Head of FX Strategy
Summary: It appears that market concern may be rising on the willingness of the Fed to deliver any fresh signs that it will push back against the recent rise in bond yields, although it must be said that further pressure higher in yields is absent today after a significant uptick yesterday. In any case, the appearance by Fed Chair Powell should reveal a good deal about market psychology today if he fails to deliver any hint of concern.
FX Trading focus: market nerves fraying ahead of Powell appearance
Later today Powell is set to appear at an event hosted by the Wall Street Journal, one that will include a question and answer session. It is difficult to read if the market is concerned that the Fed is unwilling, this early in the game, to signal any willingness to signal an eventual easing if the “treasury beatings don’t stop”, so to speak. As I have outlined before, a yield-curve-control policy has profound implications, as it would see the Fed effectively losing control of its balance sheet and be seen as a blank check for the government to spend at will with “no consequences” save for a likely mess longer term for the Fed and the government to both deal with as inflation soars and the US dollar tanks. I was set to write further on this when our CIO Steen Jakobsen weighed in with a comprehensive Macro Digest on this very matter – with which I fully agree – please have a read.
So tomorrow I will offer a post-Powell wrap, while today I would just like to point out that the chief thing going in FX, as per Steen’s article above, is the drop in Gold, as well as the drop in the Swiss Franc and Japanese Yen, both of which sold off further today. Clearly there is a link between their very low policy rates and yields in general, and gold and real interest rate rises of late. In FX, the JPY and CHF are likely to serve as coincident indicators for concerns that real yields are set to rise further from here. We’ve certainly seen a considerable repricing of CHF that may be over-baked short term if yields consolidate, but has reset the EURCHF and USDCHF charts to strategically neutral at minimum.
Graphic:
The graphic below is from my old FX Tradeboard, which shows the trend strength in the G10 currencies (a proprietary measure of the strength of the short- to medium term trend and scaled to an exponential moving average of the recent trading range). Many FX pairs have traded in both directions recently, showing less pronounced trend signals for the majority, but the weakness in JPY, CHF and Gold really sticks out!
Chart: USDCHF
USDCHF has been on the move recently and has now challenged above the 200-day moving average, quite an achievement off the massive lows below 0.8800 right at the beginning of the year. Is this chart being reset for the longer term to neutral at worst? As long as the Fed avoids going whole hog on yield-curve-control and gold is on the defensive and real rates continue to rise, the franc may prove one of the weakest currencies in the G10.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
