Head of FX Strategy
Summary: The US dollar peaked out and then rolled over this morning, generally failing to show a discernible reactivity to the US debt ceiling deal announcement as recent strength may have been on front-running the actual news. US treasury yields have eased back lower since Friday, USDJPY is showing signs of wanting to consolidate recent gains. Elsewhere, the SEK and NOK are eyeing fresh cycle lows on Sweden’s rate sensitivity and tumbling gas prices, respectively.
Today's Saxo Market Call podcast
FX Trading focus:
Trading and bias notes:
USD: debt ceiling deal not serving as a catalyst.
The deal-in-principle between Republican House speaker McCarthy and the Biden White House will hopefully punt the debt ceiling issue to the other side of the November 2024 US election. We will still need to see the deal fully passed by both houses and by President Biden in coming days, but the market looks set to put this issue behind it for now. There hasn’t been much in the way of a reaction function, with US yields easing back a bit lower at the long end of the yield curve. (Are we supposed to believe because it a) makes investors feel safer to buy longer term US debt or is it b) a function of the market pricing the Fed to prove less dovish now that it won’t have to worry about the impact of a prolonged stand-off on government spending and thus likely more successful in bringing about a recession that is probably needed to slow inflation more significantly?)
Before drawing too many conclusions, it’s important to note that the impact will have to be measured in coming weeks and months rather than days, as the implications play out in the shape of the US treasury rebuilding its reserves to the tune of some half a trillion USD or more in net issuance. That’s a lot of liquidity absorption at a time when the Fed is also doing QT. Back at the end of 2021, the Treasury’s reserves were similarly depleted in mid-December and were rebuilt to over 700 billion by early February, but banks were awash in reserves at that time and Fed QT had not yet started. Nonetheless, that period in early 2022 saw the first real break in the equity market since the pandemic lows. There seems little fear afoot in risk sentiment this time around, but as we discussed in this morning’s Saxo Market Call podcast, market internals are not pretty, with the gains in the big indices in recent days almost entirely due to enormous impact on select stocks linked to AI. As well, it is worth once again noting that the US Treasury’s drawdown of its reserves has more than offset overall Fed QT this year.
US yield curve inversion, consumer confidence in focus as recession indicators
The US yield curve has been inverting again as the market prices the Fed to stay higher for longer and possibly even hike once more in June or July (almost a full 25 basis-point rate hike priced through the July FOMC meeting and the December FOMC pricing has bobbed back to 5.00. The yield curve has inverted back toward -80 basis points for the 2-10 slope, needing weak data now to stop . A brief reminder that yield curve inversions are a profound indicator for recession risks, if a very imprecise one. Back before the financial crisis, the yield curve inverted as early as early 2006, almost two full years before the economy entered a recession in late 2007. This time around, the yield curve begain its sustained inversion in July of last year. We noted in today’s podcast that the last two cycles of 2000-1 and 2007-08 have seen the yield curve steepening proceed other indicators like the Present Situation component of the US Consumer Confidence beginning to deteriorate relative to Expectations (which are already in the gutter). Today sees the May release of that US confidence survey.
Chart: USDJPY
Watching USDJPY here after the run above 140.00 that has coincided with the recovery in US treasury yields, in part on the anticipation of the debt ceiling lifting. US yields peaked Friday and have come back lower, offering the JPY some support. Today, USDJPY has been choppy on Japan’s finance minister Kanda out with verbal intervention (oddly producing a brief USDJPY rally before it settled back lower). USDJPY will stay very sensitive to developments in US yields, but if the long end of the US treasury yield curve stays capped, pressure may be on the pair to fall back toward the 200-day moving average or at least to the 138.00 area that was broken on the way up.
More scandie woes as EURNOK and EURSEK eye highs again
The remarkable Eurozone natural gas situation (discussed in this morning’s podcast) that could see natural gas prices dropping almost to zero or even below ahead of the heating season has EURNOK testing the highs for the cycle as the Norges Bank FX purchases were excessive relative to incoming tax revenue from the oil and gas producers over the last month. Tomorrow sees the Norges Bank announcing its intended daily purchases/sales for June. Given developments in gas and NOK, these should be set to zero from their May pace of NOK 1.4B/day! Watch for NOK reactivity around this data release tomorrow at 0800 GMT.
Elsewhere, the Swedish krona got almost nothing out of the Riksbank’s first real verbal attempt to check the market last week with verbal intervention on the currency last week. Credit to the economy continues to crater, with yesterday’s April Household Lending survey dropping to 1.9% year-on-year, the lowest since the mid-1990’s. Somehow Sweden reported a slightly firmer GDP than expected in Q1, but the credit and other recent numbers suggest the economy is likely at stall speed or worse, as Sweden remains supremely vulnerable to the impact from rising yields on private disposable income. EURSEK just popped to a new high since the financial crisis above 11.62 as I am writing this.
Table: FX Board of G10 and CNH trend evolution and strength.
USD playing a “sell the fact” pattern on the debt ceiling deal here the first day after the long weekend? Hard to know, but it will take some doing to reverse the USD uptrend. Elsewhere, note the extreme woes in the Scandies and the sterling finally pulling stronger after a very misleading reaction to the inflation data last week that prompted our concern.
Table: FX Board Trend Scoreboard for individual pairs.
USD pairs are all in bull mode – with GBPUSD and USDCAD with the least positive signals. Elsewhere, watching JPY crosses broadly for whether the yen can put up a fight here.
Upcoming Economic Calendar Highlights (All times GMT)
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
