Federal Reserve Federal Reserve Federal Reserve

FX Update: Brainard delivers latest Fed attempt to impress markets.

Forex 5 minutes to read
John J. Hardy

Head of FX Strategy

Summary:  A hawkish broadside from Fed Vice Chair Brainard yesterday turned the tables on risk sentiment, sending US yields and the US dollar sharply higher. It is still a long wait until the May 4 FOMC meeting, but that meeting is now priced to deliver not only a 50 basis point rate hike, but also the beginning of a “rapid” quantitative tightening regime. AUDUSD is an interesting proxy to watch for the impact of the latest Fed attempt to impress the market after the pair broke above key resistance just yesterday.


FX Trading focus: Brainard delivers latest Fed attempt to take the Fed ahead of the curve

Yesterday, Brainard spoke at a virtual conference hosted by the Minneapolis Fed with a speech titled Variation in the Inflation Experiences of Households. In the speech, she opened the speech with an invocation of Paul Volcker’s stance on the risks of runaway inflation, which “would be the greatest threat to the continuing growth of the economy... and ultimately, to employment.” With his taking the Fed Funds rate to 20% in 1981 to help renewed inflation fears, by the way, by 1982, he had engineered an unemployment rate that reached 10.8% by the end of that year and a stock market index that traded in the summer of 1982 at 28-year lows, adjusted for inflation.

Brainard emphasized that high inflation is an especially heavy burden for lower-income households and said that the various inflation metrics don’t capture how different households experience inflation, with the consumption basket of lower-income households likely having risen more rapidly than for higher income households for many years. Then she went on to discuss the implications of current high inflation on Fed policy, which she concluded would mean “a series of interest rate increases and...(reducing) the balance sheet at a rapid pace as soon as our May meeting”. To that, she added that balance sheet reduction would proceed “considerably more rapidly” than the $40 billion/month of the 2017-19 tightening.

The hawkish broadside managed to surprise a market and take US yields to new cycle highs, with longer yields rising slightly more than the yields at the front of the yield curve as it has been assumed that leaning more aggressively on QT impacts the longer end of the yield curve (the balance sheet debate and impact on long yields was specifically discussed in the January FOMC minutes). In that set of minutes, the Fed took the trouble to emphasize that adjustments to the Fed Funds rate are the primary tool for Fed tightening, while Brainard seemed to be raising the profile of balance sheet adjustments in the Fed’s considerations for the policy mix.

In sum, Brainard’s bringing forward QT lift-off to May and at a “considerably more rapid” pace than in 2017-19 is an aggressive hawkish upgrade of the Fed tightening timeline and suggests that the Fed wants to tighten on all fronts to get ahead of inflation as soon as possible. It will be very interesting to peruse tonight’s FOMC minutes releases for the scale of adjustment in the discussion around possible scenarios for the QT pace relative to the January discussion – especially the Fed’s MBS holdings, although it has already signaled that it would like to shed itself entirely of its MBS holdings over time. There has been a brutal tightening in the US mortgage market this year, where the yield is pushing on 5% and the spread to the US 30-year treasury yield has blown out close to multi-decade highs well above 200 basis points.

Despite the further push higher in long US yields in the wake of Brainard’s speech yesterday, I am increasingly inclined to believe that in the short term, US yields may have a hard time pulling higher still, particularly if a significant deterioration in risk sentiment settles over the market. In FX, this could go a long way to supporting the JPY, and even the Euro, in the non-USD crosses.

By the way – the French presidential election’s first round is coming up fast on Sunday and the second round scenarios (for the April 24 run-off, presumably between Le Pen and Macron) have tightened at a breathtaking pace in recent days, even if Macro remains the strong favourite. He is guaranteed to get a weak mandate at best, and if the first round brings notable surprises that suggest Le Pen has a fighting chance in the run-off, it’s gray swan time for Europe.

Chart: AUDUSD
We look at AUDUSD once again today because it just broke aggressively higher yesterday into the zone above 0.7556, and is therefore one of the most pivotal USD pairs after the Fed’s hawkish surprise. If risk sentiment deteriorates badly, the commodity-angle of Australia may suddenly fail to support the Aussie as the primary concern quickly becomes one of liquidity, where the US dollar always shines. Watching the status of the AUDUSD rally around this pivotal 0.7500-50 area as a proxy for USD/risky currencies in general Many EM currencies have also enjoyed a significant run higher, generally speaking, after the market decided that the March 16 FOMC meeting still showed that the market found the Fed still behind the curve.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Despite Brainard delivering support to the greenback, it is not really showing up because of the recent heavy commodity focus that hasn’t rewarded the US dollar. If US yields ease off in the context of a significant new deleveraging event as noted above, we could have a swing back into mean reversion, with JPY and EUR finding support, while the “smalls” face sudden headwinds.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Watching AUD status in the crosses as noted above after the big break higher in AUDUSD, while watching whether yields are set for some mean reversion after a recent remarkable run higher – if so, JPY crosses are also likely set for a sudden change of pace.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • Poland Central Bank Rate Announcement
  • 1330 – US Fed’s Harker (non-voter) to speak
  • 1400 – Canada Mar. Ivey PMI
  • 1430 – EIAs Weekly Crude and Fuel Stock Report
  • 1800 – US FOMC Minutes
  • 0130 – Australia Feb. Trade Balance

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
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.