Global Head of Macro Strategy
Summary: The US dollar has declined recently to the brink of pivotal levels in a number of USD pairs as the FOMC meeting rolls into view tomorrow, a meeting that is likely to see Powell and company at pains to providing as little guidance as possible as they have vowed to wait for outcomes before suggesting the time to unwind accommodation is nigh. SEK failed to get any signal from the Riksbank meeting earlier today.
FX Trading focus: Tipping point for USD pairs ahead of FOMC
The USD sell-off took the EURUSD rally to just a hair beyond the last major Fibonacci retracement level (1.2103) before some consolidation set in, and yesterday, the AUD finally responded more forcefully to significant support from wild rises in industrial metals prices with a sharp rally versus the G3 currencies that took AUDUSD to the key tipping point area just north of 0.7800. More on the latter below in a look at the AUDUSD chart, but it is clear that we are at a tipping point for the US dollar just as the FOMC is rolling into view tomorrow evening, a meeting that is likely to see Powell and company taking pains to produce as little guidance as possible, even as central bank watchers are clamoring for a signal on when the Fed anticipates that it will eventually taper purchases (and the irony that treasury issuance pressure is set to pick up later this year after the Treasury has blown through its huge cash position). It would be a profound shocker to see any signal at tomorrow’s meeting. If that is the case, then the vagaries of the narrative (which is not particularly supported in things like real yields spreads, etc, as noted in yesterday’s FX update) and whether US treasury yields suddenly come alive again as an issue (7-year auction today, FOMC tomorrow) are the only guides here for USD traders.
Chart: AUDUSD at tipping point ahead of Australia CPI / FOMC
Yesterday, I spent considerable energy pointing out that “surface conditions” like strong risk sentiment and remarkable rallies in copper and iron ore suggest that AUDUSD should be trading at the highs of the cycle and even making new highs, while key fundamental drivers like relative real rate spreads were not sending a very supportive message, making the composite picture a tough one to dissect (AUDUSD caught between 0.7550-0.7825-ish for all of this year save for a few days in late February. Yesterday, the Aussie finally responded to the remarkable developments in metals markets, posting a solid jump versus the big G3 currencies and taking AUDUSD to the key 0.7825-area, neckline-resembling level ahead of a couple of key event risks for the currency pair: tonight’s Q1 CPI out of Australia and tomorrow’s FOMC meeting. We either get a break higher (close above 0.7825 area) or a fizzle (close well south of 0.7750) at this technical tipping point.
Odds and ends
Riksbank waxes cautious – not much to extract from today’s Riksbank meeting, which continues to see the central bank operating with an abundance of caution, acknowledging improved conditions, but continuing to fret about the lingering effects of the pandemic and not wanting to shift its rate guidance, which it has forecast for zero through 2024. This morning saw a much higher than expected unemployment rate, a notoriously choppy data series that the country is now trying to report on a seasonally adjusted basis, but surprised much higher even so at 9.5% vs. 10.0% for the headline. Further down the line, the Riksbank will need to indicate a tapering of purchases, which looks large relative to the very modest deficits run for the pandemic year of 2020 and the tiny 3% of GDP forecast for this year. I would like EURSEK lower here if backdrop remains quiet, but It has been a very long slog in this 10-10.30 range (five months!) - a lot of inertia.
South African Rand at crossroads, too, after winning on commodities focus. The ZAR has had a decent run of it for months, compounded by the decent carry (3.50% short rate in SA) that longs have enjoyed on top of the USDZAR spot exchange rate moving down from over 19 during the Covid panic last spring and even from above 17 as recently as last September to south of 14.50 at present. The massive price rises in iron ore and platinum in particular have seen ZAR volumes for these two particular commodities rise 167% and 159%, respectively, in January of this year relative to last year, when the spot exchange rate was within 10% (i.e., only a small fraction of that growth down to a weaker ZAR this Jan). The improved export picture and strong global risk appetite have seen credit spreads continuing to contract for South Africa’s USD-denominated debt, for example, a process that has continued steadily this year while credit spread elsewhere for larger EM’s like Russia and Mexico have stagnated during the same period. Technically, the USDZAR is at an interesting spot, having broken below the big 14.40-50 area and traded as low as 14.15 the week before last, although it has completely stalled since then. Interesting to watch the USD and US yields in the wake of the FOMC meeting tomorrow night for whether ZAR can continue its winning streak or whether the waning downside momentum is reversed on a renewed USD consolidation or pressure from a renewed rise in US yields. A close above 14.50 would suggest a retrenchment in the ZAR uptrend.
Table: FX Board of G-10+CNH trend evolution and strength
The AUD made a statement yesterday with a solid surge, but is unwinding today, while the USD move has stalled out ahead of tomorrow’s FOMC meeting. Trending readings have been generally low and implied volatility has trended lower as well as the market awaits new catalysts.
Table: FX Board Trend Scoreboard for individual pairs
Interesting to note that the EURUSD rally still registers as the strongest trending move in G10+CNH and precious metals space.
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