FX Update: Eyeing the FOMC meeting and yield curve control

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  Market action has suddenly become decidedly more two-way later in the European morning as markets mull whether the FOMC meeting tomorrow can provide any more fuel for the recent melt-up in risk assets and melt-down in the USD. The hard charging JPY was already a flashing red light over the last couple of sessions.


I return to work today after a short holiday for one of the first more determined equity market sell-offs in recent memory, and in the US dollar’s case, the most notable rally in some two weeks – which looks less notable once the trouble is taken to look at how far and how persistently the US dollar has dropped over the last two weeks. All market moves eventually yield to two-way action, and the timing for this bit of consolidation makes sense, given tomorrow’s FOMC meeting, which for the first time in a while has the market in a bit more on the edge of its seat.

The pivotal issue at this FOMC meeting is the latest policy guidance, particularly on an eventual yield-curve-control policy, as we discuss with our CIO Steen Jakobsen on this morning’s Saxo Market Call podcast. The basic idea and historical parallels that market observers draw with the post-World War II experience is that the Fed will eventually move to cap yields at the longer end of the curve to prevent real rates from backing up (and eventually, if inflation returns with a vengeance as more and more market participants and even consumers seem to expect, according to the latest surveys, any yield-capping by the Fed would mean increasingly negative real rates, a boon to risk assets and hard assets alike).

It is too early to expect yield-curve control policy now, but how firmly the Fed hints at its implementation (many presume September) may be enough to move the market – or have risk assets and the USD moved so far that we are in a “sell the market, buy the USD” reaction tactically almost no matter what. As for less likely or more explicitly negative market risks from tomorrow’s FOMC meeting, less clear guidance on eventual policy choices or no mention or endorsement yet of yield curve control together with any sense that the Fed thinks it has done enough for now to allow itself the luxury of a bit of wait-and-see could trigger a fairly steep bit of consolidation of recent moves. The least market friendly outcome and probably very low odds, but still worth mentioning, would be any whiff of a mention of discomfort with the degree of speculative frenzy in asset markets and risks from that to financial stability. This is

Chart: USDJPY
Until the beginning of this week, the USD sell-off was accompanied by an even more brutal sell-off in the JPY. Have a look at AUDJPY if the USDJPY chart doesn’t make this clear. After the Friday payrolls data that saw an additional burst higher in long US yields and move lower in the JPY, the latter has clawed its way back aggressively versus the USD. Already, we have a bearish technical reversal on our hands here if the move sticks below 108.00. And if US yields continue lower whether because the Fed announces the intent to focus on controlling yields well out the yield curve or because we have a new and sudden bout of safe haven seeking on our hands, much is at stake for JPY traders. USDJPY is an interesting sell if the Fed moves more aggressively to indicate it will cap yields far out the US yield curve from here, but if the Fed under-delivers on the dovish side and a bout of risk appetite consolidation settles over the markets, both the USD and the JPY could rally across the board.

Source: Saxo Group

The G-10 rundown

USD – market moves don’t move in a single direction forever and plenty of room here for a sharp consolidation back higher without erasing the bear move.

EUR – still plenty of room for EU uncertainty in the near term relative to how quick the market has bid up the single currency – the 1.1400 area is major chart resistance and plenty of room likewise for tactical consolidation.

JPY – the beleaguered JPY on the comeback trail and most interesting technicall against the USD as the USDJPY erased the break higher. Elsewhere, the JPY sell-off extended so far recently that only a major market.

GBP – tough to extract meaning from EURGBP or GBPUSD charts as EUR and USD have received plenty of attention to drive new momentum in opposite directions, but sterling uncertainty remains until we pick up the narrative on the post-Brexit transition period trade deal again. Technically, focusing on whether the GBPUSD attempt higher holds here above 1.2650 – although really 1.2500 looks more important locally.

CHF – the recent EURCHF rally got a bit too aggressive there, and looks rather correlated with the move in JPY crosses. Fairly remarkable how quickly the price action is settling back lower – suggests poor liquidity and a squeeze on former shorts that are now re-engaging.

AUD – the 0.7000+ area in AUDUSD was the ideal place for a bit of consolidation to set in (major chart highs back at the turn of this year) and the bulls are taking a few chips off the table - vast room for consolidation without altering the turn of the chart higher.

CAD – the oil rally may have extended too far and interesting to watch the USDCAD price action around the 200-day moving average (1.3465 area). Still, the reversal back lower in USDCAD is so profound at this point that an enormous reversal back to 1.3850 and higher is required to offer any ray of hope for the bulls here.

NZD – the headlines shouting New Zealand’s defeating of the Covid19 crisis allowing late-comers to the longer term AUDNZD upside potential a window of opportunity to get involved here below 1.0700.

SEK – EURSEK has explored the entirety of the big range back towards 10.40 and then some as the Swedish krona has been the star of 2020 – the move may be a bit too much for now as we watch for technical hooks from higher levels for re-establishing shorts.

NOK – EURNOK reached the major milestone at the 200-day moving average around 10.44 and the prior major high was at 10.33. May need to consolidate a bit higher if oil has overdone the recent rally and if we finally get anything resembling consolidation in risk appetite post FOMC or for other reasons.

 

 

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.