Follow-up noise from the Fed in focus
Head of FX Strategy
Summary: Markets remain largely in a buoyant mood on US-China trade deal hopes and in the afterglow of the Fed’s dovish shift last week. With a veritable parade of Fed speakers out today and tomorrow we should have a thorough impression of whether the market remains comfortable that the Fed has its back.
All in all, it seems likely that both sides will avoid measures – like the 25% tariff increase – that would deal immediate harsh damage to economic growth and market sentiment, but that lasting intractable issues remain that will not improve for the foreseeable future. The baseline for expectations, therefore, is that trade war concerns have eased considerably.
For incoming US data, however, it will be interesting to see how behaviour linked to the build up in fear that Trump’s original 25% tariff schedule would go into effect has affected inventory buildups and the risk of drawdown signs as the first 2019 data rolls in.
Yesterday’s enormous $38 billion US 3-year treasury auction saw the weakest demand, as measured by the bid-to-cover ratio, since 2009. This deserves note as a supposedly neutral to dovish Fed from here should make two- and three-year treasuries rather attractive for locking in decent yields. Is this finally a sign that the treasury issuance blitz in the wake of Trump tax reform risks outstripping demand?
Further impressions on the strength of demand in today’s 10-year auction and tomorrow’s 30-year T-bond auction as this week’s auction series will be 39% greater than last year’s equivalent. These auctions and the Fed’s QT remain massive absorbers of capital, with or without a rhetorical shift from Fed chief Powell.
Today and tomorrow should give us a thorough update on the Fed’s thinking as a veritable parade of mostly Federal Open Market Committee voting board members will be speaking. As well, late today we get a look at the FOMC minutes from the December 20 meeting. Let’s recall that the meeting was held in the context of equity markets having broken major support and in a freefall, so we should get a sense of how heavily this weighed in the FOMC’s thinking and despite the backdrop, why they were unanimous in voting in favour of the rate hike and a virtually unchanged policy statement.
An aggressive move lower in USDCAD as the big dovish shift at the December 5 Bank of Canada meeting has seen the Fed more or less following suit – in the market’s pricing of Fed intentions at least. Over the last couple of weeks, heavy speculative positioning caught the wrong way around on CAD, a rally in crude oil, and the Fed’s rhetorical shift have driven a brutal CAD rally into today’s Bank of Canada meeting, which is not likely to deliver any fresh shift after the loud shift in December. So any further CAD strength here will be driven more likely by externalities (oil and risk appetite) while a reminder of the BoC’s prior dovish shift today could see a steep consolidation higher in USDCAD. For a full bearish reversal of the chart, we’ll need to work down through the 61.8% Fibo retracement, 200-day moving average a bit lower and arguably also the 1.3000 level.
USD – EURUSD is the missing piece for a broader USD sell-off as we continue to eye the 1.1500 zone for further potential. Elsewhere, USD struggling against risk-correlated currencies, but the move is pausing a bit here, perhaps as the market second guesses how far it has run with Fed expectations in the wake of Powell’s comments on Friday.
EUR – euro traders are perhaps reluctant to make a statement as long as Brexit issue remains out there as a risk for the EU economy. This could see the EURUSD chart continuing to drag around without conviction.
JPY – follow up rally in yen requires the return of fear and loathing to asset markets. Until then, keeping an eye on the 125.00-50 area in EURJPY for whether the sell-off remains viable and perhaps 110.00 in USDJPY for the same.
GBP – the market is unwilling to react to the latest batch of headlines – earliest we can expect any real movement in sterling perhaps in days after January 15 parliamentary votes as next steps for Brexit emerge.
CHF – eyeing the 1.1200 area in EURCHF as the technical area of interest for whether CHF worth paying attention to. Meanwhile, CHF downside likely needs clarity on Brexit.
AUD – AUD rally stumbling overnight on weak building approvals data, but China’s renminbi at new local highs versus the USD and a strong rally in Asian equities is making it tough for the currency to stay down. Squeeze risk continues if markets remain in positive stance.
CAD – as noted above, the CAD rally is the market neutralising the downside from the prior BoC meeting and fed by oil and risk rallies. The Bank of Canada will be very slow to change its now thoroughly neutral stance after the huge oil price shock of recent months.
NZD – the kiwi isoutpacing the Aussie’s gains again – but AUD is potentially more reactive to good news on US-China trade war détente – watching 1.0550-75 area as a pivot zone.
SEK – SEK is in a holding pattern and rather disappointing for bullish hopefuls that yesterday’s EURSEK sell-off didn’t stick – volatility has yet to pick up again and Riksbank minutes this morning not adding much to the mix.
NOK – EURNOK stuck in neutral in the key 9.75-80 pivot zone, needing a further rise in oil prices and a rally in asset markets, most likely, to power lower into the range between 9.45-75.
Upcoming Economic Calendar Highlights (all times GMT)
1000 – Eurozone Nov. Unemployment Rate
1315 – Canada Dec. Housing Starts
1320 – US Fed’s Bostic (Non-voter) to speak
1400 – US Fed’s Evans (Voter) to speak
1500 – Canada Bank of Canada Announcement
1530 – US Weekly Crude Oil Inventories
1630 – US Fed’s Rosengren (Voter) to speak
1800 – US 10-year Treasury Auction
1800 – FOMC Minutes