FX Update: Market eyes US CPI today, ECB meeting Thursday. FX Update: Market eyes US CPI today, ECB meeting Thursday. FX Update: Market eyes US CPI today, ECB meeting Thursday.

FX Update: Market eyes US CPI today, ECB meeting Thursday.

Forex 5 minutes to read
John J. Hardy

Head of FX Strategy

Summary:  Market nerves further frayed yesterday as yields continue to rise and the White House frets an “extraordinarily elevated” US March CPI release today. Also, a sharply steepening yield curve in the immediate wake of sharp flattening demands our attention. Tonight, we watch for a rate hike and guidance from the RBNZ, tomorrow brings likely the large Bank of Canada hike in over 20 years, and Thursday features the between-a-rock-and-a-hard place ECB.


FX Trading focus: US CPI and yield reactions, Bank of Canada, GBPUSD at support, ECB Thursday.

The risk sentiment slide yesterday gathered further momentum as the Biden White House was out fretting an “extraordinarily elevated” March CPI release today. Whether that is simply to prep the general public for the first 8-handle on the headline year-on-year CPI in over 40 years or because it has had a sneak peek at the data and it is even worse than the consensus expectations for an 8.4% reading (and 1.2% month-on-month, with core expected at +0.5% MoM and +6.6% YoY) is impossible to say. A 9% CPI rate could encourage the market to look for a move straight to 1.00% at the May FOMC meeting, something the market has  not yet been willing to price, preferring instead to predict multiple 50-basis point moves.

More interesting than the data itself will be to track the market reaction in longer maturity treasuries after we have seen a strong pivot in the direction of steepening of the yield curve in recent days. As I discussed in this morning’s Saxo Market Call podcast, there could be a couple of ways to interpret this, the most alarming being that the market has become less concerned that projections of Fed tightening are getting too aggressive and therefore eventually risking an incoming recession. Instead, a continued steepening of the yield curve here could suggest that the market thinks that the Fed is not in any way in control of the narrative or inflation yet, with the risk that an inflationary mind-set has taken hold that could suddenly bring forward demand (make large purchases now and generally hoard  what can be hoarded rather than waiting for price rises later) and lead to a scramble for hard assets and spiking monetary velocity. This would trigger the risk of a titanic inflationary bust in the worst instance. Stay tuned.

Somewhat related to that last note, commodity price behavior is another key here, as oil has responded strongly from yesterday’s dip and if you look out the curve on oil prices (forward futures prices next year for example), we have hardly corrected lower. The interpretation is along the lines of: short-term, the demand reduction from Chinese lockdowns in particular and  the supply increases from the huge reserves releases recently announced will keep prices reasonably orderly for now, but the longer term price of oil has been significantly and durable adjusted higher, eroding the argument for a powerful mean reversion in prices in the longer term  – especially as reserves releases today could mean reserves builds tomorrow, particularly in an environment when central banks will question the point of holding negative-real-yielding FX reserves far beyond any basic need for trade transactions, preferring rather to hold actual oil and perhaps gold as well. In short, I am as interested as much in the impact of commodity prices on this environment as I am in central bank moves, which are merely chasing the situation rather than controlling it.

Chart: USDCAD
USDCAD has bounced back to just about the half-way point of its slide from the early March highs inspired by the risk-off meltdown in the wake of Russia’s invasion of Ukraine. One the one hand, CAD  under pressure from weaker risk sentiment of late and the correction in oil, although as we point out above, the market has repriced longer term oil prices significantly higher. And Canada’s trade bounce has pulled out of a long period of large deficits to begin posting solid trade surpluses. The Bank of Canada tomorrow is seen hiking 50 basis points for the first time since 2000. If the focus in coming days is on inflation risks and crude oil rebounds strongly without a strong melt-down in risk sentiment, USDCAD could post a key reversal lower if the BoC encourages the market’s forward pricing of its hiking intentions (currently looking for a BoC policy rate near 2.2% by year end – about in-line with Fed expectations.)

Source: Saxo Group

Sterling is struggling near 1.3000 against the US dollar. Yes, BoE expectations have marched higher this week despite weak GDP data yesterday, but as the February earnings data showed earnings rising at +5.4% clip year-on-year w/ bonus on top of last year’s solid +4.3% YoY for Feb (in other words, not due to some basing effect). The UK economy is severely supply constrained on the same energy spike that will limit real growth and due to labour shortages made far worse by the post Brexit environment. Given the UK’s commodity import dependence and already yawning traded deficits, the country will have to attract heroic amounts of capital to keep sterling imbalances from weighing. Surprised it has held in so well at this point and perhaps the negative focus on the euro is the reason.

The ECB is up Thursday after Friday saw a report suggesting that the ECB is preparing some kind of facility in the event “weaker” EU economies suffer a blowout spike in yields. This double underlines the forward risk that has been bandied about, also in this column, that the ECB may have to continue QE at least for parts of the “fragmented” EU sovereign market, even if it is tightening via raising rates. This doesn’t have to be euro negative if the ECB is willing to send credible signals on stopping balance sheet expansion and the intent to hike rates sooner.

Table: FX Board of G10 and CNH trend evolution and strength.
The commodity currencies have eased back on the latest risk off and commodity consolidation combo, but could be ready for a renewed charge. Elsewhere, watching for whether the USD could be toppish for the same reason, when Japan’s Ministry of Finance will scream “uncle” and for any NZD bump from the RBNZ to be faded.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Watching gold and silver for potential signal on commodities and therefore commodity FX as well. Also note that USDCAD is pivotal as noted above ahead of the Bank of Canada meeting. otherwise, the loudest thing on the FX board is the cold blue ATR reading for USDCNH – ahem.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Mar. CPI
  • 1610 – US Fed Vice Chair Brainard to peak
  • 2300 – US Fed’s Barkin (non-voter) to speak
  • 0030 – Australia Apr. Westpac Consumer Confidence
  • 0200 – New Zealand RBNZ Official Cash Rate

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.