FX Update: Powell surprises hawkish, data still in driver’s seat.

Forex
John J. Hardy

Chief Macro Strategist

Summary:  Fed Chair Powell surprised the market by expressing a willingness to step up the pace of hikes again if “the totality” of data warrants such a move. This triggered a fresh jump in US yields at the front end of the curve and the US dollar as the market upped the odds of a 50 basis point move the week after next. This adds further to the two-way reaction function around incoming US macro data, especially the jobs report Friday and next Tuesday’s February CPI. Elsewhere, will Bank of Canada maintain its dovish guidance today?


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

FX Trading focus: Fed Chair Powell jolts USD higher with promise to re-accelerate the pace of hikes if warranted. Bank of Canada will need to tread carefully to avoid further CAD weakness after its prior guidance to pause its tightening regime starting at today’s meeting.

Fed Chair Powell was surprisingly (to me) pointed in his remarks on the likelihood that the Fed funds rate would likely have to head higher than previously anticipated and by indicating a willingness to consider re-accelerating the pace of rate hikes if “the totality” of data warranted doing so. This gives a clear sense that the Fed doesn’t trust its own models of where things are headed and was unsettled by the January inflation data (particularly the PCE core) in particularly, as well as the strong jobs report and modern low record in the unemployment rate. With that in mind, it is clearly the data itself that is in the driver’s seat for cementing the ensuing jump and break higher in the US dollar and market reset to a higher Fed terminal rate yesterday. The 2-year US treasury yield benchmark rose to a new high since 2007 above 5.00% as the terminal Fed rate by September of this year was lifted as high as 5.65%. As noted in this morning’s Saxo Market Call podcast, the market still expects about 150 basis points of cutting by early 2025 from wherever the Fed peaks its tightening cycle, suggesting that the market remains convinced that either disinflation will quickly develop by late this year and/or that a recession at some point will have the Fed easing, if from a higher level.

First up, data-wise is minor stuff today including the woefully tardy JOLTS job opening survey for January. This survey has receive considerable attention, but other private-sector services (for example: ZipRecruiter and Indeed) release their data well ahead of the JOLTS and uniformly show a steady decline in job openings, even if they are still above where they were in February of 2020. The JOLTS survey does cast a wider net, in terms of number of firms surveyed. We also have the ADP employment change data today, which did little to prepare us last month for the +517k Nonfarm Payrolls print last month when the ADP only reported +106k. Thus, the combined Nonfarm Payrolls and Household survey (which has strengthened of late – it measures the percentage of those surveyed who say they are in work) will hold the key for supporting Powell’s message and increasing the risk of a 50 basis point hike from the FOMC on March 22 (currently about 41 basis points priced in), together with the February CPI data up next Tuesday, the 14th.

Chart: USDCAD
USDCAD is quite typical of USD pairs here as the USD makes new highs for the year against CAD, but the pair did post higher levels back at the height of the USD bull run last fall. CAD has been relatively firm in the crosses, likely on the beta that the loonie often shows to the USD in the crosses. But the Bank of the Canada has been an early mover among G10 currencies on the dovish side in trying to pre-announce a pause in their rate hike cycle on some softer Canadian data. Despite the latest shift higher in Fed expectations, the market is expecting the BoC to make good on the guidance from the prior meeting and has priced essentially no tightening from the BoC for the next two meetings, with only slightly more than 25 bps of tightening price through late this year. We could see the market punishing CAD further here if the BoC maintains this dovish guidance, especially if risk sentiment and crude oil prices remain under anything like the pressure we saw them under yesterday. Governor Macklem would do well to roll out some more emphatically two-way guidance. As with the other small, open economies, the BoC chief is likely preoccupied with the rolling trainwreck for tight household budgets incoming as Canadian mortgage reset higher. A strong majority still take out “fixed” rate mortgages, but these roll every five years. The five-year ago 5-year rate for Canadian government bonds was around 2.00% vs. over 3.50% currently, a significant difference that only worsens from here, with the 2019 5-year yield dropping to 1.50%, and then 1.00% in 2020 and even below 0.50% for much of 2021. And there is still a large minority of mortgage holders that are on floating rate mortgages and already feeling an impact. In any case, watching the 1.3900+ highs of the cycle in USDCAD through next Tuesday’s CPI release.

Source: Saxo Group

Fed Chair Powell is out testifying again today, but we can hardly expect him to add considerable further guidance to yesterday’s developments. The risk for traders may be that the market now goes sideways or even gets choppy before reacting to each incoming data point rather than trending smoothly.

The Bank of Japan drama has picked up further ahead of the Friday BoJ meeting as the higher yields pressurized USDJPY for a break above the 200-day moving average yesterday above 137.00. A complete failure for the outgoing Kuroda to act on Friday and a simple handover to Ueda to shape policy from here could see further JPY downside pressure, while it’s hard to know how the market would absorb another incremental YCC loosening like the one in December (for example, raising the band on the 10-year JGB to +/- 0.75% from the current 0.50%) if yields are still pressing higher elsewhere. Market expectations are very modest for actual policy rate tightening through the end of this year, with the policy rate priced to only move to plus 0.14% through the December BoJ meeting.

Table: FX Board of G10 and CNH trend evolution and strength.
The strong US dollar taking control here again after Fed Chair Powell’s rhetoric, with the euro trying to hang in there to a degree on the late hawkish guidance from the ECB. Watching CAD in the crosses and in USDCAD post today’s Bank of Canada meeting. Silver taking it on the chin as gold wilted on the jump in Fed expectations and the USD, and as the copper price rolled over as well.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
GBP flipping lower in an increasing number of places. Watching NZD downside risk eventually if risk sentiment worsens as well. Note USDJPY and other JPY cross status ahead of Friday.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1315 – US Feb. ADP Employment Change
  • 1330 – US Jan. Trade Balance
  • 1330 – Canada Jan. International Merchandise Trade
  • 1500 – Canada Bank of Canada decision
  • 1500 – US Fed Chair Powell to testify before House Panel
  • 1500 – US Jan. JOLTS Job Openings
  • 1800 – US 10-year Treasury Auction

Quarterly Outlook 2024 Q4

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

    Head of FX Strategy

    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

    Head of FX Strategy

    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