Head of FX Strategy
Summary: Price action is choppy after a risk-off wave yielded to a risk-on counterpunch yesterday, keeping the tactical outlook difficult. The Bank of Canada caught the market off guard yesterday with more hawkish than expected guidance on the economy, although Canadian yields suggest that the CAD reaction may have been a bit over-baked. ECB on tap today, where interesting hints may be on offer even if the policy message is set to stay the same for now.
FX Trading focus: Churning price action on RORO swings, Bank of Canada, ECB
I over-reached yesterday in anticipating that the risk-off move of earlier this week could be the impending start of a deeper correction in sentiment, as yesterday’s price action promptly took the momentum out of the prior couple of days’ negative developments – EURUSD survived 1.2000, AUDUSD backed up sharply, etc. Not that yesterday’s price action is the final arbiter on direction, either. Rather, it all feels a bit choppy and treacherous, and as we highlighted in this morning’s Saxo Market Call podcast, we are concerned for risk appetite from a seasonal and sentiment angle for the coming May time frame. If we are headed toward something on the order of a 6-8% correction in equity markets, the JPY and the USD would likely post significant broad rallies, and I am captivated by the AUDJPY triangulation of the last two months that would resolve lower on a global setback for risk sentiment (and eventually provide better strategic levels to get involved on the long side again).
Chart: AUDJPY
The AUDJPY is an old-fashioned risk proxy within G10 currencies and is also like a very sensitive pair to the global reflation trade from here, as the Bank of Japan has already moved to cap longer term rates (10 year JGB’s to be capped at 0.25%.) – so rising yields and commodity prices would likely prove a double whammy for the JPY. On the flipside, the JPY needs the opposite to thrive and the downside support is the most interesting area in play here for this chart. Technically, the pair continues to wind in a narrowing range, and the Ichimoku cloud is now in view, both the top now and the bottom in coming days coinciding almost exactly with the range lows of March.
The Bank of Canada sent a more optimistic message than expected yesterday on when the Canadian economy is set to achieve sustained inflation above 2%, moving the timeframe from 2023 to the more specific second half of next year in yesterday’s press release. As this moves forward the anticipated conditions for when a rate hike is likely, the CAD reacted strongly, as did Canadian government bond yields, though by the end of the day, while most of the CAD move stuck, the yield move (looking at 2-5 year CGB’s) didn’t really do so, suggesting that the currency reaction may have a hard time finding follow through higher unless we are set for a strong new phase of risk sentiment and rising oil prices. As well, Governor Macklem made a lightly dovish pushback against on overall hawkish interpretations by indicating that just because conditions were there for hiking rates, that the Bank of Canada would necessarily hike rates immediately. As well, the bank tapered asset purchases down to C$3 billion per week from C$4 billion, the first G10 central bank to accomplish a net tightening since the pandemic outbreak. One feature of the Canadian economy that is providing some further pressure is the Canadian housing market, which is already an absurdly large portion of the Canadian economy and private debt loads in Canada are some of the world’s highest. The latest March housing starts figure was beyond white hot at an annualized 335k, more than 50% above the average pace of the three years before the pandemic. And the March house price survey showed prices advancing 10.8% year-on-year (the fastest rise since late 2017) and the month-on-month figure was 1.5%. The 5-year rate that Canadian mortgages are based on has risen to about 1.1%, with all of the rise from the 0.6-0.7% range coming in February. A massive housing hangover awaits the country somewhere down the line.
ECB meeting on tap later today. We have an ECB on tap for today, where we won’t look for much, but will look for any signs in the press conference that the division between the “hawks” and doves is growing on the guidance provided on PEPP purchases, an eventual tapering (ECB purchases seem excessive beyond this year if GDP forecasts are correct) and especially whether it is necessary to rush out and push back against rising yields every time the longer end of the curve is pressing a bit higher (but still only around 0% for the French 10-year and -20 bps for the German bund). ECB President Lagarde is the diametric opposite of her predecessor Draghi as she seems unable to deliver a coherent message and seems out of her depth at the press conferences.
Turkey – the Turkish lira is under considerable pressure again today after President Erdogan said that the country used $165 billion in reserves over the last two years (taking “net” foreign reserves to an estimated negative $60 billion) in a futile defense of the TRY. An FT piece this morning ($) talks about the increasingly raucous political opposition against Erdogan for the “missing billions” Consumer Confidence took a bad dive in April (survey out this morning) to 80.2 from the prior 86+, likely on the huge new wave of Covid cases washing over the country. Adding some geopolitical risk into the mix is the Biden administration set to officially recognize the Armenian genocide of 1915-17 today ahead of an anniversary of the event on Saturday, a move likely to provoke a strong official response from Erdogan.
Table: FX Board of G-10+CNH trend evolution and strength
Choppy price action makes it easy to over-interpret the latest developments, but interesting to note that the gold trend reading is the strongest positive signal on the FX Board as the precious metal is outperforming fiat in a broad terms.
Table: FX Board Trend Scoreboard for individual pairs
AUDJPY continues to tease a cross-over, but needs an impulsive move lower for the actual flip to a negative trend to be meaningful (see chart above). Meanwhile, yesterday’s USDCAD smash-down spoiled the party for those looking for the recent cross to a positive trend to develop. The 1.2600-50 area in USDCAD is huge after the most recent price action if the sell-off there fails to stick.
Upcoming Economic Calendar Highlights (all times GMT)
2024: The wasted year
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.
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.
