FX Update: Rising dollar an eventual wrecking ball FX Update: Rising dollar an eventual wrecking ball FX Update: Rising dollar an eventual wrecking ball

FX Update: Rising dollar an eventual wrecking ball

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market is trying to put a brave face on after the treasury market trauma of late last week send shockwaves across asset classes. The hopeful narrative is one that yield-curve control to backstop asset markets is imminent. Already, the ECB is practicing rhetorical pushback against rising yields, and the Australian RBA stepped up long bonds purchases overnight. Surely the US is set to follow? Eventually, yes, but what will it take to get to eventually?

FX Trading focus: Rising USD an eventual wrecking ball

On Friday, I penned a longer piece discussing the path to Fed yield curve control – with the general conclusion that the Fed doesn’t want to take this drastic step at this time unless its arm is twisted forcefully by the market – either via a market crash or due to a real rate rise that is perilously steep (and persistent) and has the Fed fearing an impact on the economic and labour market outlook. The bar for the latter is rather high, given the twin factors of a vaccine roll-out progressing rapidly and allowing the economy to increasingly open up and the fresh $1.9 trillion additional stimulus that is incoming soon (most likely without a minimum wage hike, it appears) . Regardless, the veritable parade of Fed officials out speaking this week will bear close watching for whether last week’s treasury market volatility was sufficiently violent to trigger any consistent pattern that Fed members’ concern levels are rising.

Why the continued USD resilience and even strength?
The way this week (and this month) has bolted out of the gates, the market may simply be extending its celebration of the solid bid coming back into the US Treasury market on Friday and to a degree overnight, reversing much of the last Thursday’s eruption in yields. In fact, for 2-year treasuries, Thursday’s move was entirely erased on Friday, while for five and seven-year treasuries, the move was only about cut in half. But if the US yield move was largely erased at both the short end of the curve and for the very long end, why didn’t the US dollar also reverse back lower?

The possible answer is a shift in the awareness of other central bank moves relative to the seemingly nonchalant Fed: the ECB’s Schnabel out late last week warning on the rise in Euro Zone bond yields and the RBA overnight announced that it will double the pace of its longer-maturity bond purchases. These announcements leave the impression that other central banks’ puts are already incoming at these levels, and could be behind the USD resilience – i.e., that these moves remind us that the Fed doesn’t operate in a vacuum. The RBA’s move was likely motivated in part by not only rising yields, but also a steeply rising exchange rate, with AUDCNY posting new cycle highs since early 2018 last week before the hefty correction. The RBA meets tonight – its guidance will likely focus on both concern that longer rates rose too quickly as well as recent exchange rate moves.

But the key takeaway from yesterday’s close for FX traders is that the USD bears suffered a major setback last week, one that looks tactically decisive and even ominous in the likes of AUDUSD on a weekly candlestick basis (more below). Further damage will be done to the broader USD bearish case if EURUSD follows through lower through 1.2000 and sets that pair back into the 1.16-1.19 range again, which could mean a bit of a walk in the desert for USD bears of a few weeks or more until either negative real rate fears resurface down the road for the US (from excessive fiscal stimulus and spiking inflation levels) or the Fed hints at yield curve control, though my suspicion is that “eventual” yield  curve control will be something we have to wait a fairly long time for and will only be provoked by a market accident.

In the meantime, USD strength is eventually toxic for global market prices if it backs up more than a couple of percent.

Chart: AUDUSD weekly
An almost cataclysmic reversal in AUDUSD on Thursday and Friday created a rather profoundly engulfing bearish weekly candlestick, with most of the selling taking place on Friday. The only hope for bulls here would be that the move was exaggerated by end-of-month flows after a strong month for the Aussie, and stop-loss driven selling ahead of tonight’s RBA meeting. A quick rally and close well above 0.7900 would be needed to quickly neutralize the downside risk. Until then, this looks like a reversal that could follow through toward the 0.7565 prior range lows and even toward the prior major top around 0.7415 (note that this number almost coincides with the key support of the 61.8% Fibo of the last large rally wave at 0.7380. Note China’s slowing numbers overnight, with the official Manufacturing PMI out at 50.6 matched the post-pandemic nadir low of 50.6, as was the case for the Non-manufacturing PMI at 51.4.

Source: Saxo Group

Upcoming Economic Calendar Highlight (all times GMT)

  • 1300 – Germany Feb. Flash CPI
  • 1400 – US Fed’s Williams (Voter) to Speak
  • 1405 – US Fed’s Brainard (Voter) to Speak
  • 1430 – Canada Feb. Manufacturing PMI
  • 1500 – US Feb. ISM Manufacturing
  • 1520 – ECB officials Guindos and others speaking
  • 0030 – Australia RBA Cash Target, 3-year Yield Target

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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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, Product Disclosure Statement and Target Market Determination 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. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

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.