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.
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.