FX Update: USD path now depends more on financial conditions than Fed. FX Update: USD path now depends more on financial conditions than Fed. FX Update: USD path now depends more on financial conditions than Fed.

FX Update: USD path now depends more on financial conditions than Fed.

John Hardy

Head of FX Strategy

Summary:  With the sudden onset of a bank crisis in the US and this weekend’s bailout of all depositors, the market now expects the Fed to be in full easing mode within six months. The short end of the US yield curve has suffered a mark-down of historic proportions, but action in the US dollar is relatively muted, likely as nervous financial conditions help the greenback retain some safe haven appeal. Elsewhere, the shocking drop in yields has benefitted the Swiss franc the most among G10 currencies.

Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team

FX Trading focus: The USD, and the Fed for that matter, will likely track financial conditions from here more than incoming data. ECB to hike 50 but downshift guidance?

The sudden onset of a bank crisis in the US last Thursday rippled so rapidly through the system that the Fed and regulators conjured up a bailout of all US depositors of any size at the weekend to avert the risk of a series of bank runs across the country. The Fed created the unfortunately named BTFP – the Bank Term Funding Program – (consult FinTwit for humorous alternative takes on what the letters stand for.) to essentially ensure that banks won’t have to mark their US treasury holdings and other qualifying collateral to market, but essentially can mark it to par. There are reports that Had the Fed and US regulators not moved so quickly, we almost surely be in the midst of a systemic crisis with contagion into nearly all except for the largest banks suffering deposit flight and a horrific spike in funding costs. So in the first instance, the move was likely entirely necessary, but the move brings into question over the longer run what a US bank is even meant to be or why it should be allowed to exist. After all, why should banks be allowed to take significant risks for bond-holders and shareholders when the source of their funding is deposits that are fully insured up to infinity by the government?

As well, if this blow-up serves as a general wake-up call for depositors to park their money in higher yielding money market funds rather than in savings and checking accounts that still often yield almost nothing, banks will struggle with the price of funding and a creeping credit crunch could now be on the way in the months ahead. This has us suddenly watching signs of funding stress and credit spreads far more than incoming data, which will likely now take a back seat. (By the way, US Feb. CPI out in-line with expectations, save for a slightly firmer +0.5% MoM core number). Financial conditions will be more important for the greenback from here than Fed expectations (also likely a derivative of financial conditions as long as these are worsening).

The sudden revelation of how fragilized the US banking sector has become in the wake of the Fed’s  vicious tightening regime saw the market erasing most of the anticipated further Fed policy tightening for the cycle and sharply bringing forward the anticipated timing of an ensuing easing cycle. Since last Wednesday, we’ve gone from pricing in more than 100 basis points of further tightening through the July FOMC meeting and a 5% two-year US treasury yield to pricing in odds of 50 basis points of cuts by the July FOMC meeting at yesterday’s market nadir (now a mere -10 basis points as of this writing), with the 2-year yield trading south of 4% overnight and this morning (now backed up close to 4.25%). Some are already clamoring for the Fed to cut rates while others see a pause or even for at least another 25 basis points of tightening to any sense of panic.

The ECB is in an awkward place with its meeting on Thursday and if conditions remain nervously stable, could go ahead and hike 50 basis points but loosen its commitment to further tightening as it ponders the risk of contagion from the resetting of financial conditions lower after the US bank crisis emerged so suddenly out of the blue. The yield-spread has tightening in favour of the euro since last Thursday with a more aggressive expectation of the Fed to be in cutting mode sometime in Q3, while ECB expectations have merely receive a haircut, and still are looking for Lagarde and company to hike another 100 bps total through the October meeting (with about +40 bps price for this Thursday, i.e., a significant minority looking for a smaller rate hike.) The meeting may not serve as much of a catalyst if financial conditions are deteriorating again over the decision. Technically, watching the 61.8% Fibo retracement at 1.0842 if this psychological 1.0750 area falls.

Source: Saxo Group

The first rule of shock developments across markets is that traders will move first to simply deleverage existing positions to shed risk. That is the most likely proximate driver of an extreme move like the shockingly steep rally in USDMXN since last Thursday. MXN had become a relative star performer starting last year with the notable strength even against a strong US dollar as an EM currency that was in the vanguard of responsibly taking its policy rates to credibly close to or even beyond inflation levels. Further strength has been found on the deglobalization theme as Mexico is seen as a long-term winner in the US friend-shoring and reshoring of manufacturing away from China. A report on February 28 that Tesla would build a gigafactory in Mexico touched off the last leg of USDMXN downside to below 18.00 at times. This sharp backup is a wakeup call for those enjoying the MXN carry trade over the last many months. I have a hard time seeing new lows emerging any time in the near future, given the scale of the back-up here.

Table: FX Board of G10 and CNH trend evolution and strength.
The Swiss franc and gold are getting the most out of the current situation, with the USD so far merely deflating sharply after its recent rally and not yet in a downtrend. Note the relative weakness across most of the G-10 smalls, though note EURSEK comments below.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The USD is rolling over into a downtrend in places – note USDCHF and UDSJPY as the most prominent an well developed examples, but the move will need to stick through another couple of days of action. EURSEK posted a smart bearish reversal on a test above the prior 11.44 high.

Source: Bloomberg and Saxo Group


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
The Circle 38

Contact Saxo

Select region


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.