Head of FX Strategy
Summary: The initial reaction in currencies to the FOMC meeting has largely faded as the USD reversed most of the subsequent weakening in many USD pairs – yet another failure to establish a USD direction. Elsewhere, sterling rebounded from a sharp weakening move yesterday as the EU has extended Article 50 for two weeks to give May a bit more time.
The first such failure this year was the inability to sustain a move above 1.1500, for example, in EURUSD after Fed Chairman Powell made his first loud dovish turn. Even a strong CNY ‘s supporting role at the time was unable to really set the USD momentum lower.
Then, of course, we saw the very dovish turn from the European Central Bank failing to engineer a sustained break below 1.1200. For now, we would avoid over-interpreting the reversal thus far – even if it is tempting to look for more tactical USD strength in the pairs that have reversed around key levels – in USDCAD, for example.
In the bigger picture or medium- to longer-term, why should the US dollar strengthen when the Fed has shifted so quickly to a more accommodative stance and the positive effects of the Trump tax reform for the greenback are set to fade later this year? The US is a deficit country requiring constant funding. And with more room to cut the policy rate and unwind QT, there is more downside potential from additional cuts from here.
The only real potential driver of on last larger scale USD strengthening move (aside from shocking, uncomfortably hot inflation and growth numbers that require another hike or two before the cycle winds down) might be global deleveraging and issues with USD liquidity in offshore markets – the kind of thing that drove USD strength after the Bernanke blew up a bubble in EM that peaked in 2011 and began unwinding at the Fed.
But with China holding the line on its currency and central banks so vigilant in general, would any real aggravation of liquidity problems be allowed to spread for long? Shortly put, it’s a challenge to put together a strong USD narrative outside of individual cases where the local dynamics simply turn more drastically negative than those for the US – for example in Australia and Canada, where the risk of unwinding housing bubbles remain a risk. On the flip side – a persistently weak US dollar is likely only an “easy sell” once we get to the other side of whatever soft patch or worse lies ahead for the US and global economy. A rocky ride with many pitfalls seems the unfortunate risk for USD traders over the next year or two.
Elsewhere, the market has changed its mind about the implications for equities, if not for bonds, where US yields remain pegged near their multi-month lows. Equities roared into gear yesterday, with the major US indices posting strong new local highs and now only a couple of percent from the all time highs last September. The strong risk appetite rebuffs our idea that the yen could lead any renewed bout of USD weakness, though USDJPY has reversed less of the USD weakness than other USD pairs – JPY traders have at least one eye on the US treasury market for direction, where low US yields are yen supportive.
The Brexit endgame has been extended slightly to avoid an outright pressure cooker next week for UK Prime Minister Theresa May as she seeks to get her deal passed for a third time. The EU has granted a two week extension to April 12 to allow May a bit more time to get her deal passed. If the deal is approved by Parliament, the extension will in turn be extended to May 22, the eve of European parliamentary elections, to work out further details. If the deal is not passed, there will be an emergency summit at which the UK must “indicate a way forward” which either means a No Deal or a much longer delay. Sterling backed away from the precipice it was headed over briefly yesterday, but still trades defensively.
Norges Bank delivered with a rate cut yesterday and firm oil prices and strong risk appetite encourage more downside for EURNOK as Norway’s short rates shot up some 6-7 basis points yesterday.
This morning’s Euro Zone flash March PMI’s are an interesting test of sentiment for the euro.
Long USDCAD tactically on dips with stops below 1.3300 for a try toward 1.3500 next week.
Could look to add short AUDUSD position early next week on a weak close for the week today.
Keeping short EURNOK half-position from pre Norges Bank.
Less interest in short EURJPY as long as risk appetite is strong (reduce or take off with small losses from yesterday’s entry).
USDCAD one of the first USD pairs to unwind the reaction to the FOMC meeting. Arguably, as the US economy and central bank policy goes, so goes that of Canada and the Bank of Canada. And Canada has the added risk of a private leverage bubble in housing that is vastly larger as a percentage of the economy than the US housing bubble ever was. The tactical bullish reversal here looks worth trading for a return back to the higher range into 1.3500+ next week.
0815-0900 – Eurozone flash Mar. PMI’s
1030 – Russia Key Policy Rate Announcement
1230 – Canada Jan. Retail Sales
1230 – Canada Feb. CPI
1345 – US Markit Flash March PMI
1400 – US Feb. Existing Home Sales