FX Update: Markets remain in a bad place even as Fed fails to pile it on.
Head of FX Strategy
Summary: Markets tried to put together a rally on hopes for a Russia-US summit taking place, but nothing has so far been confirmed and markets are slipping back into a funk after a weak close on Friday, with FX providing little in the way of compelling narratives outside of clear safe haven seeking in the Swiss franc. The latest noises since late last week from the Fed suggest that some Fed members are content with the market pricing a series of rate hikes this year, if not a fifty basis point move in March.
FX Trading Focus: Geopolitical fog, Fed content with
I dedicated most of my update last Thursday to discussing the sentiments and ideas expressed in a piece by the influential Zoltan Pozsar, who aired the idea of the Fed focusing on equality and pressuring asset markets as a way to suppress services inflation rather than simply lurching into a string of rate hikes that won’t do anything to address the goods inflation that was kicked off by supply chain constraints and risk merely bringing sharply forward the next recession. From comments on Friday from key Fed officials, it looks like Pozsar’s voice is a random one in the wilderness so far: Vice Chair Brainard said she though it would be appropriate a string of rate hikes at the March meeting and do “runoff” of the balance sheet “in the next few meetings”. Meh – this is about where the market is anyway. The NY Fed’s Williams (voter) made similar comments and specifically pushed back against the idea of a 50 basis point move at the March 16 FOMC meeting. So at this point, outside of St. Louis Fed president Bullard, there is no general sense of fresh Fed urgency to catch up with the curve. In a meeting with some colleagues and friends far more enlightened than I am, the plausible idea was forwarded that some of the Fed rhetoric, even from Powell himself, suggests that the Fed is simply content to see a solid pace of future tightening priced into the forward curve and feels that this is already delivering a tightening, even as the Fed mysteriously failed to cut QE short and will be adding to the balance sheet for another couple of weeks.
There are two things to consider here as we await the next steps from the Fed: first, is the degree to which US yields are being held down by geopolitical tensions linked to Ukraine and Russia’s intentions there and second, that the bar is now much lower for Chair Powell himself to surprise again on the hawkish side, if he feels compelled to do so. (Arguably, that chance was lost in not cutting QE short as noted above.)
By the way, ahead of the FOMC meeting on March 16 we are awaiting the following: this Friday’s Jan. PCE Inflation data point, overdue semi-annual testimony from Fed Chair Powell before Congress (still not on schedule – has never been this late that I can recall….), next Friday’s Feb. jobs report and then the Feb. CPI print on
Otherwise, observing this market is extraordinarily difficult with the overlay of geopolitical concerns and currencies are not the center of the action, though we are seeing the US dollar coming back slightly bid today on the fresh “risk off” with the JPY also firming again and USDJPY below tactically pivotal 115.00. Above all the Swiss franc is seeing the most strength with the current backdrop (more below on that).
US markets are closed today for the Presidents Day holiday.
The market remains extremely alarmed by the situation in Ukraine and Russia’s intentions there, with EURCHF seemingly the purest proxy for market sentiment connected to the situation there. As well, EU yields have reversed hard back lower after their recent breakout. Suddenly, after poking at 1.0600, the action has slammed back south of 1.0400 and could take aim at the cycle lows of exactly 1.0300. Given the source of concern, would expect the SNB to put up a rather stout defense if the cycle lows are challenged.
Table: FX Board of G10 and CNH trend evolution and strength.
The strong gold trend continues, with CHF picking up a bit on safe haven seeking, while the odd-ball strong sterling also continues, with risk-vulnerable Scandies weak on the European angle of the current geopolitical tensions.
Table: FX Board Trend Scoreboard for individual pairs.
A number of possible trend changes in play, as USDJPY showing signs of rolling over, if still within prior range, while the EURUSD up-trend never blossomed and we are awaiting next steps after the fresh stagnation (arguably, the same thing as USDJPY is showing inversely). Also watching EURJPY for a proper trending move to the downside.
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