FX Update: We are nearing peak tightness. FX Update: We are nearing peak tightness. FX Update: We are nearing peak tightness.

FX Update: We are nearing peak tightness.

Forex
John Hardy

Head of FX Strategy

Summary:  After US yields and the US dollar leaped to the strong side again after a mostly in-line US September jobs report, the only question for investors is whether we are nearing peak tightness from the Fed or still have some weeks or even months to go before “something breaks”. The USDJPY exchange rate, for its part, is breaking higher, trading significantly above 145.00 for the first time since Japanese officialdom checked a prior rally above that level over two weeks ago. The Thursday US September CPI release is the calendar highlight of the coming week.


FX Trading focus: We are nearing peak tightness

The US September jobs and earnings data was hardly riveting stuff, but the market reacted strongly to it, nonetheless, as US yields tore back to the highs for the cycle at the front end of the curve and the US dollar stormed higher on the combination of higher US yields and weak risks sentiment. The key development that may have driven the reaction was the official US unemployment rate dropping back to the modern record low at 3.5%. This suggests the Fed will have to stay on message for now with its tightening regime. As well, the broader U-6 unemployment rate dropped back to its record low of 6.7% as well, after rising 0.3% to 7.0% in August. Next steps will be the September US CPI print this Thursday and the Retail Sales data for September on Friday. The latter suggest a rather slow pace of spending growth, with core “less Autos and Gas” sales generally sliding in month-on-month comparisons since early this year.

A spike in geopolitical angst is not helping as we start a new week as the US moves ahead with further measures to cinch off semiconductor sales to China and on Russia’s response against Ukrainian civilian targets after unknown operatives significantly damaged the Kerch bridge, the only road link between the Russian mainland and the Crimean peninsula.

Chart: AUDUSD
The RBA dovishness is aggravating inflation risks for Australia from a currency angle as the currency hits new lows versus the USD for the cycle below the prior cycle low of 0.636. Worth noting that the exchange rate has only seen one monthly close below the current level since….2003. A couple of interesting data points are up tonight in Australia, including the latest Westpac Consumer Confidence Survey, Household Spending Survey (was up 15% in August!) and NAB Business Confidence survey. The Aussie weakness also felt heavily in the crosses here, as AUDCAD drops to new lows and AUDNZD is threatening the key 1.1250 area again, which it may not survive on a third test.

Source: Saxo Group

Two things worth watching in Asia this week if US treasury yields stick at these high levels or trader higher still: whether USDJPY becomes a bit unhinged and rips toward 150.00 if the Bank of Japan/Ministry of Finance maintain radio silence for now. This is possible if the intent of the prior round of intervention was more to check the pace of JPY weakening rather than defending any absolute level. And if the USDJPY rate does continue notably higher, the pressure may pick up on the USDCNH rate to pull to new highs after not really sticking the move above the prior high water of 7.20 (traded to nearly 7.27 on September 28, only to close the day back below 7.20.). The pressure is building on USDCNH and the volatility is coming at an awkward time for the Chinese political calendar.

As far as the title of this article: I do believe we are nearing peak Fed tightness, and that is likely to mean that we are nearing peak US dollar as well, although I don’t have a sense of whether we are already “there” or have another 25-50 basis points to go at the short end of the yield curve. As well, the USD rollover to weakness could take two-three years or even longer to develop into a new trend, if we look at how prior major regime shifts unfolded in 2001-2003 and in the incredibly protracted 2008-2014 experience. That would make sense in the context of the current cycle as the USD will still retain a liquidity premium as the world goes through recessionary dynamics that will likely prevail wherever this bear market in equities bottoms out in the perhaps year to eighteen months ahead.

Table: FX Board of G10 and CNH trend evolution and strength.
The surge in oil prices after last week’s OPEC+ production cut announcement offering CAD and NOK a helping hand in some of the crosses. AUD is getting the worst of it here as the RBA dovishness sits poorly in a rising yield environment. As noted above, watching CNY and JPY closely here.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD looking heavy again as 1.1250 is a kind of bull/bear line (and a close below would conveniently see our trending indicator turn negative as well). Elsewhere, NOKSEK looks close to pivoting higher on the comeback in oil prices, while the new EURGBP “uptrend” looks far from convincing tactically.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1300 – US Fed’s Evans (voter 2023) to speak
  • 1300 – ECB Chief Economist Lane to speak
  • 1700 – US Fed Vice Chair Brainard to speak 
  • 2200 – Australia Sep. CBA Household Spending
  • 2330 – Australia Oct. Westpac Consumer Confidence Index
  • 0030 – Australia Sep. NAB Business Conditions/Confidence
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.