FX Update: Too much Brainard on the market’s brain?
Head of FX Strategy, Saxo Bank Group
Summary: If the action since last Friday has mostly to do with the shifting odds in favour of President Biden nominating Lael Brainard to serve as the next Fed Chair, then the market may be making too much fuss on what the shift from Powell would mean for Fed policy down the road. In any case, we are only wiser once the announcement is made, very likely inside the next week or two. In the meantime, the US October CPI release today is the next focus.
FX Trading focus: To much Brainard on the brain? US CPI, yields in focus.
In today’s Saxo Market Call podcast, I discuss the Bloomberg chart I also show below of USDJPY (inverted), gold and US Ultra T-bond futures, which all jumped to attention on Friday, first seemingly in reaction to a fairly strong US jobs report (a bit of a head-scratcher) but later the move was clearly accelerated by news that both Fed Chair Powell and potential nominee Lael Brainard were seen at the White House. The Bloomberg columnist John Authers does a great job of pointing out the market reaction to this development as well as arguing that it makes little sense and why he sees it as unlikely that Brainard will be nominated.
I would agree and underline that it will matter very little to nothing for the course of future Fed monetary policy if Brainard is chosen over Powell, but it will definitely mean that the Fed has a far more hawkish regulator at its helm, a very different approach from Powell (and might mean that anyway, as even if she is nominated to head the Fed, she will very likely receive a prominent new regulatory position and title under a second term at the Fed).
I really don’t know who Biden will choose, accepting Authers’ argument as logical, but having a hard time seeing why Biden wouldn’t take the opportunity to be seen as making Powell pay for the trading scandal that happened under his watch. Either way, we are likely to get a considerable one-off reaction to the nomination announcement once it is made, and if those market moves on Friday are linked to the potential for a Brainard nomination, they could very quickly reverse if the market decides that the course of Fed policy is unlikely to veer much from where it was before – likely in my book.
We also have today’s US October CPI release, where the bar may be high for a surprise to generate significant volatility unless the market is willing to roll back its anticipation of a possible Brainard nomination. A 0.8% or higher month-on-month headline print or especially a 0.5% or higher ex-food-and-energy print could have the market on tilt, driving the USD higher, yields higher, risk sentiment lower, etc…with the JPY caught somewhere in the crosswinds.
Chart: USDJPY (inverted) vs. gold and US T-bond futures.
The chart discussed above, where we watch today’s CPI release and the imminent news of who Biden will nominate to head the Fed next February for the effect on the US dollar, particularly USDJPY, and on US treasuries, with a big new sell-off in the last of these possible driving a consolidation in the recent strong rally in risk sentiment.
Table: FX Board of G10 and CNH trend evolution and strength
The US dollar and JPY stuck effectively in neutral here waiting for next steps, which feel like they should come soon in the US dollar’s case as discussed above. Note some of the negative momentum in the G10 smalls, including NZD, SEK and especially AUD.
Table: FX Board Trend Scoreboard for individual pairs
Lots of yellow in the “Age” category as we se the AUD and suddenly NZD flipping to a negative trend in places. The NZDUSD chart in particularly looks set for a test lower if the USD puts up a further fight here – it is almost ready to flip and the 200-day moving average has been a key focus on the chart. Also watching EURSEK for a squeeze risk if not yet a trend change as I suspect stops may be lined up near and just above 10.00.
Upcoming Economic Calendar Highlights (all times GMT)
- 1330 – US Weekly Initial Jobless Claims
- 1330 – US Oct. CPI
- 1400 – UK BoE’s Tenreyro to speak
- 1530 – US Weekly DoE Crude Oil and Product Inventories
- 1700 – US Weekly Natural Gas Storage Change
- 0001 – UK Oct. RICS House Price Balance
- 0030 – Australia Oct. Employment Change / Unemployment Rate
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
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)