Head of FX Strategy
Summary: The US dollar is tumbling as US treasury yields have also corrected sharply lower, with conspiracy theories rife on the idea that the Fed wants to avoid making waves ahead of an important mid-term election, with the Treasury possibly piling on with thoughts of treasury “buyback”, purportedly to improve market liquidity. With this move, the market will begin to wonder if the US dollar has peaked for the cycle, but such talk looks premature.
FX Trading focus: Dollar down, but may not stay down for long.
The US dollar has tumbled since yesterday, mostly on the drop in longer US treasury yields, with the move lower in yields and the US dollar persisting in today’s European session as yields continue to run lower. The US 10-year treasury yield benchmark is already back near the 4.00% level that was important on the way up. Key technical levels have fallen in most important USD pairs, including the parity level in EURUSD, the 1.1500 level in GBPUSD, and the 0.6400 area in AUDUSD. USDJPY is also under pressure, trading below 147.00 as of this writing, with the next important level up at 145.00, a level I have a hard time seeing falling unless US treasury yields drop well below that 4.00% mark.
The proximate trigger for the move yesterday, judging from its timing, was arguably the release of the August S&P CoreLogic Home price data, which showed the 20-city index dropping -1.32% MoM, far more than the -0.8% expected and with the July data revised some 25 bps lower to -0.69%. Given that 15 months ago, US mortgage rates were still only 10 basis points above record lows and then rose to more than 20-year highs by late September, we can expect a further brutal correction in housing prices. Less noticed was the ugly drop in the US October Consumer Confidence survey, where the present situation index fell sharply and to a new 18-month low. This survey correlates tightly with the jobs market.
As we discussed on this morning’s Saxo Market Call podcast, a few “events” and signals have encouraged a conspiracy theory that the Biden Administration is doing all it can to tilt the odds going into the US mid-term elections, with the Fed helping by wanting to avoid attention entirely. The most important for the US dollar and US yields in the near term would be the idea that the Fed doesn’t want to make any further waves for the moment and would prefer to fly under the radar at next Wednesday’s FOMC meeting. It probably would want to wax a bit less hawkish soon anyway, given that expectations for the Fed Funds rate had reached the psychologically significant 5.00% level recently. The WSJ article at the weekend from “Fed whisperer” Nick Timiraos added some fuel to this narrative. As well, US Treasury Secretary Yellen expressed interest earlier this week in carrying out treasury “buybacks”, supposedly to improve market liquidity after consulting with primary dealers. Such buybacks make some sense, given that the Treasury can reduce the nominal national debt burden by retiring low-coupon debt trading at a significant discount to par and then refinancing at higher rates. Then again, it’s just a shuffle beyond the very short term, as issuance would simply have to increase by the same amount down the road as committed to such buybacks now.
So – how long can the squeeze on USD longs stretch? Arguably, at current levels, the market has front-run a bit of a dovish shift in the Fed at next Wednesday’s FOMC meeting, so that will be the next key test, with the immediate test in tactical, price action terms around the levels noted above in key USD pairs that were taken out yesterday and this morning. The window of the next two weeks (through the tabulation of the mid-term results after the Tuesday, November 8 election) is an important test of the secular USD trend, to be sure.
Chart: EURUSD
EURUSD surged above the local resistance briefly already on Monday, but followed through with more force yesterday after the release of the latest house price data in the US, with the parity level falling this morning in European trading. That level was pivotal, as is easily visible on the chart, but ahead of it, the extremely well defined and persistent falling trend channel was already broken. If the move holds, the next obvious focus is on the pivot high near 1.0200, with an even more significant level up at 1.0350. Sentiment has brightened in Europe as the pressure on gas and power prices has eased tremendously in the wake of panic topping up of gas storage facilities just as fresh LNG ships have arrived with nowhere to put the gas in the face of extremely balmy weather across much of Europe. But forward prices know that Europe’s energy woes are far from solves. Also, let’s not forget we have an ECB meeting tomorrow, where the ECB may struggle to stay credibly hawkish beyond the expected 75 basis point hike, with longer term credibility issues around its QT plans and how it avoids “fragmentation” on weaker peripheral bond markets. But EURUSD bears would need a sharp reversal back through 0.9900 to suggest that this move has been a false dawn.
The Bank of Canada is set to hike rates 75 basis points today after the hot September CPI report last week, a move that is mostly priced in, but at the same time, the market is expecting a sharp deceleration in the tightening trajectory after this meeting, with only another 50 basis points of tightening priced through the March BoC meeting of next year, so guidance will be important in the statement today and in the Governor Macklem press conference that follows. USDCAD ha a bit more room to run without fully reversing the trend, due to the scale of the run-up in September and October, but 1.3500 looks important ahead of the far bigger and more trend-defining 1.3200 level.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD is on the verge of registering a broad, negative trend reading and has crossed below support in a number of places, but will need to hold these breaks on today’s close at minimum to suggest a new trend is afoot. Elsewhere, the CNH is trying hard to rally today, but the broad down trend is well in place. AUD has jumped in recent days, but likely to trade as an “anti-USD” from here.
Table: FX Board Trend Scoreboard for individual pairs.
The next new USD down-trends are in USDNOK and USDSEK, with NZDUSD and USDCAD trying to cross into USD-negative status today and AUDUSD shortly to follow if it can hold above 0.6400. And look at EURGBP suggesting a new down-trend in EURGBP. Will believe that if the pair can continue lower through 0.8575.
Upcoming Economic Calendar Highlights
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
