FX Update: Make or break for USD bears through Friday. FX Update: Make or break for USD bears through Friday. FX Update: Make or break for USD bears through Friday.

FX Update: Make or break for USD bears through Friday.

John Hardy

Head of FX Strategy

Summary:  The US dollar has broken down in places if not in others ahead of tomorrow’s December CPI data print, which may not provide much clarity if we look at how the prior weak number failed to drive notable USD weakness. Elsewhere, the China rebound trade felt mostly only in the Aussie among G10 currencies, as metals have surged.

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FX Trading focus: Will US December CPI data provide any clarity? Employee vs. employer confidence.

Another weak US sentiment survey yesterday, this time in the form of the NFIB Small Business Optimism number for December, which posted a surprising fresh decline to 89.8 versus the prior 91.9 and nearly matching the cycle lows from last summer when the incredible inflation ramp was in full swing and the impact of spiking gasoline prices were reaching their maximum. The next sentiment data point of note is the first January look at the University of Michigan sentiment survey on Friday, one that nearly matched an eight-month high in December (and the Conference Board number rose sharply to a new eight-month high) Perhaps employees have a different perspective on the economy than their employees?

First up, however, is tomorrow’s US December CPI release. The CPI data series has received so much focus in recent months and the zany response to the soft November CPI number back on December 13 may suggest that the reaction function may have shifted: let’s recall that the November print was solidly weaker than expected on the headline, and the month-on-month core levels were soft, rising only +0.2% vs. +0.3% expected and the year-on-year at 6.0% vs. 6.1% and at the lowest level since last summer. The market reacted to that data with a sharp rally higher in equities as Fed expectations were marked sharply lower. But within hours, equities had reset to their starting point and the Fed expectations bottomed out within 24 hours without much collateral damage for the US dollar.

So what are we to make of the latest print tomorrow? It would likely require profound weakness in the core “ex Food and Energy” data to trigger a notable further slide in Fed expectations now that we are already sitting back toward the low of the cycle for where Fed policy peaks next year (below 5.00% currently priced) and for the policy rate by mid-2024. The core CPI is expected at +0.3% MoM and +5.7% YoY.  To really rattle the Fed and reset expectations lower still within the next three months, we would probably need a couple of months of unambiguous signs of a sharply weakening labor market. On the flipside, even if tomorrow’s CPI data is inline or a tenth of a percent higher than expected on the month-on-month or a bit more than that for the year-on-year, how much will the market be willing to fret the implications, knowing that from here, year-on-year comparisons are set to become far more favorable as the spike in energy prices from last February on Russia’s invasion of Ukraine rolls into view?

I participated in conversation with other market and economic observers today, one of whom suggested that the US savings may be over-estimated and that the increasing use of credit cards is a sign that some are using credit to sustain spending levels – a late cycle sign. Certainly, a look at the Fed’s consumer credit or “revolving” credit data (latest November data point was out just this Monday) shows an interesting acceleration in the use of credit cards starting around last March and extending through the November data point. A similar acceleration in credit card balances also came in starting in August of 2007 and extended through January of 2008. It’s interesting stuff, but we need some more evidence here, and I will be pouring over Q4 earnings reports as the US earnings season cranks up starting this Friday for timely indications on consumer activity and company guidance.

A fascinating test here of relative themes as the US dollar weakens on the Fed getting marked back toward the lows for the cycle on its further policy tightening expectations in H1 of this year and where it will have cut rates to by perhaps mid-next year. On the other side of the equation, Aussie traders are ignoring the cautious and dovish RBA and celebrating the rise in metals prices as Chinese growth is seen coming back online with a vengeance in Q2 and perhaps even late this quarter as activity levels on the ground are rapidly normalizing, at least in terms of metrics like passenger volume on metro systems in various Chinese cities. AUDUSD has broken above the important pivot high just below 0.6900 from December and has now taken out the 200-day moving average, but has yet to follow through higher. The upside is littered with a number of resistance levels, starting with the 0.7000 psychological level, the 61.8% retracement level of the sell-off from the 2022 high of 0.7661, which comes in at 0.7091, and then the major pivot highs of 0.7137 and 0.7283. A USD rally into the end of this week that sees perhaps a drop and close toward 0.6800 or below, on the other hand, would suggest that this is a false new dawn for the pair. Likely a few pivotal days ahead.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
SEK continues to misfire – so out of past market behavior regimes when strong risk sentiment in Europe and a stronger euro would have a multiplying effect into SEK. The balance sheet recession risks from a cratering housing market are likely a key driver. Elsewhere, the CNH continues to outpace all of G10 in trending higher, with AUD hanging on, but the market has priced an awful lot for China in FX terms.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The great JPY comeback has thoroughly fizzled – need global risk off and sharply lower yields to light a new fire under the JPY again. Note that AUDJPY is already attempting to establish a new up-trend (needs a bit more on the chart) and the same goes for EURJPY today. Elsewhere, note that EURGBP and XAUUSD are two of the first instruments on the list to show a white shading in the ATR column, indicating mid-quintile volatility relative to the last 1000 trading days.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 2350 – Japan Nov. Current Account data
  • 0030 – Australia Nov. Trade Balance
  • 0130 – China Dec. PPI, CPI


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