FX Update: How much of a debt ceiling lift already in the USD price? FX Update: How much of a debt ceiling lift already in the USD price? FX Update: How much of a debt ceiling lift already in the USD price?

FX Update: How much of a debt ceiling lift already in the USD price?

Forex
John Hardy

Head of FX Strategy

Summary:  The recent US dollar rally and backing up of treasury yields may represent a partial front-running of the debt ceiling issue lifting soon. Until then, the market has now neutralized most of the anticipated Fed rate-cutting later this year and is even pricing higher risk of another hike at the June or July FOMC meetings, with important inflation-related data on tap. Elsewhere, the Swedish krona is attempting a comeback from remarkable new lows from the first signs of official intervention.


Today's Saxo Market Call podcast

FX Trading focus:

  • The US dollar has rallied together with treasury yields backing up – is this a partial front-running of the a debt ceiling agreement?
  • Swedish krona – countdown to a more robust official response after latest leg lower reversed today on rhetorical Riksbank intervention.

Trading notes/bias shifts

  • USD: Key support violated in EURUSD and elsewhere, but this did not lead to capitulation. Volatility danger around today’s data releases (PCE and UMich Sentiment) and on debt ceiling deal announcement. Tactically neutral, but eventually looking for a debt ceiling deal to play as USD-supportive.
  • NZD: NZDUSD shorts may look to trim positioning for reloading as long as rallies fall short of 0.6150. Similarly, AUDNZD longs may revert to buy on dips as long as price action remains north of 1.0650.
  • GBPUSD: A sluggish affair lower, shorts may trim positions here, will want price action to stay south of 1.2425-50 to maintain tactical downside view.
  • JPY: back-up in global yields has meant another false starts for JPY bulls trying to spot a comeback, but still favour 3-6 months options for expressing downside view in GBPJPY and EURJPY
  • SEK: have to believe that an official response to shore up SEK fortunes will arrive in coming months, prefer expressing in GBPSEK or EURSEK if bearish reversal develop enough credibility.

USD: watching inflation-related data today, debt ceiling lifting.
Two data points today will help determine whether the US dollar remains bid tactically. These are the PCE inflation data up today, with a core month-on-month surprise in either direction from the +0.3% expected a tactical catalyst for direction. Also remember that the final May University of Michigan sentiment survey will get extra play today after the preliminary release earlier this month saw long-term (5-10yr) inflation expectations in the survey rising to 3.2%, a high above the range since 2011. These may inspire some short term volatility, but the reaction could get quickly drowned by an announcement of a debt ceiling deal-in-principle as soon as today (it’s futile to track this story, as one day’s collapse yields to the next day’s optimism, but the latest according to sources is that a  possible two-year deal could be in the works, though Freedom Caucus Republicans are a risk for scuttling this plan if Democrats can’t be found in favour of making it a bipartisan effort.). The presumption is that eventually, the liquidity pressures from the US Treasury issuing a net $500 billion or so of new treasuries will support the green-back. But how much of this is already in the price? We may soon find out.

Swedish krona – countdown to more robust official response?
The Swedish krona has suffered another aggravated sell-off as the country faces widening concerns of a credit crunch and weak economy on the cratering property market. The local FSA has unhelpfully bemoaned the wobbly property developers, arguing that they should seek to deleverage by raising capital and selling assets. This is impossible in a post-property bust environment as no new capital wants exposure to the sector and listing properties on a market that already faces weak liquidity on shriveling demand would crystallize even worse losses as price pressures would inevitably accelerate. The Swedish yield curve points to the gloomy outlook for the country, as the 2-10 yield curve is almost -65 basis points compared to -71 basis points today in the US despite Swedish 10-year yields trading some 135 basis points lower at 2.43%.

Today, Riksbank Deputy governor suggested that the Riksbank should consider accelerating its quantitative tightening if the currency continues to weaken, Governor Thedéen also weighed in that the krona is a problem, and yet another Riksbank official echoed these comments. Riksbank measures can help to shore up the risk of further downside here, but the powerful medicine would be a clean-up of the property sector and perhaps creation of a “bad bank” to lift the worst assets from banks and allow them to continue providing credit (household lending growth has dropped to the lowest level in a generation in recent months). This and a considerable expansion of Swedish government bond issuance even on top of QT to deepen local sovereign debt markets are needed to get SEK back into its historic range back below EURSEK of 10.00. Let’s see how long this takes, but beginning to get contrarian to further SEK weakness – more on chart below.

Chart: EURSEK
A solid reversal in EURSEK today on verbal intervention from Riksbank officials, but it would need to extend significantly to suggest a more robust rejection of the new highs above 11.48, and ideally, a retreat to at least 11.25 together with some more firm sense of a policy response as outlined above is likely needed to suggest a secular top – but we’ll be on watch for that potential.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The SEK weakness has gotten extreme – watching for mean reversion potential now that we are beginning to see more pushback from officialdom. Elsewhere, the JPY continues to push lower on, while the US dollar has already risen considerably ahead of the likeliest time frame for a debt ceiling lifting announcement (coming few trading days). How much is already in the price? And sterling has managed to avoid further turmoil on the unsettling rate spike after the latest inflation print, which raises the risk of the BoE being forced into an economy-cratering series of further hikes.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD is bidding for a flip to positive on today’s close.  Elsewhere, GBPNOK is a remarkable one now, having held the positive trend for 102 trading days without a turn – probably getting old in the tooth if Norway always wakes up and smells the policy coffee on NOK.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (All times GMT)

  • 1230 – US Apr. PCE Inflation 
  • 1230 – US Apr. Preliminary Durable Goods Orders
  • 1400 – US Final May University of Michigan Sentiment/Inflation expectations

Disclaimer

Saxo Capital Markets (Australia) Limited 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 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

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) Limited 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, Product Disclosure Statement and Target Market Determination 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. 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. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

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.