, but will the ECB indicate declining resolve to continue tightening policy?). Further tightening is not priced in until March or later of next year. I suspect a solidly high risk that the ECB removes forward guidance for any further tightening, at least upgrading the uncertainty level, which could knock the Euro a bit lower. How much will the ECB admit that the elephant in the room is the recent instability in French sovereign bonds? Awkward, with a French ECB President presiding. Still, the euro has suffered quite a bit in the crosses already, so a dovish shift is partially priced in (note the trend readings in the FX Board below.)
BoJ incoming as well
The retreat in short-date US treasury yields post-FOMC helped punch the USDJPY and other JPY crosses back lower. USDJPY squeezed as high as 158.35 Wednesday before retreating back below 158.00 ahead of tomorrow's Bank of Japan meeting (look for the statement release around 0230-0330 GMT and Ueda presser at 0630). The highs on Wednesday came close to the critical 158.50 area that has mostly capped the price action in USDJPY (near the 200-day moving average and other technically important levels as noted in USDJPY chart below) in recent weeks as traders eye the risk of official Japanese intervention that has come on multiple occasions in recent months. With USDJPY trading near 158.00, I would expect the Bank of Japan to sound resolute on doing what it takes to ensure inflation fighting credibility, including on the currency angle risk to inflation, but how much this can jolt rate spreads higher is somewhat doubtful, given that the December BoJ is already mostly priced to deliver a hike, with more to come next year. Actual intervention may be needed from the Ministry of Finance to make the point clear, even if Ueda waxes hawkish.
Chart: USDJPY
With so many bouts of intervention in the mix in recent months, it is difficult to argue the case for technical analysis on the USDJPY chart, but either way, the 158.50 plus area remains obviously critical for the pair, as it is both near recent resistance and the obvious 200-day moving average and Ichimoku cloud levels. Note that the recent lows avoided touching the bottom of the cloud, which is now set to rise above those levels – so the first downside key is the cloud bottom on the daily closing basis, followed by the local 156.08 pivot low and then the 155.25 area (61.8% retracement level).
RBNZ dovish shocker and BoC hike
The Bank of Canada hiked yesterday as seemed inevitable after recent hawkish rhetoric from Governor Macklem, but even with the dovish FOMC yesterday, USDCAD is having a hard time separating from the magnetic round 1.4000 level. That level looks pivotal for the pair. Canadian short rates pulled toward the cycle highs as Macklem said that the estimate of the neutral rate may have to rise, among other comments. The RBNZ surprised early Wednesday with a dovish shocker in not hiking again as the market expected, though it positioned the move as a delay rather than a direction change and the vote was a close 4-3. Still, the bank upgraded short-term inflation forecasts at the same time, while saying it paused as an expression of concern on the outlook for global growth and that inflation was mostly being driven by imported energy costs. The NZD was punched steeply lower, especially in AUDNZD as Australia was out with strong inflation numbers around the same time frame, but RBNZ Governor Breman has already been out with a bit of pushback on the market's takeway, saying that the odds of a December hike are high. AUDNZD set a new 13-year high near 1.2600.
Autumn Budget statement yawn for sterling
There was little drama in sterling pairs Wednesday on the Autumn Budget announcement from UK Chancellor Healey, which observers felt was credible enough in allowing enough “fiscal headroom” to avoid fiscal stability concerns for now, although that headroom is now smaller than before. The household energy subsidy of GBP 100 to 20 million households won't break the bank, and most moves were incremental, with some modest tax increases, a temporary one on bank earnings and on savings and property income (not on wage). The really tough stuff is yet to come: the overall spending by the government's various departments which will be undergoing the biannual 2027 spending review. EURGBP remains near the 17-month cycle low, trading early 0.8366 early Thursday.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
China keeping a firm hand under its currency as the country remains mired in a balance sheet and deflationary (for housing especially) spiral. Elsewhere, the JPY rally attempt has fizzled a bit ahead of the BoJ tomorrow. In the negative column, the NZD paid a heavy price for not hiking and the Euro is extremely weak, so a bit tough to hope for a massive reaction to a dovish surprise at today’s ECB meeting when it is already beaten down so aggressively. Much of that, by the way, is versus SEK and especially NOK.
Table: NEW FX Board Trend Scoreboard for individual pairs. The AUD is trying to put on a show here, but AUDUSD, for example, is in the shadow of the prior major sell-off and has sold off sharply after punching above the 200-day moving average after the FOMC meeting – it looks sensitive to risk sentiment here. Let’s give the AUDNZD and AUDJPY another couple of days to settle as well – a bit skeptical about this AUD move, obviously. USDJPY status is uncertain as well – yes, the recent sell-off was neutralized, but we have a massive overhead resistance and a BoJ meeting to get through. Elsewhere, EURNOK is getting to be a bit much with a -12.4 trend reading (!). Imagine what happens there if we suddenly get 10-dollar drop in crude.