Federal Reserve

FX Update: Brainard delivers latest Fed attempt to impress markets.

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  A hawkish broadside from Fed Vice Chair Brainard yesterday turned the tables on risk sentiment, sending US yields and the US dollar sharply higher. It is still a long wait until the May 4 FOMC meeting, but that meeting is now priced to deliver not only a 50 basis point rate hike, but also the beginning of a “rapid” quantitative tightening regime. AUDUSD is an interesting proxy to watch for the impact of the latest Fed attempt to impress the market after the pair broke above key resistance just yesterday.


FX Trading focus: Brainard delivers latest Fed attempt to take the Fed ahead of the curve

Yesterday, Brainard spoke at a virtual conference hosted by the Minneapolis Fed with a speech titled Variation in the Inflation Experiences of Households. In the speech, she opened the speech with an invocation of Paul Volcker’s stance on the risks of runaway inflation, which “would be the greatest threat to the continuing growth of the economy... and ultimately, to employment.” With his taking the Fed Funds rate to 20% in 1981 to help renewed inflation fears, by the way, by 1982, he had engineered an unemployment rate that reached 10.8% by the end of that year and a stock market index that traded in the summer of 1982 at 28-year lows, adjusted for inflation.

Brainard emphasized that high inflation is an especially heavy burden for lower-income households and said that the various inflation metrics don’t capture how different households experience inflation, with the consumption basket of lower-income households likely having risen more rapidly than for higher income households for many years. Then she went on to discuss the implications of current high inflation on Fed policy, which she concluded would mean “a series of interest rate increases and...(reducing) the balance sheet at a rapid pace as soon as our May meeting”. To that, she added that balance sheet reduction would proceed “considerably more rapidly” than the $40 billion/month of the 2017-19 tightening.

The hawkish broadside managed to surprise a market and take US yields to new cycle highs, with longer yields rising slightly more than the yields at the front of the yield curve as it has been assumed that leaning more aggressively on QT impacts the longer end of the yield curve (the balance sheet debate and impact on long yields was specifically discussed in the January FOMC minutes). In that set of minutes, the Fed took the trouble to emphasize that adjustments to the Fed Funds rate are the primary tool for Fed tightening, while Brainard seemed to be raising the profile of balance sheet adjustments in the Fed’s considerations for the policy mix.

In sum, Brainard’s bringing forward QT lift-off to May and at a “considerably more rapid” pace than in 2017-19 is an aggressive hawkish upgrade of the Fed tightening timeline and suggests that the Fed wants to tighten on all fronts to get ahead of inflation as soon as possible. It will be very interesting to peruse tonight’s FOMC minutes releases for the scale of adjustment in the discussion around possible scenarios for the QT pace relative to the January discussion – especially the Fed’s MBS holdings, although it has already signaled that it would like to shed itself entirely of its MBS holdings over time. There has been a brutal tightening in the US mortgage market this year, where the yield is pushing on 5% and the spread to the US 30-year treasury yield has blown out close to multi-decade highs well above 200 basis points.

Despite the further push higher in long US yields in the wake of Brainard’s speech yesterday, I am increasingly inclined to believe that in the short term, US yields may have a hard time pulling higher still, particularly if a significant deterioration in risk sentiment settles over the market. In FX, this could go a long way to supporting the JPY, and even the Euro, in the non-USD crosses.

By the way – the French presidential election’s first round is coming up fast on Sunday and the second round scenarios (for the April 24 run-off, presumably between Le Pen and Macron) have tightened at a breathtaking pace in recent days, even if Macro remains the strong favourite. He is guaranteed to get a weak mandate at best, and if the first round brings notable surprises that suggest Le Pen has a fighting chance in the run-off, it’s gray swan time for Europe.

Chart: AUDUSD
We look at AUDUSD once again today because it just broke aggressively higher yesterday into the zone above 0.7556, and is therefore one of the most pivotal USD pairs after the Fed’s hawkish surprise. If risk sentiment deteriorates badly, the commodity-angle of Australia may suddenly fail to support the Aussie as the primary concern quickly becomes one of liquidity, where the US dollar always shines. Watching the status of the AUDUSD rally around this pivotal 0.7500-50 area as a proxy for USD/risky currencies in general Many EM currencies have also enjoyed a significant run higher, generally speaking, after the market decided that the March 16 FOMC meeting still showed that the market found the Fed still behind the curve.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Despite Brainard delivering support to the greenback, it is not really showing up because of the recent heavy commodity focus that hasn’t rewarded the US dollar. If US yields ease off in the context of a significant new deleveraging event as noted above, we could have a swing back into mean reversion, with JPY and EUR finding support, while the “smalls” face sudden headwinds.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Watching AUD status in the crosses as noted above after the big break higher in AUDUSD, while watching whether yields are set for some mean reversion after a recent remarkable run higher – if so, JPY crosses are also likely set for a sudden change of pace.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • Poland Central Bank Rate Announcement
  • 1330 – US Fed’s Harker (non-voter) to speak
  • 1400 – Canada Mar. Ivey PMI
  • 1430 – EIAs Weekly Crude and Fuel Stock Report
  • 1800 – US FOMC Minutes
  • 0130 – Australia Feb. Trade Balance

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

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/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. 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. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.

©   since 1992