FX Update: Four CB meetings in the spotlight this week, topped by Fed.
Head of FX Strategy, Saxo Bank Group
Summary: The US dollar is hanging in there as yields have backed up a bit on hints that the Fed may not be happy with the market heavily anticipating a dovish shift at this Wednesday’s FOMC meeting. Elsewhere this week, will the RBA indicate a new, sedate 25-bps per meeting regime tonight despite the most recent inflation shocker, and will the Bank of England be willing to pull the trigger on its largest rate hike of the cycle despite the strong sterling and quiet Gilt market?
FX Trading focus: The market is all over the place on the anticipated Fed policy tightening downshift. Three other central bank meets this week, starting with an RBA meeting overnight.
The October 21 Nick Timiraos article in the Wall Street Journal (Fed Set to Raise Rates by 0.75 point, Debate Size of Hikes) may have been the Fed’s careful attempt to gauge the market’s reaction to the idea that the Fed might like to signal that it wants to reach a plateau in its tightening regime at some point in order to offer some time to measure the impact of the extraordinary tightening of policy that it has already carried out. The equity market rallied hard that day and for much of last week as well, and this also marked the peak of Fed rate expectations for the cycle, right around the time a 5% “terminal rate” had been achieved by early next year. Expectations further out the curve were adjusted sharply lower. It’s rather ironic that the market reacted so strongly to this signal (was this the signal, or merely a consolidation triggered by having achieved 5% as the terminal rate?), given that the forward Fed curve already reflected anticipation that the Fed was set to slow the pace of hikes as early as December and then stop hiking rates by next spring.
Regardless, this weekend saw the release of another Timiraos article (Cash-Rich Consumers Could Mean Higher Interest Rates for Longer), this one possibly aimed at tempering expectations for a sharp dovish downshift at this Wednesday’s FOMC meeting. The idea, as spelled out in the headline, that significant parts of the economy may be less sensitive to tightening rates than they have in past cycles. If this is the Fed speaking between the lines through Timiraos article, the message may be that “we may downshift the pace of hikes, but we don’t approve of the pricing in of eventual rate cuts or the sharp easing of financial conditions”. In response, risk sentiment is a bit lower, the US dollar is a bit stronger and US rate expectations have come sharply back higher for the late-2023 to early-2024 time frame, about cutting the recent move in the opposite direction in half.
And it hasn’t just been the original Timiraos article that have encouraged the general sense that central banks are looking for excuses to slow down their respective pace of tightening – the RBA surprised last month with the small 25 basis point move (more on the RBA meeting tomorrow in the AUDUSD chart discussion below), the Bank of Canada surprised many by not matching the Fed at its meeting last week in only hiking 50 basis points, and the ECB last Thursday provided dovish guidance, even if much of the reaction to that guidance was erased on Friday.
I suspect the Fed will do all it can to provide as little guidance as possible, especially on December’s rate move (currently priced at around +60 bps after the +75 set for this week) and in some way hint that it sees the “high for longer” cited in the Timiraos headline as the most likely course for policy. The Fed then has a chance to get a look at two more monthly jobs reports and two more CPI readings before deciding on the size of the December 14 rate hike and tinkering with its economic and policy forecasts for the coming years.
Will talk BoE and Norges bank decisions, both Thursday, in coming couple of days.
An RBA meeting tonight is an interesting one, with the RBA having downshifted to a 25 basis point hike last month in the wake of a string of 50 basis point moves. Since then, we got the very hot Q3 Australian CPI print that may have the RBA second guessing its own downshift. But are Philip Lowe and company willing to suggest they made a mistake last month and to hike by 50 basis points, or will they continue to cite forward concerns for the impact on consumption and mortgage payments from the tightening already in the bag? Most lean for a 25-basis point hike, with just under 30 bps priced into the market, according to Bloomberg’s World Interest Rate Probability monitor. Technically, AUDUSD has had a look above the pivotal 0.6400 area but now finds itself back near and even below that level ahead of this meeting. A large hike than expected could save the bullish case for the moment, though if the Fed fails to encourage USD bears at Wednesday’s FOMC, the pair may still eventually roll over lower from higher levels. The rate decision may have more last impact in crosses like AUDNZD, trading down toward the interesting 1.1000 level ahead of the decision.
Table: FX Board of G10 and CNH trend evolution and strength.
The isolated CNH weakness remains a prominent story and pressures AUD as industrial metals prices remain weak. And sterling continues to look over-baked heading into the BoE meeting this Thursday. The next move in USD after FOMC sets up likely next trend, as many USD pairs are in limbo.
Table: FX Board Trend Scoreboard for individual pairs.
Not convinced yet on the EURNOK attempt to turn lower – a little extension of today’s rally and we’ll likely have switched the focus back higher. EURSEK is also at a tipping point today. USDCHF looking higher now again near that important parity level, aided by some fresh CHF weakness.
Upcoming Economic Calendar Highlights
- 1345 – US Oct. Chicago PMI
- 1430 – US Oct. Dallas Fed Manufacturing Activity
- 1500 – ECB Chief Economist Lane to speak
- 0145 – China Oct. Caixin Manufacturing PMI
- 0330 – Australia RBA Cash Target Announcement
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