FX Update: USD move higher sticking despite volatility elsewhere.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The volatility and direction changes in long yields and equities since last Friday have failed to disturb the USD move, where consolidation in the wake of the FOMC meeting has been very shallows, The yen failed to keep pace with the greenback as long treasury yields rose sharply, even as the shift in Fed expectations, like the US dollar has stuck ahead of a Fed Chair Powell appearance today and PCE inflation data on Friday.


FX Trading focus: How high is the bar for further USD strength?

The chief point of interest since yesterday is noting that the brief mini-meltdown in equities on Friday was reversed, as was the reaction in US 10-year treasuries (where yields are effectively unchanged relative to the day before the FOMC meeting after having traded first sharply higher and then sharply lower). Was this because the market has simply brushed off the hawkish talk from the St. Louis Fed’s Bullard Friday or because weak liquidity and the expiry of monthly and quarterly interest rate and equity derivatives on Friday in the wake of large post-FOMC moves were the cause of a confusing and choppy market reaction? Pass, but given the general flattening of the yield curve, the market has shifted hard in the direction of pricing a significant Fed tightening cycle – and maybe even a full one. After all, even the 2-5 year portion of the Fed expectations yield curve has flattened aggressively, and not just because, for example, early 2023 rate expectations are going up, but also because expectations further out (for example late 2025 rate expectations) are actually going down. That’s right, as the market has brought Fed rate hike expectations forward, it has lowered the expected (or arguably, hedged) terminal rate of the cycle.

This suggests that the market sees the inflation threat as largely transitory and that the Fed’s hiking in the medium term will lower the risk that inflation runs uncontrollably higher in the longer term and/or that the Fed will have a hard time taking rates to the previous cycle high above two percent before any such move becomes self-limiting, whether due to the greater amount of debt or otherwise. These yield curve moves will bear close watching as the next rounds of macro data become available, but for now, the lower terminal rate and recovery in risk appetite would seem less immediately USD bullish than otherwise, although USD liquidity is another question and factor and the 5-bps hike on excess reserves represents a tightening of the market that has reduced said liquidity has helped support this USD move higher. All of this is building to a head into quarter end (banks reducing balance sheet size) and August 1, the date the US Treasury has declared it will complete its drawdown of its general account to below $500 billion, with some $250-300 billion left to go from the most recent data point.  In other words, we are in for a long wait not only on the transitory inflation question, but also the equally important USD liquidity question.

Elsewhere, the other recent development of note, the stronger JPY, has partially reversed back lower as US yields at the longer end of the curve picked up again. This has kept the USDJPY chart in the rising channel, with the 111.00 area the next resistance, while the bounce in most JPY crosses has been modest relative to the size of the prior sell-off. The JPY will likely only turn notably strong again on long safe haven yields pushing back lower, with any aggravated JPY rise needing that plus a deterioration in global credit spreads to send bond investors packing. Complacency in credit  remains at extreme levels – no signs of fear there from any recent developments.

Chart: USDCAD
Not a lot of differentiation across USD pairs as the US dollar move from last week has consolidated little in broader terms, although in USDCAD the fresh jump to new cycle highs in crude oil has helped CAD push back a bit more than against the strong USD than elsewhere. Still, it’s important to note that the move off the cycle lows in USDCAD showed higher beta to USD strength than elsewhere, likely as a function of the impressive prior outperformance of CAD, a sign that USDCAD shorts have become over-crowded. So far, the selloff from yesterday’s highs is modest relative to the sharp squeeze higher in the US dollar on the back of the FOMC surprise last week. 1.2500 has shaped up as tactical psychological resistance here, with the next resistance into the 1.2650-1.2700 area as we watch for any follow on potential higher. Interesting all the while to note that market pricing of the Bank of Canada has stretched more aggressively higher in recent sessions than pricing for Fed rate hikes, offering CAD bulls some fundamental support here.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength
No big new moves here, although the JPY lost a lot of steam yesterday on the bump higher in long safe haven yields – watching the status there as well as whether this USD move holds, and note the weak commodity currency theme creeping into the picture, if somewhat inconsistently as oil price rises are offering counterpart to the weakness in other commodities.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
In the individual pairs, today I would pull out the EURCHF again as it tries to post an actual cross higher to a positive trend after failing to do so yesterday on the closing level. Also noting the very higher USD trend reading in places possibly needing consolidation before the USD can trying pulling higher again.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Hungary Central Bank Rate Decision
  • 1400 – ECB Chief Economist Lane to speak
  • 1400 – US May Existing Home Sales
  • 1400 – US Jun. Richmond Fed Manufacturing Index
  • 1400 – Euro Zone Jun. Consumer Confidence
  • 1430 – US Fed’s Mester (non-voter) to speak
  • 1500 – US Fed’s Daly (voter) to speak
  • 1800 – US Fed Chair Powell to testify on Covid 19 response and economy
  • 0315 – Australia RBA’s Ellis to speak

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
Zürich
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 series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or 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.