Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team
FX Trading focus: FOMC defers to incoming data for next steps. JPY rips higher again as treasury yields plunge on fresh US regional bank concerns. NOK kneejerks higher on Norges Bank. ECB incoming.
Bias shifts today:
- JPY: USDJPY trading focus shifting to selling strength (sub-136.50) unless data takes US yields back higher.
- NOK: more constructive on finding ways to get long (NOKSEK) after FX mentioned in today’s Norges Bank
- EUR: awaiting how euro settles after ECB today. EURUSD pivotal in 1.1100 area.
- AUD: looks very heavy again. Downside trending picking up in AUDNZD. Possibly AUDJPY also tilting lower (watch yields).
The FOMC brought as little drama as conceivable, perhaps slightly on the hawkish side relative to market positioning and expectations, but it was clear from the statement and the Powell press conference that the Fed is attempting to deliver as little forward guidance on policy as possible. In the statement, the language pointing to further tightening was softened to indicate that incoming data will determine whether any further tightening is necessary. Powell’s press conference saw the Fed Chair studiously avoiding sending anything that could be mistaken for pointed guidance. Some observers, like Bloomberg’s John Authers, did pick up on some nuances that were arguably dovish, but pulling away any message was all in the inferences. One of those, as Authers argues, is that Powell’s lack of greater concern expressed on the regional bank issue helped spark an ugly slide in regional bank stocks late in the session yesterday, even before the press conference was done. And after the close, PacWest announcing that it was “reviewing its strategic options”, including a sale, spooked sentiment thoroughly and sent US yields lower still.
The particularly are extremely different, but this feels a lot like Bernanke not having a sufficient grasp of the dangers of the leverage in the US housing market back in 2007. Could we be looking at another weekend sale of a bank and at what point does this situation become systemic until the Fed and other regulators provide a blanket approach to the issue – when two more banks go the same route, or ten or twenty? And can they do so with a dysfunctional Congress sidelined by the debt ceiling stand-off?
This Fed is in hot water for having gotten the banking sector in this situation in the first place with its slow start to the tightening cycle and steep pace of rate increases. At the same time, inflation has not yet fallen sufficiently to justify the scale of rate cuts the market is pricing in for later this year (75 basis points of cuts priced through the December FOMC meeting) or next year unless this banking turmoil hits hard and fast and shows signs of tanking the economy inside the next three months. In reaction to last night’s market developments, the JPY benefitted the most as poor traders are suffering whiplash after having sold the yen on last week’s Bank of Japan meeting. In the wake of the ECB (more below), will be watching whether EURJPY also reversed back lower through perhaps 148.00, making the JPY reversal more or less a clean sweep.
USDJPY has now backed out nearly all of the sharp rally that came on the heels of the Bank of Japan meeting last week as US treasury yields and a massive downdraft in crude oil prices are offsetting the yen-negative implications of the Bank of Japan taking a very slow approach to reviewing policy over as much as the next eighteen months. Still, for the JPY to generally head higher still (And USDJPY and other JPY crosses lower), we will likely need for US treasury yields to head lower still and possibly for other central bank expectations to begin flattening out and turning lower as well, so the ECB today will have a role to play (not yet out as I am writing these observations on USDJPY. In the specific case of USDJPY, this reversal means traders will likely prefer trading for more downside as long as the 136.50-137.00 zone continues to cap the action, with further confirmation of a more significant downtrend developing if we can start adding some weak US data into the mix (tomorrow’s US jobs report, for example) and the price action pushes down through the 132.50 area, indicating a challenge of 130.00 eventually.