FX Update: USD pushed lower after treasuries shrug off hot CPI print.

FX Update: USD pushed lower after treasuries shrug off hot CPI print.

Forex 6 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  The US CPI print for March came in hot yesterday, but by the end of the day the market has shrugged off the development and a firm 30-year US T-bond auction sent the longest US yield to close to the lowest level in a month, weakening the US dollar and beginning to make its recent reversal back to the downside look decisive if current levels stick. Commodity currencies have jumped the most as risk sentiment welcomed the development.


FX Trading focus: USD rolling over after hot CPI ignored
The hottest month-on-month US headline CPI reading since 2009 and inflation for both headline CPI measures and both core CPI measures beating expectations by 0.1%? Naturally that is a signal to buy treasures, right?  No, of course it isn’t, but it just goes to show the difficult nature of markets and the interminably difficult task of figuring out where expectations are versus reality and how much is already in the price on different time horizons.

A slightly complicating factor, as pointed out in John Authers’ Bloomberg column on yesterday’ rally in treasuries despite the strong US inflation data, is that we also saw a recommendation to halt use of the Johnson and Johnson vaccine, one that is critical for completing the vaccine effort in many regions, particularly for Europe, as long as the AstraZeneca drug is on hold there in particular. The numbers of complications with the Johnon & Johnson vaccine look so vanishingly small that we might expect that it is cleared for use again soon – let’s certainly hope so. But as well, a reasonably firm US T-bond (30-year) treasury auction also helped to support treasuries and the US dollar rolled over as one would expect. The twist this time is that the traditional risk-sensitive currencies outperformed on the development, rather than the lowest yields like EUR, CHF and JPY that performed the best once US treasury yields stopped rising a couple of weeks back. The move is beginning to look decisive in places, but we need to see a more

Inflation is always a tricky beast, and some of the inflation we are seeing is from supply chain disruptions brought about by the pandemic itself as well as bad guessing on the future shape of demand in a world where too many operators are working with just-in-time principles. Some of these issues will inevitably ironed out, but much of the policy response is likely providing the  foundation for long term price rises, like stimulus that brings little or no productivity with it, especially helicopter cash drops, but also the green transformation focus and a drastic reduction in investment in still-important fossil fuel energy. Besides the headline oil price, traditionally the most important, as an input for future inflation, I would also focus on US petrol prices at the pump, especially as a psychological factor that can affect sentiment, because the move prices so much there relative to elsewhere, where taxes are generally a far higher percentage of the end-price. (Here in Denmark, over the last 10 years the retail price has stayed within 15% to either side of the average price whether crude oil was 110 dollars a barrel or 25 dollars a barrel.) We are looking at the highest prices at the pump in the US since 2015, but round levels are that will have impact probably don’t arrive until 4 dollars per gallon (highest range during 2011-14 high oil prices for regular gas was 3.50-4.00). With regular gas sitting just below 3.00 for the national average, this metric has some way to rise before making an impact.

The next macro data of interest from the US will be the US March Retail Sales release tomorrow as we measure the combined boost from the latest round of stimulus checks as well as the more widespread opening up across the nation (though some areas – notably California - only likely to become more or less fully normalized in another two months) .

As mentioned  in this morning’s Saxo Market Call podcast, another issue issue that is likely important for the US dollar, treasuries and therefore the broader market is the US Treasury’s drawing down of its funds held at the Fed, currently around $925 billion, but the Treasury has said it will draw that general account to $500 billion by the end of June. That’s a solid chunk of liquidity and sets up that time frame as a focus.

Chart: AUDUSD
The AUDUSD chart is making an effort at resolving to the upside, with today’s break of the recent high of the range around 0.7650-75 area the first key, but further progress above perhaps the 0.7700-50 area needed to keep the prospects for a reversal back higher in place, as it wouldn’t take much weakness here tactically to suggest that we remain stuck fully in limbo. Chinese markets are not supportive and the key Australia linked commodities are elevated, but still within the range. AUDUSD bulls and bears should also keep an eye on gold, where a more full-fledged recovery back through the next key layer of resistance (1750-1775) would help provide a coincident indicator suggesting the USD is on its way down and out again. Note that tonight sees the release of Australia’s latest jobs data, after the Westpac consumer confidence gauge has soared to new highs.

Source: Saxo Group

Odds and ends

TRY is enjoying the backdrop ahead of Turkish Central Bank rate setting meeting tomorrow. The new central bank chief Kavciouglu is still getting his sea legs and will have an interesting task ahead of him if he wants to open up the idea that rates are too high and must come down. Turkish credit spreads have stabilized considerably since the original shock move by President Erdogan to boot former central bank head Agbal. There is perhaps a small window for more TRY appreciation in the near term if rates are kept unchanged, but the market has been forced to slap a semi-permanent “unpredictability” discount on TRY on the risk of political interference. Turkey is also in the throes of another pandemic outbreak.

RBNZ keeps it easy, also on the macroprudential message -a  long statement from the RBNZ overnight, mostly accommodative and cautious sounding, but the kiwi perhaps got a slight boost overnight (if any – most of it probably from the lower US yield effect) because the RBNZ is taking it easy with its new mandate to focus on housing affordability as it merely said it would like to see the effects on housing from the Ardern government’s recent raft of measures aimed at restraining speculation in the housing market and the RBNZ will develop a series of indicators for including in the next Financial Stability Review next month.

Table: FX Board of G-10+CNH trend evolution and strength
The US dollar reversal lower is seeing it poking into a negative trend reading on our FX Board showing trend evolution, but all of the new trend shifts are rather fledgling affairs, so let’s see if yesterday’s interesting developments stick and extend.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1400 – ECB President Lagarde to speak
  • 1430 – US Weekly DoE Crude Oil and Product inventories
  • 1600 – US Fed Chair Powell to speak
  • 1800 – US Fed Beige Book
  • 1830 – US Fed’s Williams (Voter) to Speak
  • 1945 – US Fed’s Clarida (Voter) to Speak, with Q&A
  • 2000 – US Fed’s Bostic (to peak)
  • 2100 – New Zealand Mar. REINB House Sales
  • 0100 –Australia Apr. Consumer Inflation Expectations
  • 0130 – Australia Mar. Employment Change / Unemployment Rate

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
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.