Chief Macro Strategist
Summary: The USD has firmed to new local highs against several currencies without much help from coincident indicators and despite an indifferent ADP payrolls report yesterday. One reason for fresh USD strength could be the latest burst of USD liquidity suggesting that the Fed will have no choice but to signal a tapering sooner rather than later. US ISM Manufacturing up later today as many see the pace of recovery peaking here.
FX Trading focus: Burst of USD liquidity into USD end to eventually force Fed’s hand
The US dollar rallied further into quarter-end, especially against the Japanese yen yesterday and this morning. Looking at a weak Q2 Tankan survey overnight, one might be tempted to believe that this weighed on the yen, but alas, there was no interesting price reaction around its release, with the bulk of the move unfolding in the European afternoon yesterday and the follow through coming in early European hours this morning. US treasuries have lurched slightly lower to start the quarter, but the move pales in comparison to the move in USDJPY. It’s tough to build a narrative around the move, other than that the fresh, enormous surge in the Fed’s reverse repo facility yesterday (to $992 billion from $841 billion the prior day) could be driving the belief that the Fed will have no choice but to taper asset purchases sooner rather than later, as purchases are one of the drivers in unprecedented growth in that facility over the last few months.
The facility began inflating, it should be noted, around the very time frame that US long yields peaked out at the end of Q1. Certainly, as we discussed in this morning’s Saxo Market Call podcast, it will be interesting whether the transition to quarter-end drives any slowdown in the inflation of this facility and therefore a move to higher US yields or if the Treasury’s ongoing addition of liquidity from its drawdown of its account with the Fed d. Regardless, these factors are not driving any shift in Fed expectations, where rate hike expectations have actually eased a couple of basis points for the beginning of 2023. The June US ADP payrolls change data yesterday offered no surprise, as the better than expected June number was precisely offset by a downward revision of -92k in the May data.
Chart: USDJPY
USDJPY is stretching to new cycle highs here well above 111.00, with no apparent need for the usual coincident indicators to provide support, although US yields have jumped slightly since late yesterday, a possible sign that quarter-end effects are in play. The next resistance level for this pair is the big 114.50 area that held all rallies back for the bulk of 2017 after Q1 and briefly in 2018 as well. To get anywhere close to that level. I suspect we would need to see US long yields picking back up toward the range highs. Tomorrow’s June US jobs report is the first test of whether the upside of this channel established since late April continues to define the price action.
BoE’s Bailey clearly on Team Transitory – A speech this morning from Bank of England Governor Bailey saw considerable emphasis on a view that inflation would prove transitory as the UK economy is seen mean reverting to lower growth, the assumption that supply chain disruptions will fade and the like. This is weighing on sterling, with EURGBP back above 0.8600 in today’s trade and well below 1.3800 and the prior pivot low from the post-FOMC sell-off. This leaves the 1.3670 area pivot from April as the next key level, which also know almost coincides with the 200-day moving average. Interesting to contrasts Bailey’s complacency with exiting Chief Economist Haldane’s shouting on inflationary risks from every roof top. One of these two will be tucking into some humble pie in a year’s time.
Riksbank: low expectations and even less delivered – Recently, forward expectations for Swedish liftoff have seen a modest stirring, with 2-year swap rates rising 3-4 basis points above the prior peaks of earlier this year to around 7 bps, but today’s Riksbank offered nothing new for market observers, stuffing rate expectations back about 1.5 bps lower after the bank failed to indicate any likelihood of a lift-off in its three-year policy forecast. This, as core CPI recently reached 2.5% year-on-year and the composite PMI for Sweden reached 70.2 in May, the highest ever recorded. SEK was modestly offered on the event as the Riksbank will clearly prove a laggard in following other central banks in shifting to a tightening regime after burning its fingers on a premature rate hike cycle in 2010-11. I would like to fade EURSEK eventually, but waiting for pattern reversals or a proper squeeze to develop.
Table: FX Board of G10 and CNH trend evolution and strength
The USD up-trend has reasserted, while the JPY attempt to get something started to the upside has been almost entirely neutralized. Note the AUD weakness becoming a bit more prominent as well.
Table: FX Board Trend Scoreboard for individual pairs
Not much sticks out here as we are looking for whether continuation trades in JPY downside and USD upside develop further. The strongest reading now across the board is the USDCHF positive tally of 6.3 as the pair posts new highs since early April – needs to hold above 0.9200 through tomorrow’s US jobs report to maintain the upside momentum.
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