FX Update: Could market front-run next Fed move despite FOMC non-event tonight?
Head of FX Strategy
Summary: Yesterday, US yields spiked back higher, reminding traders of their importance as the implications were felt across markets, particular in the hyper-yield-sensitive JPY. EURJPY popped a new top as well as the German Bund eyes a major support level. Tonight, focus shifts to the FOMC meeting, where the Fed is likely to say nothing new, but the market may yet try to front-run an eventual tapering move anyway.
FX Trading focus: JPY touchy as EU, US yields on the rise again ahead of FOMC tonight
Rising US yields caught the market’s attention yesterday, a development that has followed through today and seen a significant rise in core EU yields today, as I cover below in the discussion of what has driven EURJPY higher today. The proximate trigger for the jump was theoretically the result of the 7-year US Treasury auction yesterday, although its metrics didn’t show any deterioration relative to the prior auction. Rather, I wonder if the market is front-running the Fed’s eventual need to taper as I discuss in the FOMC preview below.
In an case, the ever yield-hypersensitive JPY was the chief mover on the back of US yields yesterday and US- and EU yields higher today and that will likely remain the case until a) US real yields fail to continue tracking the rise in US nominal yields and b) if the ECB were to bring a similar indication of an explicit yield cap, a move that looks too bold and unnecessary for an EU economy that is on the cusp of opening up in the months ahead and where the manufacturing sector is already on fire (EU flash Apr. Manufacturing PMI registered 63.3, highest for the cycle).
Elsewhere, the Australian dollar wilted on a much weaker than expected Q1 CPI, but less than one might have thought likely, given that iron ore and copper finally consolidated a bit after their recent relentless rise yesterday. Too early to draw conclusions on AUD and AUDUSD, as I suspect the market – outside of JPY – is largely waiting for the FOMC for next steps.
FOMC – market to “react” despite no new guidance?
There is significant speculation that the Fed is going to have to move far faster to indicate a taper of asset purchases than it thought was likely before. And perhaps this is true: another several weeks of collapsing US weekly claims numbers in the US would likely begin to wear on FOMC members’ nerves, as would a hefty CPI print for April and May, their declaration of “transitory” inflation notwithstanding (but it would be the combination of a labor market vastly improving that is likely the key, as inflation alone would take far longer). There are widespread reports of “negative unemployment” in many places in the US, where especially lower-paid jobs can’t be filled as benefits recipients are happy to sit on their stimulus checks and benefits (not set to run out until September).
Bottom line: I am fairly convinced, together with consensus, that the Fed is going to make another show of its commitment not to alter guidance just yet, with no mention of a timeframe for tapering or any other notable hint in tonight’s policy statement, touting the desire to wait for outcomes rather than anticipating them beforehand. Then again, yesterday’s move in US treasuries suggests to me that the market may be willing to front-run what it thinks is coming at the next meeting anyway – so we may get a Fed that says virtually nothing but a fairly strong market movement in the wake of the meeting anyway if the market is hot to price in the Fed's eventual taper-capitulation some time over the summer.
If the above scenario plays out, US treasury yields would likely run higher again. And that would theoretically be USD supportive, and likely would be at first blush in USDJPY, but we will also have to keep an eye on yields elsewhere and the spread to the US yields (Bunds, etc.) , as well as whether real yields are failing to keep up with new nominal yield rises in the US, which would prove less USD supportive than the last cycle of yield rises from the beginning of this year. Another factor is the degree that any new rise in yields unsettles risk sentiment and how EM- and commodity currencies react to that.
Chart: EURJPY attacks new highs as Bunds at cycle high yield
While US treasury yields were the focus late yesterday, the rise in yields across the EU, and in particular in Bunds deserves attention here as Bund yields rose close to their cycle top near the -20 basis point level (there was a previous double top in yields at the beginning of the year and just after the pandemic panic last spring a bit higher at -15 bps – but safe to say that this is key territory for the Bund. A break above there and follow through higher for EU core yields can really start to buttress the fundamental support for the EURJPY rally, assuming real yields are not in play and only the simple fact that the BoJ has declared a cap on 10-year JGB’s at 0.25% while the ECB only complains when yields rise (that could change, of course, but the ECB is doing plenty already and the EU economies are set for opening up in the months ahead).
Table: FX Board of G-10+CNH trend evolution and strength
The yield-sensitive JPY has cratered again on the back-up in global bond yields as the Bank of Japan’s explicit yield cap on 10-year JGB’s. Elsewhere, rising yields also have the recent gold rally wilting, while developments elsewhere are still to weak to garner much attention, save perhaps for the petro-currency NOK enjoying broad strength as EURNOK has another go below 10.00 after failing sustain a move below that level on the previous attempt.
Table: FX Board Trend Scoreboard for individual pairs
The EURUSD rally continues to post the strongest trend reading. In terms of new developments, perhaps the most interesting one is the plethora of new CAD long signals. Among these, I like the AUDCAD short signal, although that pair generally correlates quite well with AUDUSD, where the bears need another impulsive sell-off to have a case.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Mar. Advance Goods Trade Balance
- 1230 – Canada Feb. Retail Sales
- 1400 – ECB President Lagarde to Speak
- 1800 – US FOMC Meeting
- 1830 – US Fed Chair Powell press conference
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.