Head of FX Strategy
Summary: The Fed will find it difficult to concoct a coherent message on why it has provided so much policy easing and is cutting rates again today, even as the economy is supposedly in satisfactory shape and equity and risk appetite are reaching for the sky. Elsewhere, a Bank of Canada meeting is also up later, and the Bank of Japan announcement will arrive overnight.
Tonight’s FOMC meeting sees the Powell Fed faced with the tough task in framing their recent resumption of balance sheet expansion and cutting rates even as the US economy is supposedly performing well. As well, how does the Fed provide forward guidance without either goading markets into a further melt-up on the one hand or engineering a possibly ugly correction on the other? Guidance on the policy rate therefore will likely lean heavily on “based on incoming data” while the discussion of the balance sheet expansion is a more awkward affair as the Fed may be at pains to skirt the simple truth that it must begin to resume balance sheet expansion and lose control of its balance sheet if it wants to maintain control of policy rates (and if the US government wants to continue running ever larger deficits that are crowding out liquidity and funding elsewhere in the system). In effect, one can argue that the Fed is doing MMT already, but simply MMT driven by Trump’s supply side tax reforms that leave gaping holes in the budget, rather than MMT designed to direct additional spending on large-scale investments in infrastructure or other large scale projects. Regardless, the interesting bit is how this market reacts to whatever the Fed delivers, given what it is doing and the complacency it is expressing.
Elsewhere, the Bank of Canada set to meet today and could surprise the market if it sounds the least dovish note, given the scale of recent CAD strength and Canadian short yields pulling to new highs since early this year as the market has almost removed all anticipation of rate hikes, now that the 2-year rate is trading just a few basis points lower than the 1.75% policy rate.
Brexit has been shelved now that the EU has granted a delay until January 31 and Boris Johnson finally got his druthers and we are headed for a rare December election, December 12, to be specific. There are a number of ways this can hasten Boris Johnson’s path to the Brexit deal as currently agreed or open for all manner of mischief, from a fight over the terms in the deal to the calling of a new referendum – with Remain as one of the options – if a determined Remain vote shows up at the election and results in a hung Parliament. The great John Authers over at Bloomberg outlines how the risk of outcomes has dramatically raised the probability (if still a rather slim one) of an eventual Remain.
Chart: USDJPY
With US long yields at pivotal levels (US 10-year benchmark within a few bps of the 1.90% high from September) and both the FOMC and BoJ to meet inside the next 24 hours, together with the blitz of important US economic data starting Friday, USDJPY volatility should pick up from here as the pair also trades at pivotal levels around 109.00. Arguably some kind of upside down head and shoulders style formation neckline is in play here, but certainly also the flat-line resistance of 109.00 is very clear and the 200-day moving average is conveniently making an appearance as well. Higher levels likely require higher bond yields, further strength in risk appetite, etc., and a pivot back lower the opposite.
The G-10 rundown
USD – likely to hinge on the dovish/hawkish impression from the Fed and whether bond yields pivot strongly either way – with lower longer yields and risk off more USD supportive.
EUR – weak confidence surveys out of Europe this morning as Europe is crying out for a new policy response that the ECB can’t really give. And President-to-be Lagarde has already been out today discussing uneven playing field on fiscal among EU members.
JPY – as we note above, JPY crosses possibly pivotal on the incoming FOMC and BoJ meetings, where the focus is on whether a pivot back to lower yields brings the yen some relief after its recent run lower.
GBP – the election scenario doesn’t clear anything up and actually opens some daylight for a full Bremain scenario – the polls will bear close watching and incoming data not likely to provide much fundamental support in the interim.
CHF – a breakout in yields to the upside apparently more needed than the generally complacent risk appetite backdrop to break EURCHF up through the line of resistance above 1.1050.
AUD – the AUDUSD rally pulling into the last bits of the local range here – looking pivotal on the USD view here – with the full pull above 0.7000 needed to really begin neutralizing the long established descending channel.
CAD – again, both BoC and FOMC up today – 1.3000 the pivotal chart level if the USD is weaker post FOMC and the Bank of Canada shows it is comfortable with market assumptions.
NZD – AUDNZD on the bid again – potential toward 1.1300 eventually, but may need further catalysts as rate spreads still flat. The ANZ business survey up tonight in New Zealand.
SEK – EURSEK needs to turn tail here ahead of 10.85 to suggest the recent rejection of the prior rally was supposed to generate further bearish potential.
NOK – EURNOK looked like it might be flashing signs of exhaustion yesterday when Norges Bank’s Olsen strongly indicated that he is looking through the current NOK weakness and not raising any alarm bells yet: “To the extent that we think the krone movement is a fluctuation and may swing back again, then in that sense we would look past it.”
Upcoming Economic Calendar Highlights (all times GMT)
The end of the road
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