FX Update: BoE response rather muted, but big hikes still baked in. FX Update: BoE response rather muted, but big hikes still baked in. FX Update: BoE response rather muted, but big hikes still baked in.

FX Update: BoE response rather muted, but big hikes still baked in.

Forex
John Hardy

Head of FX Strategy

Summary:  The Bank of England’s response to the downdraft in sterling since late last week was rather lacking, as the bank merely indicated it will address the situation at the next regularly scheduled meeting. They may not have that luxury unless this brightening of global risk sentiment that has materialized overnight has legs. Elsewhere, traders continue to steer clear of challenging Japan’s Ministry of Finance on intervention despite a fresh surge in US treasury yields yesterday.


FX Trading focus: Bank of England response to sterling crisis rather muted, but a broad sentiment shift might keep them off the hook near term.

The Bank of England’s response yesterday to the enormous downdraft in sterling was not as dramatic as those looking for a kneejerk hike this week might have expected. The Bank issued a short statement, which merely indicated that it is aware of what the government is doing and will take that and sterling’s moves into consideration at the next regularly scheduled meeting on November 3. Perhaps the phrase that it “will not hesitate to change interest rates by as much as needed to return inflation to the 2% target” that saved sterling from a further pounding just yet. There are two ways to look at this: the BoE doesn’t want to be seen as panicking and jerked around by market developments. On the other hand, it would have been more hawkish to avoid mention of the next regularly scheduled meeting to suggest that we might infer a rate hike is possible at any time if the sterling volatility worsens again. In support of sterling, the overall rate expectation for the November 3 meeting remains pinned just below 150 basis points this morning, a very large rate hike indeed when your policy rate is 2.25%. We may not have seen the cycle low in sterling, but in the nearest term, a rally in risk sentiment can keep sterling in consolidation mode tactically after the trauma of the last couple of sessions.

Chart: USDCAD
Remarkable to see USDCAD extending the rally yesterday at an even more rapid pace than the one established over the last couple of weeks, the kind of price action one often associates with at least a temporary climax in the trend. A fresh sell-off in oil prices added to the pressure on CAD and NOK as well. But that trend has extended so far and so quickly that the USDCAD pair can easily retrace to 1.3500 without meaningfully softening the up-surge, and today’s price action suggesting we may avoid a correction even to that level. Since the early 2000’s, USDCAD has only traded above yesterday’s 1.3800+ highs on two occasions – for a couple of months when oil collapsed during the pandemic outbreak in the spring of 2020 and during a short episode during the USD peak of late 2015/early 2016. The coming recession may prove more vicious in Canada relative to the US, given very elevated private debt levels in Canada, much of it associated with housing. Mortgage financing is generally 25 year mortgages that roll every 5 years. That 5-year mortgage rate has risen to levels similar to the US 30-year rate around/above 6%. In the US, the vast majority of mortgages are 30-year fixed, meaning no real impact for most homeowners who are staying put with existing mortgages, but a far faster and greater impact on Canadian mortgage holders who must roll to the new and suddenly vastly higher rates.

Source: Saxo Group

As discussed in this morning’s Saxo Market Call podcast, it will be very interesting to watch the evolution in the US Consumer Confidence survey of the spread between the Present Situation and Expectations components, which reached their lowest levels since 2001 in July. The latest September survey is up today. Typically this spread bottoms out and is rising quickly as the US economy is tilting into recession. As this survey is historically closely correlated with the labor market, any rise in the spread would likely be preceded by a couple of months of clearly rising jobless claims. On that front, we hit record lows in claims (adj. for population) back in March, followed by a significant surge into July. Since then, the lower claims suggest a still-strong labor market, but another turn and rise above a 250k weekly run puts us on a countdown toward a recession and peak Fed tightening expectations. We are likely at an inflection point in Q4 as the real wear on the economy from policy tightening is picking up pace, given the 9-12 month lag of policy, which may be more compressed this time given the vicious pace of the tightening once it got underway. It’s remarkable to recall that the Fed only achieved lift-off from effective zero in March, with treasury yields beginning to surge, however, already in late 2021 and accelerating higher in January.

Table: FX Board of G10 and CNH trend evolution and strength.
Nothing much new here, but the readings are extreme in USD strength and GBP weakness, while development around the edges are interesting, including whether the broad JPY bounceback can hold and the degree of relative weakness in CNH as the key 7.20 level approaches in USDCNH and the jockeying amongst the G-10 smalls.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
NOKSEK is pressing on a major level at 1.0500 as cratering oil prices and crazy messaging from the Norges Bank have NOK under pressure – crazy volatility in today’s session, by the way. Elsewhere, note the pump and reversal in AUDNZD – was that at least a temporary top for now there?

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1100 – UK Bank of England Chief Economist Pill to speak
  • 1100 – ECB's Villeroy to speak
  • 1130 – Fed Chair Powell to speak on digital currencies
  • 1230 – US Aug. Preliminary Durable Goods Orders 
  • 1300 – US Jul. S&P CoreLogic Home Prices
  • 1355 – US Fed’s Bullard (voter 2022) to speak
  • 1400 – US Sep. Consumer Confidence
  • 1400 – US Aug. New Home Sales
  • 1700 – US 5-year Treasury Auction
  • 1700 – US Fed’s Kashkari (voter 2023) to speak
  • 2350 – Japan Bank of Japan meeting minutes
  • 0130 – Australia Aug. Retail Sales 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.