FX Update: RBA surprises with hike. FOMC preview.

Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team

FX Trading focus: FOMC tomorrow, RBA surprises with hike.

The market seems highly – almost excessively – reactive to incoming data as we saw once again yesterday with the release of the slightly firmer than expected ISM Manufacturing survey for April, for which the Prices Paid component bumped up to 53.2 versus 49.0 expected. That was a nine-month high. US treasury yields from 2- to 10-years ended the day some 15 basis points higher from Friday’s close, with much of the action seemingly sparked by this survey release and focus on prices paid.

Still, the more important data lies ahead, including ISM services tomorrow, claims on Thursday and the jobs report on Friday. And there just isn’t enough in the directional surprises of the data of late for the Fed to change its tune or firmly position tomorrow’s anticipated 25-basis point rate hike as the last one for now, as it ought to reserve some wiggle room for further moves, just in case. Still, the setup here is that Fed Chair Powell will likely want to say as little as possible in the way of guidance, which can leave the market to its own interpretations of the likely path from here (even when the Fed has tried to protest against the notion that it will be cutting rates later this year, the market largely ignores guidance anyway.). In sum – look for a Fed that is trying to avoid signaling very much and a market that may realize that it is too confident in the Fed rolling over to cutting by later this year. That could mean risk off and USD up.

Then again, while I consider it unlikely, the Fed could theoretically indulge in confidence that inflation will flatten out and eventually fall back in line with its projections from March (core PCE forecast to fall to 3.6% by year-end) from here and/or at the margin is concerned enough about significant disruptions from the debt ceiling issue, the market may read this as dovish, risk sentiment could notch another sharp leg higher. Either way, it feels like the market has mostly already priced a pivot even if we get a small spurt higher, so surprising dovish beyond a day post-FOMC is the higher bar. Market expectations are drifting, in fact, in the direction of higher odds for an additional Fed hike in June.

On the debt ceiling, US Treasury Secretary Yellen warned yesterday that the US could default as soon as early June if a raise of the debt limit is not passed. This comes after recent news that surprisingly high tax revenues in recent weeks were more likely to push the last gasp time frame out to late July or even August. She may just be trying to light a fire under Congress to get its act together and avoid last-second brinksmanship. The market hardly budged on the news. Biden and key congressional members are set to meet next week.

Beware the JOLTS survey up later today and beware any market attempts at a takeaway, given the cavalcade of more important data and the FOMC meeting to follow.

Chart: EURAUD
Interesting to see the hard reversal in EURAUD over the last week, in part as the EURUSD move above 1.1000 has been contained and capped the euro broadly, but also as the RBA’s surprise hike helps push back against the notion that the ECB and RBA rates were headed toward parity. More on the RBA’s hike below, but the important point here is that EURAUD has once again found resistance in the 1.6800 area, one that capped the action in the exchange rate both before and after the crazy pandemic-inspired spike of early 2020. This high-momentum sell-off will make it tough to turn the chart back higher again. This may be either peak EUR or nadir AUD. For the action to continue lower sooner rather than later in EURAUD, we will likely need mounting evidence that the ECB is being marked for too much further tightening relative to its peers (EUR negative but perhaps unlikely in the short term?) or for an AUD-positive revival in the Australia-centric commodities complex (iron ore, copper, etc.) on, for example, new signs that the China re-opening story is coming into full swing.