Global Head of Macro Strategy
Summary: An ugly and broad deterioration in risk sentiment yesterday, in part on fresh hawkish comments from Fed Chair Powell, has the US dollar and Japanese yen rallying hard against all other currencies, with EM and commodity currencies seeing the most weakness. This morning, the bottom has dropped out of GBPUSD on greenback strength, but also a sudden jolt of GBP weakness after a sharp contraction in UK Retail Sales in March.
FX Trading focus: The twin USD and JPY wrecking balls swinging, GBP thrashed after data, commodity FX also taking it on the chin
Well, the euro focus on a more hawkish ECB and a likely solid showing for Macron in the French presidential election run-off this weekend is more than a bit out the window today on the sudden intrusion of an ugly deterioration in risk sentiment yesterday. It started right around the opening bell in the US equity session and continued all day long, aggravated by fresh hawkish comments from Fed Chair Powell that boosted the 2-year treasury yield over 15 basis points. Powell indicated he is in favour of a 50-basis point move in May (already priced, in fact the market has priced marginally higher levels for that meeting, possibly as some believe that the Fed could take the yield straight to 1.00% (maybe, please, please, ditching the 0.25% range of the target yield?). He also said that it is appropriate for the Fed to move a little more quickly and that the US labor market is “unsustainably hot”. This supported the US dollar more broadly than some of the previous surges in US yields on more hawkish Fed rhetoric as risk sentiment took a dive and there is a very different energy suddenly in many commodity linked assets, as markets perhaps begin to fear more for forward demand and recession. More on that in the AUDUSD chart discussion below. The JPY has actually managed to maintain altitude against a very strong US dollar here as the US yield curve has flattened over the last couple of sessions, with longer yields unable to maintain the pace of rises at the front-end of the treasury yield curve. JPY may also be supported on the change of focus as commodity and other traditional pro-cyclical EM currencies have weakened sharply here as well. A more profound and broader rally in the JPY, however, would likely require a equally powerful rally in long duration global safe haven bonds.
The Powell comments yesterday should be the last we see from any Fed member as we enter the blackout period for Fed comments until the other side of the May 4 FOMC meeting. After yesterday’s jolt, we are firmly into a regime of risk sentiment swings dominating until volatility calms, with the starting point quite low for equities and middle-range for FX, although yesterday saw a dramatic acceleration in realized volatility across a broader spectrum of FX and beyond the JPY focus of late, with the CNH weakening move this week adding a significant extra twist. Next week’s US data highlights are the Thursday Q1 GDP estimate and the Friday Mar. PCE Inflation data, while elsewhere, the Bank of Japan meets on Thursday (any tinkering with the existing policy would elicit a massive reaction, particularly as none expected, though discomfort with recent JPY volatility is high). The Riksbank is seen raising rates next Thursday as well – a lot has been priced in there and EURSEK is back above its’ 200-day moving average after a break below on Wednesday due to the weak risk sentiment – but SEK still looks solid.
Chart: AUDUSD
It is difficult to limit the chart coverage to just one chart, but the sharp and profound reversal in commodity currency- and EM-strength deserves special attention as it has been the most jolting. This broad selling in the US equity market yesterday saw the commodity sector performing weaker than the broader averages and overnight, a pivotal equity for the Aussie outlook, BHP Billiton has likewise suffered a sharp markdown of more than four percent since the Thursday Asian session close and some 9% from its recent peak. The mounting concerns for the Chinese outlook now coupled with the sharpest one-week weakening in the yuan in years are perhaps adding some downside energy to the Antipodean currencies here as well. This morning’s action is already seeing the 200-day moving average in play just below 0.7300 as we are suddenly in danger of a capitulation that re-focuses attention on the massive 0.7000 level that survived its last attack back earlier this year and which still looks like an enormous head-and-shoulders neckline.
Sterling took a nasty dive this morning on a very weak March Retail Sales report (off -1.4% m/m for the headline and -1.1% ex Auto Fuel), which underlines the Bank of England’s fear of an impending slowdown on the unfolding cost-of-living crisis. Underlining the risk of cratering activity was the most recent GfK confidence survey, the one released last night for April, which registered the second lowest reading in its more than 40-year history, with only one month in the teeth of the GFC showing a lower level than April’s -38. The market has likely over-estimated the BoE’s potential to hike rates this year, with UK rates slavishly moving higher in sympathy with US rates yesterday. GBPUSD burst down through 1.3000 today and the next natural target is the psychological 1.2500 level, although the ultimate range support is 1.2000. EURGBP is worth watching after this weekend’s French poll as well and with the ECB needing to play some catch-up in the rate tightening game, at least in relative terms (i.e., whether because expectations are over-baked elsewhere or even if expectations continue to ratchet higher everywhere.)
CAD binned after its sharp rally. The market since yesterday proving once again that when risk sentiment deteriorates and crude oil prices head south, CAD will come under pressure, with the timing particularly jolting this week after the very high CPI print brought BoC tightening expectations sharply higher. If oil continues to correct and equity markets capitulate, the local key resistance above 1.2650 doesn’t look to have a chance of holding, with the 1.3000 level the next focus.
Table: FX Board of G10 and CNH trend evolution and strength.
CAD has gone from top of the lot to a sudden dog in such quick fashion that it has yet to register on the FX Board, which measures trending behaviour – but expect a sharp deceleration in CAD in coming sessions. The CNH move is the most remarkable shift this week, together with the silver weakness as can be seen in the 5-day momentum change reading – a real change of pace.
Table: FX Board Trend Scoreboard for individual pairs.
Note the EURGBP crossover attempt today to the upside – this could have legs next week – as could EURNOK also flipping positive, provided oil prices continue to correct. USDCAD is doing its latest whiplash routine, but could hold the new uptrend here if it stays above 1.2600, while gold’s flat performance has been quite impressive but looks threatened on a close to new lows. Note the 12.8 (!) reading for USDCNH – the reason this is so extreme is that it is volatility adjusted and this is the most significant weekly move in USDCNH since at least 2019.
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