FOREX 6 minutes to read

Growth fears accelerating ahead of FOMC

John Hardy

Head of FX Strategy

Summary:  The market is clearly betting on a significant shift in outlook from the Fed. Elsewhere today, Brexit dynamics to accelerate on hyperactive parliamentary schedule.


The Nvidia sales warning and Caterpillar profit miss yesterday spooked markets anew on China’s growth trajectory, and despite a cratering business confidence survey out of Australia, AUDUSD is essentially unchanged.

Risk sentiment took a fresh hit yesterday on ugly  news from Nvidia, a company associated with consumer tech and cloud computing data center tech and from Caterpillar. For perspective, Caterpillar’s profit miss was its worst in a decade and if Nvidia’s new sales outlook for Q4 is correct, it will be the worst slowdown in the company’s topline growth since 2010. The blame in both companies was squarely on developments in China.

Piling on to this story overnight, the latest Australia NAB business confidence survey showed the worst month-on-month drop in the Business Conditions portion of that survey since the teeth of the global financial crisis. The Aussie hardly reacted to this ugly development, as the market. On that front, note that while top Chinese negotiation Liu He is scheduled to visit Washington tomorrow and Thursday, the US has just charged Huawei on a number of accounts, not only on Iranian trade sanctions, but also on industrial espionage. The timing can’t be a coincidence and the situation is a pressure cooker that may not result in the deal everyone is hoping for. The end of this week could be downright explosive on all fronts if developments take a wrong turn on US-China negotiations, the Federal Open Market Committee meeting or Brexit.

On the Brexit front, today marks the beginning of the endgame into the March 29 Article 50 deadline, a process that will either take us closer to a new version of May’s original deal that can find its way through parliament or to a delay of the Article 50 deadline to give more breathing room for where the process leads next. The process is becoming so Byzantine that it has become increasingly tough to understand what is going on, but a Reuters article today gives a solid overview of today’s calendar. Basically, the House speaker John Bercow will announce at 13:00 GMT the amendments that will be voted on later in the day, and those amendments will be voted on at 19:00 GMT in serial fashion. The two most pivotal issues at stake are first, whether parliament will take control from the government on avoiding a No Deal risk as the March 29 deadline approaches and second, whether May can impress the EU with a vote sufficiently in favour of her strategy to revisit the Irish backstop portion of the existing deal that was so profoundly rejected.

Chart: AUDUSD

AUDUSD rallied sharply on Friday on the hopes that the Fed is set to signal a reassessment of its commitment to QT at tomorrow’s FOMC meeting. The AUD has also been held aloft despite various desperately bad corporate announcements clearly pointing to weakness in demand in China because offsetting that news we have the FOMC hopes and China continuing to boost its currency.

Another test for the Aussie dead ahead over tonight’s Q4 CPI release. We’re negative on the currency, but the immediate path is very unclear and the “right” outcome of US-China talks and the FOMC could engineer a further squeeze before fresh headwinds arrive to drive the Aussie back lower.

Enlarge
Source: Saxo Bank
The G-10 rundown

USD – China man-handling its currency higher as their top trade negotiator is set to visit Washington over the next two days. Another factor possibly affecting USD direction over the next few weeks is the US Treasury’s boost to USD liquidity ahead of the debt ceiling extension deadline expiring on March 1. 

EUR – the euro rising mostly at the weak US dollar’s expense, as we fail to see an isolated positive catalyst for the single currency – the 1.1500 level post-FOMC is the upside focus of note in EURUSD.

JPY – the yen stronger versus the US dollar but not strong elsewhere as  EURJPY pokes above resistance, for example. Hard to gin up enthusiasm for the yen unless global rates and risk appetite are cratering as 10-year JGB’s are flouting the Bank of Japan's YCC policy and trading at a yield of 0%.

GBP – a potentially pivotal day for sterling, but not sure how the mix of amendments clarifies the situation dramatically today, aside from perhaps indicating a pointed determination to avoid a cliff-edge Brexit on March 29. EURGBP could revisit support and then some on a positive spin from today’s developments.

CHF – EURCHF back threatening resistance at 1.1350 and not sure how to spin this development, given the backdrop.

AUD – the Aussie incredibly resilient given the backdrop of developments with that resilience built on some combination of the currency CNY strength, hopes for US-China trade deal, hopes for a dovish climbdown from QT from the FOMC  meeting. Meanwhile, we’ll have a look at the Q4 CPI out overnight as the Reserve Bank of Australia is likely set to ease policy this year.

CAD – ugly oil sell-off yesterday doing the loonie no favours. USDCAD perhaps showing low beta to the USD through the end of the week on the flurry of event risks in coming days.  

NZD – NZDUSD poking higher and the range high of 0.6970 is the next resistance level – highly reactive to any shift in China’s commitment to continue supporting the renminbi.

SEK – EURSEK poking at the 200-day moving average and range highs above 10.35 yesterday – not yet breaking but struggling to built a positive narrative around Sweden outside of weak SEK valuation.

NOK – EURNOK wants to go lower but having a hard time, given the chunky sell-off in oil markets yesterday. Rate expectations are oddly holding up very well for Norway and providing support at the margin. Watch out for the latest retail sales report tomorrow and the credit growth indicator on Thursday which, like its Swedish counterpart, has been steadily falling and is cause for concern.

Upcoming Economic Calendar Highlights Today (all times GMT)

1300 – UK Parliament Amendments selection
1400 – US Nov. Home Price Index
1900 – Voting on Amendments begins
1500 – US Jan. Consumer Confidence
0030 – Australia Q4 CPI
 
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/legal/disclaimer/saxo-disclaimer)