FX Update: Yesterday an odd day, a big surprise if it repeats.

FX Trading focus: An odd day yesterday as USD was no safe haven

A strange day in FX-land yesterday, as we saw a classic, broad risk-off move across markets that took US long yields a bit lower, US equities sharply lower (interesting discussion around the big cross-currents in equities, by the way in today’s Saxo Market Call podcast) and the JPY higher. What was not “classic” was the resilience in commodities and the US dollar staying mostly weaker against pro-cyclical currencies and even some EM currencies even if it has bounced back a bit in today’s trade. Not sure where to attribute the odd pattern, but would be surprised to see all of those developments extending. US long yields are back higher today after a somewhat mixed message from US treasury auctions over the last couple of days. The cycle highs in longer US treasury yields are not far away and can quickly dominate the narrative again and dominate the narrative for risky assets.

As we watch the USD’s losses since consolidate today, a bit of extra focus on the 1.1400 area in EURUSD and 0.7250 to as low as 0.7200 in AUDUSD as a failure of these levels to hold will suggest that this week’s USD breakdown after the US CPI release on Wednesday was merely a brief squeeze, signifying little or nothing, save perhaps that Fed forward expectations have to break significantly higher for act as a specific driver USD strength.

Chart: USDCAD
The USDCAD pair has gone far and fast to the downside since the crude oil market recovered swiftly from its December post-omicron breakout nadir and is now interacting with the psychologically significant 1.2500 area that slow happens to also be the 200-day moving average. Coming up next for the two currencies are signals from their respective central banks, with a hawkish raising of the bar from the Fed likely requiring, for example, calling an early end to QE already at the Jan 26 meeting and possibly indicating that “larger than 25 basis point” hike increments are under consideration. Perhaps too early for the latter, if not the former (what does the last few tens of billions of QE matter besides as a symbol). The Fed is priced to hike to about 1.0% through the December meeting, depending on the barometer. The pricing for the Bank of Canada is less reliable, but it is certainly priced to lead the Fed in hiking this year by around two hikes even if the spread for 2-year yields between the two countries has been relatively flat for over a month, so little new has been priced in on a relative basis recently. On that account, the move lower in USDCAD looks a bit over-extended without new signals from respective central banks. Other factors influencing the exchange rate will include whether oil continues to march to new highs or corrects and risk sentiment, where I suspect extended weakness will begin to offer more safe haven support for the US dollar if long US yields are also on the rise.