FX Update: How much of a debt ceiling lift already in the USD price? FX Update: How much of a debt ceiling lift already in the USD price? FX Update: How much of a debt ceiling lift already in the USD price?

FX Update: How much of a debt ceiling lift already in the USD price?

John Hardy

Head of FX Strategy

Summary:  The recent US dollar rally and backing up of treasury yields may represent a partial front-running of the debt ceiling issue lifting soon. Until then, the market has now neutralized most of the anticipated Fed rate-cutting later this year and is even pricing higher risk of another hike at the June or July FOMC meetings, with important inflation-related data on tap. Elsewhere, the Swedish krona is attempting a comeback from remarkable new lows from the first signs of official intervention.

Today's Saxo Market Call podcast

FX Trading focus:

  • The US dollar has rallied together with treasury yields backing up – is this a partial front-running of the a debt ceiling agreement?
  • Swedish krona – countdown to a more robust official response after latest leg lower reversed today on rhetorical Riksbank intervention.

Trading notes/bias shifts

  • USD: Key support violated in EURUSD and elsewhere, but this did not lead to capitulation. Volatility danger around today’s data releases (PCE and UMich Sentiment) and on debt ceiling deal announcement. Tactically neutral, but eventually looking for a debt ceiling deal to play as USD-supportive.
  • NZD: NZDUSD shorts may look to trim positioning for reloading as long as rallies fall short of 0.6150. Similarly, AUDNZD longs may revert to buy on dips as long as price action remains north of 1.0650.
  • GBPUSD: A sluggish affair lower, shorts may trim positions here, will want price action to stay south of 1.2425-50 to maintain tactical downside view.
  • JPY: back-up in global yields has meant another false starts for JPY bulls trying to spot a comeback, but still favour 3-6 months options for expressing downside view in GBPJPY and EURJPY
  • SEK: have to believe that an official response to shore up SEK fortunes will arrive in coming months, prefer expressing in GBPSEK or EURSEK if bearish reversal develop enough credibility.

USD: watching inflation-related data today, debt ceiling lifting.
Two data points today will help determine whether the US dollar remains bid tactically. These are the PCE inflation data up today, with a core month-on-month surprise in either direction from the +0.3% expected a tactical catalyst for direction. Also remember that the final May University of Michigan sentiment survey will get extra play today after the preliminary release earlier this month saw long-term (5-10yr) inflation expectations in the survey rising to 3.2%, a high above the range since 2011. These may inspire some short term volatility, but the reaction could get quickly drowned by an announcement of a debt ceiling deal-in-principle as soon as today (it’s futile to track this story, as one day’s collapse yields to the next day’s optimism, but the latest according to sources is that a  possible two-year deal could be in the works, though Freedom Caucus Republicans are a risk for scuttling this plan if Democrats can’t be found in favour of making it a bipartisan effort.). The presumption is that eventually, the liquidity pressures from the US Treasury issuing a net $500 billion or so of new treasuries will support the green-back. But how much of this is already in the price? We may soon find out.

Swedish krona – countdown to more robust official response?
The Swedish krona has suffered another aggravated sell-off as the country faces widening concerns of a credit crunch and weak economy on the cratering property market. The local FSA has unhelpfully bemoaned the wobbly property developers, arguing that they should seek to deleverage by raising capital and selling assets. This is impossible in a post-property bust environment as no new capital wants exposure to the sector and listing properties on a market that already faces weak liquidity on shriveling demand would crystallize even worse losses as price pressures would inevitably accelerate. The Swedish yield curve points to the gloomy outlook for the country, as the 2-10 yield curve is almost -65 basis points compared to -71 basis points today in the US despite Swedish 10-year yields trading some 135 basis points lower at 2.43%.

Today, Riksbank Deputy governor suggested that the Riksbank should consider accelerating its quantitative tightening if the currency continues to weaken, Governor Thedéen also weighed in that the krona is a problem, and yet another Riksbank official echoed these comments. Riksbank measures can help to shore up the risk of further downside here, but the powerful medicine would be a clean-up of the property sector and perhaps creation of a “bad bank” to lift the worst assets from banks and allow them to continue providing credit (household lending growth has dropped to the lowest level in a generation in recent months). This and a considerable expansion of Swedish government bond issuance even on top of QT to deepen local sovereign debt markets are needed to get SEK back into its historic range back below EURSEK of 10.00. Let’s see how long this takes, but beginning to get contrarian to further SEK weakness – more on chart below.

A solid reversal in EURSEK today on verbal intervention from Riksbank officials, but it would need to extend significantly to suggest a more robust rejection of the new highs above 11.48, and ideally, a retreat to at least 11.25 together with some more firm sense of a policy response as outlined above is likely needed to suggest a secular top – but we’ll be on watch for that potential.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The SEK weakness has gotten extreme – watching for mean reversion potential now that we are beginning to see more pushback from officialdom. Elsewhere, the JPY continues to push lower on, while the US dollar has already risen considerably ahead of the likeliest time frame for a debt ceiling lifting announcement (coming few trading days). How much is already in the price? And sterling has managed to avoid further turmoil on the unsettling rate spike after the latest inflation print, which raises the risk of the BoE being forced into an economy-cratering series of further hikes.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD is bidding for a flip to positive on today’s close.  Elsewhere, GBPNOK is a remarkable one now, having held the positive trend for 102 trading days without a turn – probably getting old in the tooth if Norway always wakes up and smells the policy coffee on NOK.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (All times GMT)

  • 1230 – US Apr. PCE Inflation 
  • 1230 – US Apr. Preliminary Durable Goods Orders
  • 1400 – US Final May University of Michigan Sentiment/Inflation expectations

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