Today's Saxo Market Call podcast
Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: USD firm, JPY chasing its tail despite higher yields as weak risk sentiment, Ueda hearings weigh. Commodity FX the weak spot.
Risk sentiment finally went on tilt yesterday as US treasury yields lifted all along the curve to new cycle highs, with the Fed terminal rate now almost fully pricing three more 25 basis point rate hikes, which would take the Fed funds rate to 5.25-5.50% somewhere in the summer time frame. Some very slight yield steepening going on as well, with the 10 year Treasury benchmark yield pulling within a few basis points of the 4.00% level. This is highly awkward for JPY traders as the JPY generally wilts on advancing long US yields, but at the same time we are all anticipating a coming policy shift from the Bank of Japan, with nominee for Governor Kazuo Ueda out testifying before the Lower House on Friday (and the wily Kuroda possible set to make a legacy-defining splash at his final meeting on March 10, all while hedging activity for the coming year is active into the end of the financial year in Japan at the end of March. As long as risk sentiment is under pressure here, I would anticipate that potential BoJ tightening/JPY strength might weigh more on crosses like CADJPY, AUDJPY etc., than it will weigh on USDJPY.
I don’t see tonight’s FOMC minutes tonight weighing much in the balance as concerns have shifted in the direction of incoming data and evidence of rising wage pressures (have a listen to today’s Saxo Market Call podcast, for example, on wages set to rise for Walmart and Home Depot, two very large US retailers). The data points next week from the US are more important than the January PCE inflation data this Friday (although any big surprises for the core data are always worth consideration.)
AUD under a bit of extra pressure here on the Q4 wage growth coming in lower than expected overnight at 3.3% YoY vs. 3.5% expected. We have to remember that RBA has often linked its rate tightening policy with wage growth, so no fresh ammunition here and AU yields at the front end fell overnight. As well, we have steady pressure on the Chinese renminbi over the last couple of weeks as the China re-opening story is struggling for fresh fuel, all while geopolitical concerns are weighing heavily as we wonder how closely China will link itself with Russia’s aggression in Ukraine after the US’ recent stark warning. AUDUSD is trading heavily here on the cycle lows and the 200-day moving average is not much lower. If risk sentiment is set for a down cycle of a week or more, we could be looking at a test down to 0.6600-0.6550.