FX Update: A USD reversal or a red herring? FX Update: A USD reversal or a red herring? FX Update: A USD reversal or a red herring?

FX Update: A USD reversal or a red herring?

John Hardy

Head of FX Strategy

Summary:  Yesterday offered up a wild ride across markets after a hotter than expected US core CPI print spooked sentiment, only to see the action yielding to a wild rally that took the USD back down after a spike higher, though the action was very mixed across USD pairs and USDJPY remains pinned near multi-decade high. Elsewhere, has sterling wrung about all that it can to the upside for now? Certainly an important test for the gilt market and sterling if the BoE’s emergency QE is halted on schedule today.

FX Trading focus: US CPI on tap. GBP focus early next week.

Fair to say we saw a crazy day yesterday, particularly for equity markets and the USD pairs, like AUDUSD and USDCAD, most correlated with swings in risk sentiment of late. The trigger was of course the hot core US September CPI data, out at +0.6% MoM vs +0.4% expected, with the YoY figure of 6.6% representing a new high since the early 1980’s. Arguably, the core CPI figures may prove stickier here at high levels in part on the owner’s equivalent rent (OER) measure that is an artificial construct and was notoriously slow to pick up in the early part of this inflation cycle and may now be lagging in mean reverting back lower, as we know that a massive weakening in house prices is in the forward pipeline and will eventually work into this measure as well. Specifically, the OER measure, which has a 24% weight in the US CPI calculation, rose +0.8% in September.

Regardless, the task now is judge whether yesterday’s back-up in risk sentiment and risk-correlated USD pairs are a sign of a turn higher for sentiment and lower for the US dollar. Too early to tell, but USDJPY blasting to new highs above the 1998 mark of 147.66 today despite the retreat in long US treasury yields from new highs yesterday speaks volumes, as does the quick reversal of this morning’s attempt to take the USD a bit lower still. The reaction at the shorter end of the US yield curve, which took the peak Fed rate to the 4.75-5.00% area, has held up today.

A close below 0.9700 in EURUSD suggests that yesterday’s reaction to the incoming data was so much derivative-driven noise. Retail Sales are unlike to move the needle in any way resembling what we saw yesterday unless we see an enormous miss in either direction. Note that three voting FOMC members are out speaking today, with little anticipation of any rhetorical shift. Otherwise, a huge focus on sterling into early next week as noted in the GBPUSD chart discussion below.

Things are moving fast in UK politics, as the press is abuzz with claims that Chancellor Kwarteng is set to get the axe and that PM Truss will back-track on the “mini-budget” the Chancellor announced, purportedly the proximate cause of the melt-down in the UK gilt market and sterling. But in reality, while there is plenty of blame to be placed on Kwarteng’s shoulders, the universe of factors certainly included Truss’ over-generous energy subsidies and the Bank of England’s foot dragging on hiking rates, not to mention pension funds hedging their exposures using “LDI” principles (akin to the “portfolio insurance” that drove the crash of the US equity market in 1987. There is still plenty that can go wrong for sterling, simply from the ongoing need for funding of external UK deficits and still very higher energy prices. We’ll have to check back in on the gilt market early next week as the Bank of England is supposedly set to wind down its emergency operations today. As for chart levels in GBPUSD, watching the 1.1000 area on daily closes as a potential downside trigger and the 1.1500 resistance to the upside. The key areas in EURGBP include the 0.8575-0.8625 zone and to the upside, the 0.8800-50 zone.

Source: Saxo Group

USDCNH is trading above the pivotal 7.200 level ahead of Chinese leader Xi Jinping’s speech to the party congress on Sunday, a key step in his “election” to a third term. Besides the focus on well-known policy principles like “common prosperity”, “dual circulation”, focus will be on any change in the commitment to zero Covid tolerance (doubtful) as well as the general tone toward the US and its allies after the recent moves to limit Chinese access to semiconductor technology.

Table: FX Board of G10 and CNH trend evolution and strength.
Sterling has posted an enormous comeback - is it’s near term potential maxing out here, given that structurally, nothing has changed for the better in the UK? After all, we are merely set to see the government eliminating the last couple of hubristic policy moves. Elsewhere, note AUD still struggling, the back-up in NOK probably set for a strong challenge next week if sentiment rolls over, and the JPY just accelerating lower again – 150 in USDJPY the next level for the Bank of Japan / Ministry of Finance to put up a fight?

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Not wanting to jump on the flip to a positive trend reading in GBPCHF, at minimum due to the difficulty of establishing risk/reward levels after the recent volatility. Similar on EURGBP. Also note EURCHF looking at that interesting 0.9800-50 resistance zone – has this recent rally been about the relief trade on sterling?

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1230 – US Sep. Retail Sales
  • 1230 – Canada Aug. Manufacturing Sales
  • 1400 – US Fed’s George (Voter 2022) to speak
  • 1400 – US preliminary University of Michigan Sentiment
  • 1430 – US Fed’s Cook (Voter) to speak on economic outlook
  • 1615 – US Fed’s Waller (Voter) to speak on central bank digital currency 

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