Head of FX Strategy
Summary: The Bank of Japan policy meeting was about as dovish as one could have expected, and the JPY knee-jerked sharply lower. But a major further rout for the yen would likely require a significant shift higher in global yields. Elsewhere, the USD firmed broadly ahead of March US PCE inflation data and the run into next Wednesday’s FOMC meeting.
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Today's Global Market Quick Take: Europe from the Saxo Strategy Team
FX Trading focus: FOMC tomorrow, RBA surprises with hike.
The market seems highly – almost excessively – reactive to incoming data as we saw once again yesterday with the release of the slightly firmer than expected ISM Manufacturing survey for April, for which the Prices Paid component bumped up to 53.2 versus 49.0 expected. That was a nine-month high. US treasury yields from 2- to 10-years ended the day some 15 basis points higher from Friday’s close, with much of the action seemingly sparked by this survey release and focus on prices paid.
Still, the more important data lies ahead, including ISM services tomorrow, claims on Thursday and the jobs report on Friday. And there just isn’t enough in the directional surprises of the data of late for the Fed to change its tune or firmly position tomorrow’s anticipated 25-basis point rate hike as the last one for now, as it ought to reserve some wiggle room for further moves, just in case. Still, the setup here is that Fed Chair Powell will likely want to say as little as possible in the way of guidance, which can leave the market to its own interpretations of the likely path from here (even when the Fed has tried to protest against the notion that it will be cutting rates later this year, the market largely ignores guidance anyway.). In sum – look for a Fed that is trying to avoid signaling very much and a market that may realize that it is too confident in the Fed rolling over to cutting by later this year. That could mean risk off and USD up.
Then again, while I consider it unlikely, the Fed could theoretically indulge in confidence that inflation will flatten out and eventually fall back in line with its projections from March (core PCE forecast to fall to 3.6% by year-end) from here and/or at the margin is concerned enough about significant disruptions from the debt ceiling issue, the market may read this as dovish, risk sentiment could notch another sharp leg higher. Either way, it feels like the market has mostly already priced a pivot even if we get a small spurt higher, so surprising dovish beyond a day post-FOMC is the higher bar. Market expectations are drifting, in fact, in the direction of higher odds for an additional Fed hike in June.
On the debt ceiling, US Treasury Secretary Yellen warned yesterday that the US could default as soon as early June if a raise of the debt limit is not passed. This comes after recent news that surprisingly high tax revenues in recent weeks were more likely to push the last gasp time frame out to late July or even August. She may just be trying to light a fire under Congress to get its act together and avoid last-second brinksmanship. The market hardly budged on the news. Biden and key congressional members are set to meet next week.
Beware the JOLTS survey up later today and beware any market attempts at a takeaway, given the cavalcade of more important data and the FOMC meeting to follow.
Chart: EURAUD
Interesting to see the hard reversal in EURAUD over the last week, in part as the EURUSD move above 1.1000 has been contained and capped the euro broadly, but also as the RBA’s surprise hike helps push back against the notion that the ECB and RBA rates were headed toward parity. More on the RBA’s hike below, but the important point here is that EURAUD has once again found resistance in the 1.6800 area, one that capped the action in the exchange rate both before and after the crazy pandemic-inspired spike of early 2020. This high-momentum sell-off will make it tough to turn the chart back higher again. This may be either peak EUR or nadir AUD. For the action to continue lower sooner rather than later in EURAUD, we will likely need mounting evidence that the ECB is being marked for too much further tightening relative to its peers (EUR negative but perhaps unlikely in the short term?) or for an AUD-positive revival in the Australia-centric commodities complex (iron ore, copper, etc.) on, for example, new signs that the China re-opening story is coming into full swing.
The RBA hiked 25 basis points when the market was expecting almost nothing (though nearly a third of economists surveyed by Bloomberg predicted the move). The statement guided on the potential for further tightening, though the market remains reluctant to price much more. The move makes sense, given the revival of home prices across Australia. As well, it may also have been about Governor Lowe pushing back against the RBA’s outlier status relative to global peers in terms of the RBA’s cash target rate level and all of the criticism that has been heaped on his management style. He is leaving in September and in July, the RBA is set for a massive overhaul.
There wasn’t enough in this morning’s Eurozone Flash April CPI readings (core dipping to 5.6% YoY as expected and vs. the cycle high of 5.7% in March) nor in the euro area bank lending survey data to excite anticipation of a larger rate hike at the Thursday ECB meeting (28 basis points priced).
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY remains the weakling after extending sharply lower in the rise in yields yesterday, but has fought back some intraday (as yields have also dropped back a bit). The US dollar remains neither here nor there -hopefully we have a signal by the Friday close. The euro losing altitude fast – just consolidation ahead of ECB? AUD backed up sharply on RBA as noted above.
Table: FX Board Trend Scoreboard for individual pairs.
Regarding JPY, the most important pair is of course USDJPY, with the sub-138.00 area highs from early March the key focus. EURSEK is making a bid at a new downtrend – needs to stick post-FOMC and post-ECB for more validity.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
