FX Update: Too much Brainard on the market’s brain?

FX Update: Too much Brainard on the market’s brain?

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  If the action since last Friday has mostly to do with the shifting odds in favour of President Biden nominating Lael Brainard to serve as the next Fed Chair, then the market may be making too much fuss on what the shift from Powell would mean for Fed policy down the road. In any case, we are only wiser once the announcement is made, very likely inside the next week or two. In the meantime, the US October CPI release today is the next focus.


FX Trading focus: To much Brainard on the brain? US CPI, yields in focus.

In today’s Saxo Market Call podcast, I discuss the Bloomberg chart I also show below of USDJPY (inverted), gold and US Ultra T-bond futures, which all jumped to attention on Friday, first seemingly in reaction to a fairly strong US jobs report (a bit of a head-scratcher) but later the move was clearly accelerated by news that both Fed Chair Powell and potential nominee Lael Brainard were seen at the White House. The Bloomberg columnist John Authers does a great job of pointing out the market reaction to this development as well as arguing that it makes little sense and why he sees it as unlikely that Brainard will be nominated.

I would agree and underline that it will matter very little to nothing for the course of future Fed monetary policy if Brainard is chosen over Powell, but it will definitely mean that the Fed has a far more hawkish regulator at its helm, a very different approach from Powell (and might mean that anyway, as even if she is nominated to head the Fed, she will very likely receive a prominent new regulatory position and title under a second term at the Fed).

I really don’t know who Biden will choose, accepting Authers’ argument as logical, but having a hard time seeing why Biden wouldn’t take the opportunity to be seen as making Powell pay for the trading scandal that happened under his watch. Either way, we are likely to get a considerable one-off reaction to the nomination announcement once it is made, and if those market moves on Friday are linked to the potential for a Brainard nomination, they could very quickly reverse if the market decides that the course of Fed policy is unlikely to veer much from where it was before – likely in my book.

We also have today’s US October CPI release, where the bar may be high for a surprise to generate significant volatility unless the market is willing to roll back its anticipation of a possible Brainard nomination. A 0.8% or higher month-on-month headline print or especially a 0.5% or higher ex-food-and-energy print could have the market on tilt, driving the USD higher, yields higher, risk sentiment lower, etc…with the JPY caught somewhere in the crosswinds.

Chart: USDJPY (inverted) vs. gold and US T-bond futures.
The chart discussed above, where we watch today’s CPI release and the imminent news of who Biden will nominate to head the Fed next February for the effect on the US dollar, particularly USDJPY, and on US treasuries, with a big new sell-off in the last of these possible driving a consolidation in the recent strong rally in risk sentiment.

Source: Bloomberg

Table: FX Board of G10 and CNH trend evolution and strength
The US dollar and JPY stuck effectively in neutral here waiting for next steps, which feel like they should come soon in the US dollar’s case as discussed above. Note some of the negative momentum in the G10 smalls, including NZD, SEK and especially AUD.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Lots of yellow in the “Age” category as we se the AUD and suddenly NZD flipping to a negative trend in places. The NZDUSD chart in particularly looks set for a test lower if the USD puts up a further fight here – it is almost ready to flip and the 200-day moving average has been a key focus on the chart. Also watching EURSEK for a squeeze risk if not yet a trend change as I suspect stops may be lined up near and just above 10.00.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1330 – US Weekly Initial Jobless Claims
  • 1330 – US Oct. CPI
  • 1400 – UK BoE’s Tenreyro to speak
  • 1530 – US Weekly DoE Crude Oil and Product Inventories
  • 1700 – US Weekly Natural Gas Storage Change
  • 0001 – UK Oct. RICS House Price Balance
  • 0030 – Australia Oct. Employment Change / Unemployment Rate
Disclaimer

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
Australia

Contact Saxo

Select region

Australia
Australia

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.