FX Update: Strange brew
Head of FX Strategy
Summary: Yields closed at new cycle high on Friday and followed through to a degree in trading to start the week today, likely a key driver in spooking risk sentiment in equities. Commodity related FX has been happy to shrug off the usual sensitive to risk sentiment as some commodity prices are white hot, even if EM currencies seem a bit less than thrilled with the steep back-up in US yields.
FX Trading focus: Commodity frenzy, higher yields, Fed’s Powell ahead, CHF move for real?
Some commodity FX ignoring risk sentiment swings: The mood in equities has been rather downbeat since the last record high for the cycle in the US equity market was posted last Tuesday, with the selling in Asian intensifying today on a very weak session for mainland Chinese shares. But the fallout in FX was muffled and inconsistent. Some EM currencies like RUB and MXN and ZAR are decidedly lower, and no surprise there, especially given the sharply higher US treasury yields of the last couple of sessions (more on that below), but there is a notable lack of correlation so far across the EM space. Commodity FX within the G10 preferred to focus on the white-hot action in some metals markets rather than the risk sentiment backdrop, as seen in AUDUSD leaping to a new high for the cycle on Friday before easing back in early hours today as copper and iron ore both pulled back from intraday highs. At some point very soon, if risk sentiment continues south, I would expect it to carry greater and broader weight than it has thus far, and in crosses like AUDCAD, things are beginning to overheat.
Yield rises need to slow to prevent a train wreck: I have emphasized that it may be possible for yields to rise slowly from here without necessarily upsetting the “risk apple cart” – but the pace of rises on Friday and into today have gotten a bit brutal for risk sentiment and – would like for the US 10-year to slow down and fail to take out 1.50% for a while or we may have to don helmets. Rather more remarkable is that the US dollar hasn’t responded much to today’s very weak risk appetite across risky assets – how much can equities correct before triggering traditional safe haven seeking in USD, treasuries, etc., or are we seeing an erosion of the status of these havens? Far too early to tell, and elsewhere, there is hardly a ripple in credit spreads, so the risk sentiment weakening can hardly be characterized as particularly deep thus far.
Fed’s Powell ahead – The Fed really doesn't want to send any new policy signals at this time, as it hopes that a recovery will broaden in Q2 and beyond on the reopening of the economy, helping especially lower paying service jobs to recover. But we'll watch Fed Chair Powell's semi-annual testimony this week before both Senate (tomorrow) and House (Wednesday) committees for signs of whether the Fed's activities are creeping up on politicians' radars, whether in terms of the Fed underwriting budget deficits on a large Biden stimulus (Republican line of attack?), or in terms of aggravating inequalities and over-pumping asset markets (the potential progressive Democrat line of attack). Also important would be any Powell comments on the recent sharp rise in treasury yields - as even a statement of "unconcerned" is the Fed making a point.
What is up with CHF going down? The franc has been sharply weaker lately – some of that is down to GBPCHF flows on the sterling’s strong post-Brexit rally and hopes that the UK will be more quickly ready to open for business after its more aggressive vaccine roll-out. Today it was announced that schools in England are set to reopen on March 9 and outdoor sports and small gatherings will be allowed towards the end of the month. But the most important exchange rate for the CHF status is EURCHF, and that one is having a look at the key 1.0900 area resistance today. Bloomberg ran a story on a group of Swiss economists who advised that the SNB consider looking at the exchange rate more than the interest rate for managing policy – not sure if that played any role in today’s move in particular, but it is a tough argument to make, given that the SNB has long intervened and has been labeled a currency manipulator by the US Treasury. Not sure I want to bite on this move higher – but it certainly bears watching.
Chart: EURCHF weekly
Now here is a chart we practically never post – because it has been so boring for so long – but the EURCHF pair deserves comment if it is somehow able to close north of 1.0900 for a possible revaluation higher still, though it is tough to see how Switzerland can conjure up any strategy to weaken its currency sharply versus the euro given the latter’s more difficult path from here to inflation-generating fiscal, and the fact that . Still, if yields and commodities continue to reprice sharply higher, the CHF could be in for a repricing at the margin – perhaps a run to 1.1000-1.1050 or so in EURCHF, if risk sentiment turns again and yields and commodities rush higher still here in the short term. I’m not holding my breath for much more excitement than that.
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