FX Update: Market complacent on FOMC

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  While the US dollar and to some degree, US rates, are a holding pattern ahead of the FOMC meeting tomorrow, risk sentiment looks more than a little complacent elsewhere on the apparent assumption that Powell and company will not want to rock the boat on policy guidance for now. Then there is the SLR issue, which does little to address longer term issues in the Treasury market, even if the Fed brings short term relief.

FX Trading focus: FOMC agenda: the SLR and the dot plot

The currency market seems to be holding its collective breath a bit more than the equity market on what the Fed will say tomorrow at the FOMC meeting, one that will include the quarterly update of economic forecasts and “dot plot” of policy rate forecasts from Fed members. Recent Fed rhetoric underlining that the Fed wants to stay the course for now and that any strong inflationary pick-up is seen as likely transitory means that we are very unlikely to see any strong upward revision in policy forecasts in the dot plot. But the Fed can still send a rather loud measure in the amount that it raises forecasts for growth and inflation and especially by lowering the unemployment forecasts. Remember that the last batch of forecasts came at the December meeting, before the Georgia Senate race results were known and before the subsequent stimulus package passed by the outgoing Trump and doubled up again by the Biden administration last week. And on the dot plot, a few more Fed members shifting to a 2022 lift-off forecast and several more suggesting that 2023 is in play could impress the market and send the US dollar and US yields higher. See the discussion of the 5-year Treasury yield below for additional thoughts on US yield moves. (For perspective, only one of the seventeen Fed members forecasted lift-off in 2022 and five in total expected a higher rate in 2023 than the current level, with three of those only suspecting that a single 25-bp hike would be likely). The market is pricing greater than even odds that the first hike comes in late 2022, with about three more priced for 2023.

The secondary issue has more to do with the hot button issue of the supplemental leverage ratio (SLR) rule and whether it will be allowed to expire at the end of this month as originally scheduled or extended for some time or indefinitely. As this article, for example, makes clear, the SLR issue is only one aspect of the overall challenging structure of the US treasury market and has little to do with what happens down the road later this year when treasury issuance will vastly outstrip the Fed’s current pace of QE purchases and likely overwhelm any domestic or even foreign buying interest. As Althea Spinozzi, our fixed income strategist, pointed out in this morning’s Saxo Market Call, the foreign interest (despite superior currency-hedged yields for US in Europe, for example), has been trending lower. For the short term, a failure to extend the SLR rule or an only temporary extension to end of Q2 or Q3 could spook the treasury market anew on the implications that banks will need to reduce their treasury holdings.

Chart: US 5-year yields and 5-to-30 yield curve slope
The 5-year yield in the US and how quickly it moves (most interesting direction is up) relative to other points on the yield curve should prove an interesting coincident indicator relative to what is going on in other markets on the other side of the FOMC decision and presser tomorrow evening. Remember that it was a multi-sigma move in the “belly” of the US yield curve of 3-7 years that generated significant volatility across global markets in late February, when everyone was looking for general yield steepening, the curve actually flattened for a few days. Certainly, yield curve steepening bets are likely extreme out there as this has been one of the “macro trades of the year” and patterns on the curve as much as and perhaps more than any shift, for example, in the nominal 10-year yield could prove the interesting plot twist tomorrow. Flattening together with risk off would be the most potently USD positive, while “nothing new” and a dovish Fed could see the USD bears trying to restart their engines for a new sell-off leg.

Source: Bloomberg

Graphic: FX Board of G10 trends and momentum
Note that we have added the CNH to the FX Board. Recent trends are in a holding pattern, save perhaps for the interesting divergence in the JPY’s continued weakness ahead of an important Bank of Japan meeting on Friday, while the Swiss franc has consolidated a bit. And NOK traders are a bit nervous about their conviction ahead of the Norges Bank meeting on Thursday as EURNOK recently poked toward the massive 10.00 level and NOKSEK traded well north of parity and crude oil has consolidated sideways for over a week after its impressive run higher. The NOK bull case could suffer a setback for a while if the Norges Bank mentions currency as one consideration delaying any eventual intent to hike the deposit rate.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Feb. Retail Sales
  • 1315 – US Feb. Industrial Production and Capacity Utilization
  • 1400 – US Mar. NAHB Housing Market Index
  • 1700 – US 20-year Treasury Auction
  • 2330 – Australia RBA’s Kent to speak

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.

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

Contact Saxo

Select region


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 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. 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.