USD perched near highs ahead of pivotal FOMC

Forex 7 minutes to read

John Hardy

Head of FX Strategy

Summary:  The greenback is eyeing its highs for the cycle ahead of an FOMC meeting this week that is expected to bring a dovish hike from the Powell Fed. Signs of a widening credit crunch will certainly see a more cautious Fed, but is this already in the price for the big dollar?


A pivotal week ahead after Wall Street closed last week on a sour note near key support levels stretching back to the beginning of the year (the 2600 area in the S&P 500, for example) and the ugly drawdown in equity markets in February. Signs of a widening credit crunch are intensifying in corporate credit, where the FT notes that “December on course to be first month without junk bond sale since Lehman crash” (paywall) and over at Bloomberg, John Authers discusses financial stocks globally and frets whether they are the “canary in the coalmine” for global asset markets, given their tendency to lead the market to the downside in times of turmoil.

This brings us to the matter of this week’s Federal Open Market Committee meeting. Fed chair Powell has been rather clear in expressing his belief that inflation is not a factor driving risks to the economy, and that financial stability is perhaps the most important factor in what drives cycles of economic weakness.

Coming into this week, the alarm bells are sounding in corporate credit and the US dollar is perched at its highest levels since early 2017. It is clearly time for the Fed to blink and that is what the market is pricing – but how profound will the actual blink prove on Wednesday and is the market watching the Fed or has the credit crunch taken on its own momentum that will only be reversed when the Fed not only blinks, but goes into full reverse? 

The US risks another government shutdown ahead of the New Year as Trump demands border wall funding and can’t get it from what will be an increasingly obstreperous opposition next year as the new Congress commences on January 3. The GOP willingness to join battle over the border wall appears less than enthusiastic.

Elsewhere, Brexit dominates the focus in Europe. After EU leaders roundly rebuffed Theresa May’s attempt to alter the existing Brexit deal last week, the markets are at a loss for what happens next. January 21 is the last date for a vote that will see an inevitable rejection of the deal and sterling will likely remain in a nervous holding pattern, particularly as May has taken up a position for now against a second referendum.

Chart: Dollar index

The dollar index posted brief new highs for the cycle on Friday before pulling back slightly into the close ahead of this week’s FOMC meeting. Two factors to look for this week are of course the degree to which the Fed brakes its policy tightening trajectory, but also whether the market finds a more cautious message sufficiently encouraging to boost risk appetite. If so, the dollar may have peaked for now, but if the credit crunch has taken on its own momentum, any Fed downshift may be too little, too late for now. 
The G-10 rundown

USD – the most dovish surprise scenario (low odds) would be a no-hike from the Fed and the most hawkish surprise would be a statement that doesn’t sufficiently address the market’s concerns.

EUR – the Italian budget issue has faded for now, only to crop up next year. Instead, Brexit concerns, German banks and concerns that the EU recovery is cratering are on the menu and could drive new lows in EURUSD if the market mood doesn’t improve. 

JPY – the yen has found little support from the backdrop of falling rates and weak risk appetite and refuses to stand out here in the crosses. Remarkable to see USDJPY perched near the highs despite the decline in US long yields from their highs.

GBP – until the market can get a clearer sense of where the Brexit process is headed, 0.9000 in EURGBP seems the local magnet and implied volatilities will remain very high. Sterling is already quite profoundly discounted.

AUD – employment data up this week, but multi-year lows in the unemployment rate, for example, at a time when Australia clearly in the throes of its own credit crunch linked to its long-standing housing bubble remind that employment is a badly lagging indicator. AUDUSD is trying to break lower as new lows since early November trade, but the status of the break won’t be clear until the other side of the FOMC meeting this Wednesday.

CAD – prefer CAD over AUD and NZD, but all of the small developed market economies dealing with some version of a credit crunch linked to housing sector excesses. CAD has recently dealt with the additional issue of the flap over the arrest of Huawei’s CFO.

NZD – the kiwi’s star has faded after last week’s sell-off and its brief status as strongest G10 currency is likely done for now. NZDUSD posted a sharp technical reversal on Friday in falling well back below the 200-day moving average and other pivot lines.

SEK – the Riksbank meeting this Thursday the main event for SEK, with global markets, the Swedish economy (negative QoQ GDP posted in Q3) and recent inflation tendencies not where the Rikbank wants them for delivering a hike this week. A normalizing Riksbank, whether it hikes this week or not until February, is one that it is admitting that QE and negative rates don’t work and recognizing that failure – not one that is normalizing policy due to an improving economic outlook or inflation risks. 

NOK – the krone continuing to suffer on weak risk appetite and moribund price action in Brent, and there was no hawkish spin on Norges Bank last week, even if their outlook looks too optimistic. If EURNOK rallies above 9.75-9.80, the Norges Bank may more explicitly link hike plans to defense of the currency.

Upcoming Economic Calendar Highlights (all times GMT)

• 1000 – Eurozone Nov. Final CPI
• 1330 – US Dec. Empire Manufacturing
• 1330 – Canada Oct. International Securities Transactions
• 1400 – Canada Nov. Existing Home Sales
• 1500 – US Dec. NAHB Housing Market Index
Disclaimer

The Saxo Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.