FX Update: Eyeing the FOMC meeting and yield curve control
Head of FX Strategy
Summary: Market action has suddenly become decidedly more two-way later in the European morning as markets mull whether the FOMC meeting tomorrow can provide any more fuel for the recent melt-up in risk assets and melt-down in the USD. The hard charging JPY was already a flashing red light over the last couple of sessions.
I return to work today after a short holiday for one of the first more determined equity market sell-offs in recent memory, and in the US dollar’s case, the most notable rally in some two weeks – which looks less notable once the trouble is taken to look at how far and how persistently the US dollar has dropped over the last two weeks. All market moves eventually yield to two-way action, and the timing for this bit of consolidation makes sense, given tomorrow’s FOMC meeting, which for the first time in a while has the market in a bit more on the edge of its seat.
The pivotal issue at this FOMC meeting is the latest policy guidance, particularly on an eventual yield-curve-control policy, as we discuss with our CIO Steen Jakobsen on this morning’s Saxo Market Call podcast. The basic idea and historical parallels that market observers draw with the post-World War II experience is that the Fed will eventually move to cap yields at the longer end of the curve to prevent real rates from backing up (and eventually, if inflation returns with a vengeance as more and more market participants and even consumers seem to expect, according to the latest surveys, any yield-capping by the Fed would mean increasingly negative real rates, a boon to risk assets and hard assets alike).
It is too early to expect yield-curve control policy now, but how firmly the Fed hints at its implementation (many presume September) may be enough to move the market – or have risk assets and the USD moved so far that we are in a “sell the market, buy the USD” reaction tactically almost no matter what. As for less likely or more explicitly negative market risks from tomorrow’s FOMC meeting, less clear guidance on eventual policy choices or no mention or endorsement yet of yield curve control together with any sense that the Fed thinks it has done enough for now to allow itself the luxury of a bit of wait-and-see could trigger a fairly steep bit of consolidation of recent moves. The least market friendly outcome and probably very low odds, but still worth mentioning, would be any whiff of a mention of discomfort with the degree of speculative frenzy in asset markets and risks from that to financial stability. This is
Until the beginning of this week, the USD sell-off was accompanied by an even more brutal sell-off in the JPY. Have a look at AUDJPY if the USDJPY chart doesn’t make this clear. After the Friday payrolls data that saw an additional burst higher in long US yields and move lower in the JPY, the latter has clawed its way back aggressively versus the USD. Already, we have a bearish technical reversal on our hands here if the move sticks below 108.00. And if US yields continue lower whether because the Fed announces the intent to focus on controlling yields well out the yield curve or because we have a new and sudden bout of safe haven seeking on our hands, much is at stake for JPY traders. USDJPY is an interesting sell if the Fed moves more aggressively to indicate it will cap yields far out the US yield curve from here, but if the Fed under-delivers on the dovish side and a bout of risk appetite consolidation settles over the markets, both the USD and the JPY could rally across the board.
The G-10 rundown
USD – market moves don’t move in a single direction forever and plenty of room here for a sharp consolidation back higher without erasing the bear move.
EUR – still plenty of room for EU uncertainty in the near term relative to how quick the market has bid up the single currency – the 1.1400 area is major chart resistance and plenty of room likewise for tactical consolidation.
JPY – the beleaguered JPY on the comeback trail and most interesting technicall against the USD as the USDJPY erased the break higher. Elsewhere, the JPY sell-off extended so far recently that only a major market.
GBP – tough to extract meaning from EURGBP or GBPUSD charts as EUR and USD have received plenty of attention to drive new momentum in opposite directions, but sterling uncertainty remains until we pick up the narrative on the post-Brexit transition period trade deal again. Technically, focusing on whether the GBPUSD attempt higher holds here above 1.2650 – although really 1.2500 looks more important locally.
CHF – the recent EURCHF rally got a bit too aggressive there, and looks rather correlated with the move in JPY crosses. Fairly remarkable how quickly the price action is settling back lower – suggests poor liquidity and a squeeze on former shorts that are now re-engaging.
AUD – the 0.7000+ area in AUDUSD was the ideal place for a bit of consolidation to set in (major chart highs back at the turn of this year) and the bulls are taking a few chips off the table - vast room for consolidation without altering the turn of the chart higher.
CAD – the oil rally may have extended too far and interesting to watch the USDCAD price action around the 200-day moving average (1.3465 area). Still, the reversal back lower in USDCAD is so profound at this point that an enormous reversal back to 1.3850 and higher is required to offer any ray of hope for the bulls here.
NZD – the headlines shouting New Zealand’s defeating of the Covid19 crisis allowing late-comers to the longer term AUDNZD upside potential a window of opportunity to get involved here below 1.0700.
SEK – EURSEK has explored the entirety of the big range back towards 10.40 and then some as the Swedish krona has been the star of 2020 – the move may be a bit too much for now as we watch for technical hooks from higher levels for re-establishing shorts.
NOK – EURNOK reached the major milestone at the 200-day moving average around 10.44 and the prior major high was at 10.33. May need to consolidate a bit higher if oil has overdone the recent rally and if we finally get anything resembling consolidation in risk appetite post FOMC or for other reasons.