Brexit gets brief pause, FOMC reaction fades Brexit gets brief pause, FOMC reaction fades Brexit gets brief pause, FOMC reaction fades

Brexit gets brief pause, FOMC reaction fades

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The initial reaction in currencies to the FOMC meeting has largely faded as the USD reversed most of the subsequent weakening in many USD pairs – yet another failure to establish a USD direction. Elsewhere, sterling rebounded from a sharp weakening move yesterday as the EU has extended Article 50 for two weeks to give May a bit more time.


US dollar traders were unable to continue piling on the pressure after the Federal Open Market Committee meeting in many USD pairs as the greenback rebounded to reverse most of the post-FOMC weakness. So far, then, we have yet another example of the dollar failing to establish a persistent direction after a major event risk.

The first such failure this year was the inability to sustain a move above 1.1500, for example, in EURUSD after Fed Chairman Powell made his first loud dovish turn. Even a strong CNY ‘s supporting role at the time was unable to really set the USD momentum lower.

Then, of course, we saw the very dovish turn from the European Central Bank failing to engineer a sustained break below 1.1200. For now, we would avoid over-interpreting the reversal thus far – even if it is tempting to look for more tactical USD strength in the pairs that have reversed around key levels – in USDCAD, for example. 

In the bigger picture or medium- to longer-term, why should the US dollar strengthen when the Fed has shifted so quickly to a more accommodative stance and the positive effects of the Trump tax reform for the greenback are set to fade later this year? The US is a deficit country requiring constant funding. And with more room to cut the policy rate and unwind QT, there is more downside potential from additional cuts from here.

The only real potential driver of on last larger scale USD strengthening move (aside from shocking, uncomfortably hot inflation and growth numbers that require another hike or two before the cycle winds down) might be global deleveraging and issues with USD liquidity in offshore markets – the kind of thing that drove USD strength after the Bernanke blew up a bubble in EM that peaked in 2011 and began unwinding at the Fed.

But with China holding the line on its currency and central banks so vigilant in general, would any real aggravation of liquidity problems be allowed to spread for long? Shortly put, it’s a challenge to put together a strong USD narrative outside of individual cases where the local dynamics simply turn more drastically negative than those for the US – for example in Australia and Canada, where the risk of unwinding housing bubbles remain a risk. On the flip side – a persistently weak US dollar is likely only an “easy sell” once we get to the other side of whatever soft patch or worse lies ahead for the US and global economy. A rocky ride with many pitfalls seems the unfortunate risk for USD traders over the next year or two.

Elsewhere, the market has changed its mind about the implications for equities, if not for bonds, where US yields remain pegged near their multi-month lows. Equities roared into gear yesterday, with the major US indices posting strong new local highs and now only a couple of percent from the all time highs last September. The strong risk appetite rebuffs our idea that the yen could lead any renewed bout of USD weakness, though USDJPY has reversed less of the USD weakness than other USD pairs – JPY traders have at least one eye on the US treasury market for direction, where low US yields are yen supportive.

The Brexit endgame has been extended slightly to avoid an outright pressure cooker next week for UK Prime Minister Theresa May as she seeks to get her deal passed for a third time. The EU has granted a two week extension to April 12 to allow May a bit more time to get her deal passed. If the deal is approved by Parliament, the extension will in turn be extended to May 22, the eve of European parliamentary elections, to work out further details. If the deal is not passed, there will be an emergency summit at which the UK must “indicate a way forward” which either means a No Deal or a much longer delay. Sterling backed away from the precipice it was headed over briefly yesterday, but still trades defensively.

Norges Bank delivered with a rate cut yesterday and firm oil prices and strong risk appetite encourage more downside for EURNOK as Norway’s short rates shot up some 6-7 basis points yesterday.

This morning’s Euro Zone flash March PMI’s are an interesting test of sentiment for the euro.

Trading interest

Long USDCAD tactically on dips with stops below 1.3300 for a try toward 1.3500 next week.
Could look to add short AUDUSD position early next week on a weak close for the week today.
Keeping short EURNOK half-position from pre Norges Bank.
Less interest in short EURJPY as long as risk appetite is strong (reduce or take off with small losses from yesterday’s entry).

Chart: USDCAD

USDCAD one of the first USD pairs to unwind the reaction to the FOMC meeting. Arguably, as the US economy and central bank policy goes, so goes that of Canada and the Bank of Canada. And Canada has the added risk of a private leverage bubble in housing that is vastly larger as a percentage of the economy than the US housing bubble ever was. The tactical bullish reversal here looks worth trading for a return back to the higher range into 1.3500+ next week. 
Source: Saxo Bank
Upcoming Economic Calendar Highlights (all times GMT)

0815-0900 – Eurozone flash Mar. PMI’s
1030 – Russia Key Policy Rate Announcement
1230 – Canada Jan. Retail Sales
1230 – Canada Feb. CPI
1345 – US Markit Flash March PMI
1400 – US Feb. Existing Home Sales
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.