FX Update: USD shrugs off Fed’s balance sheet expansion FX Update: USD shrugs off Fed’s balance sheet expansion FX Update: USD shrugs off Fed’s balance sheet expansion

FX Update: USD shrugs off Fed’s balance sheet expansion

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The larger than expected Fed balance sheet expansion move has largely been shrugged off by markets, while plenty of scepticism is raining down on the longer term implications of the handshake US-China trade deal trumpeted by US President Trump on Friday. Elsewhere, Boris Johnson is running out of time this week in getting a deal in place before the EU summit later this week.

A trio of news stories late last week doing about everything possible to support risk appetite. First was the Brexit negotiation breakthrough last week that could lead to a Brexit deal, second was the handshake US-China trade deal announced by US President Trump, and finally, late on Friday we get the news that the US Federal Reserve will purchase $60 billion per month in US T-bills “at least into Q2” of next year, bringing far more liquidity than many expected. Markets reacted with restrained enthusiasm, outside of sterling and the bond market, where the price action was more exuberant.

For each of these issues, there are plenty of devils in the details for each of these three developments that may prevent significant follow through in last week’s reaction.

On Brexit, the EU side has tempered some of last week’s enthusiasm by saying that Boris Johnson has a long way to go on the specifics and the schedule could prove too short ahead of this week’s EU summit, set to begin Thursday. Still, some sort of memorandum of understanding could be on the table before the end of the month that the two sides are in agreement, but merely need a three month delay to hash out the details. But are the votes there in the Parliament? We’re still concerned about a UK recession, with or without a deal.

On the US-China trade deal, as our Steen Jakobsen points out in today’s podcast, the risk is that this is merely Trump’s desperation to get a deal and that the key issues remain further down the road, including on technology transfer and national security issues. As well, we still don’t know the fate of the US tariffs scheduled for mid-December, which will be assessed on the last portion of Chinese imports and include popular consumer goods like laptops and mobile phones. Also, what happened to the “currency pact” tease we heard about last week?

On the Fed’s announcement of $60 billion a month in US T-bill purchases, while the magnitude of the programme, at perhaps a minimum of $360 billion if we assume six months of purchases and that the programme ends in April, it was clearly positioned by the Fed as a move to boost reserves and that “These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy.” In other words, it’s not playing as a resumption of QE and the other good news, especially on trade, has driven a slight pull away from pricing an October 30 FOMC rate cut, which this morning sits at around 75%.

USDJPY found plenty of support last week in the trio of risk sentiment-supportive developments, which drove a chunky sell-off in long treasuries in particular. USDJPY managed to poke above the local pivot levels. Note the resistance from the 200-day moving average, and prior pivot levels around 109.00 as perhaps more important to overcome for the pair to sustain an upside break. Any return of weak risk sentiment and especially any fresh drop in long yields could drive a chunky reversal back to the strong side for the yen. In any case, the next few sessions look important for the JPY.

Source: Saxo Group

The G-10 rundown

USD – the modest reaction to the Fed’s provision of more generous than expected liquidity is a warning sign that it may take something far more forceful to turn the US dollar lower here. EURUSD remains in limbo after failing to take out the key first resistance last week toward 1.1100.

EUR – the euro enjoying the chunky rise in EU yields last week, in part driven in Europe by hopes for a Brexit deal – continued strength likely needs to see more of the same, otherwise the risk that the EURUSD price action, for example, once again bogs down.

JPY – as noted above, the JPY slide the most directly linked currency to the bond slide (higher yields). We like USDJPY lower – or at least the yen generally higher – for the long run unless US bond yields have bottomed for the cycle.

GBP – last week made clear that the speculative shorts weren’t ready for the good news, but this latest move has likely cleared a significant portion of those shorts, and the path to Brexit still remains tricky. Price action could prove treacherous in both directions in the near term.

CHF – disappointing for CHF bears to see that EURCHF can’t hold the 1.1000 level after last week’s events. Full on reversal risk back lower for the pair if global long bond yields lurch into a fresh slide.

AUD – the Aussie getting a modest boost on the handshake US-China trade deal, but if more RBA rate cuts and eventual QE await on an Australian credit crunch, it’s tough to call a bottom for the trade-weighted AUD just yet. Note the rejection of local highs in AUDUSD this morning so quickly after the trade deal news.

CAD – Canada had a jobs report like only Canada can – wildly positive +70k full time jobs and this sends fresh USDCAD speculative longs in full reversal, making the chart look very bearish locally, but we’ve been chopping around between 1.3000 and 1.3600+ for…a full year!

NZD – a smart rebound in AUDNZD suggests the lows may be in for the pair after its recent gentle round of consolidation, unless this Wednesday’s Q3 NZ CPI brings a positive surprise.

SEK – hopes around Brexit and a strengthening Euro bringing an even stronger SEK, helped out further by last week’s strong Swedish CPI print, but EURSEK is some ways away from a capitulation lower just yet (at least needing to take out the 10.80-75 area.)

NOK – EURNOK sell-off has been weak stuff so far and if oil and risk appetite don’t bring in the cavalry for the NOK here, risk of a test of the highs.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0900 – Euro Zone Aug. Industrial Production
  • 2000 – New Zealand Sep. REINZ House Sales

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.