FX FX FX

FX Update: Where and when do we price the Fed put?

Forex 4 minutes to read
John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  The slow motion melt-down in US long treasuries and melt-up in the US dollar is a double whammy that risks driving an escalating dysfunction in global markets until it is addressed the only way possible: by Fed easing. The FOMC meeting last week actually provided a modicum of easing relative to expectations. Is this a preview of coming attractions? Markets will force the Fed hand eventually.


FX Trading focus: USD remains ascendant if off day’s highs

The US dollar strength and higher US yields are the one-two punch continuing to drive risky assets into the red as the week gets under way, with US equity markets at new lows for the cycle ahead of the US open today. I suspect now that in the bigger picture, this cycle of USD strength only ends once US long yields begin falling, and falling because the Fed has exercised its put with new yield caps or because US pension- and/or other rules are changed requiring US savers to hold more treasuries, not because market forces at some point decide that long US treasuries are a superior long-term investment. For now, it would seem talk of such eventualities are premature, although if volatility continues at the current level for much longer, it will sharply bring forward the eventual policy response.

As for market timing tactically if this recent deleveraging move is set to persist now or not until later this week, some have opined that “turnaround Tuesday”, the idea that bouts of market weakness often turned to the better on Tuesdays has been brought forward to Monday of late, and we are seeing signs of this in the early New York session today after the last three Mondays in a row saw snapback rallies from new local lows, even if the price action eventually faded again later in the week. Wednesday’s US CPI release is the data point of the week on the US economic calendar, and 3-, 10- and 30-year Treasury auction are set for Tuesday through Thursday.

The euro continues to get solid respect in many crosses, with a chop-fest in EURUSD after ECB officials last last week upped their sense of urgency on achieving lift-off. As well, longer European yields are offering more for domestic savers as German Bund yields stretching aggressively higher since late last week – the Bund trades as of this writing at 117 basis points, up 20 basis points from last Wednesday’s close. Those willing to risk a sniff at Italian BTP’s have yields comfortably above 300 basis points now. The rise in yields clearly helping EURCHF higher as the CHF safe haven status is nowhere in evidence, a notable development. Today’s weekly SNB sight deposits grew aggressively last week – is Switzerland adding to the CHF weakening? Certainly, Swiss reserves held as gold and US stocks have been losing considerable altitude at the same time. 1.0500 is a significant EURCHF level now not far away.

Chart: USDCAD
A number of USD pairs are at significant chart tipping point as this week gets under way. The most well defined of these is perhaps the 0.7000 level in AUDUSD, although USDCAD in the 1.2950+ area is quite remarkable as well – an area that has seen at least four prior touches, first as support just prior to the pandemic in early 2020 and then as resistance once the pair crashed back down through that level later that year. Oil prices are challenged from the demand side on Chinese Zero Covid lockdowns and budding behaviour change globally from skyrocketing diesel- and jet fuel prices. The range above there and above the psychological 1.3000 level is considerable – all the way to the double top of 1.4600+ from 2016 and 2020, but the bulk of the time, the 1.3650 area capped the action during those years. If oil suffers a more significant setback over this latest risk deleveraging event, that level could quickly come into play. The private debt leverage is far higher in Canada than in the US and one of the more sensitive sectors to rising rates is housing, which represents a far greater portion of the Canadian GDP growth over the last decade and a half relative to the US – interesting to watch the trajectory of the housing market in both countries after the enormous back-up in yields in recent months.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The USD strength continues, though note the solid pick-up in the euro, which does better than the smaller currencies when the focus is on liquidity. Also note that CNH isolated weakness has picked up a bit – is that set to accelerate?

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note the EURAUD up-trend establishing as a sign of China-linked concerns eclipsing Ukraine War collateral damage on the euro. Also, note CNHJPY flipping negative on Friday and following through today – more potential there if the rise in global yields eases/consolidates.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – Canada Mar. Building Permits 
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