FX Update: USD rolls over post FOMC, UK election on tap
Head of FX Strategy
Summary: As expected, the FOMC meeting yesterday failed to provide strong signals for the market that was pricing the Fed to pause here and maintain a flat outlook for now. But the overall sense is that the Fed is happy to supply plenty of liquidity over year-end if any issues arise and the USD rolled over again. Tonight, the focus will be on the UK election results.
The FOMC statement and accompanying materials released last night were short on surprises, with most interest any way on the Press Conference and Powell’s signaling on the balance sheet. We have discussed the widespread coverage over the last couple of days on Credit Suisse’s Zoltan Pozsar and his assertion that the Fed will have to start “real QE” (buying longer term US treasuries) and very soon to avoid a mishap over year-end USD liquidity issues. One of the journalists specifically referred to this research in a question, to which Powell made clear that, while they see no issues over year-end, they will respond if necessary with purchases of coupon treasuries as well as the current T-bill purchases.
Overall, Powell’s signaling in the press conference is that for now, the Fed will respond to any and all disruptions in money market liquidity issues with balance sheet expansion, meaning that only a sudden shift in animal spirits can reverse the very positive mood across markets and there are three potential sources of a negative mood shift – the most pressing of which is the current round of US-China trade negotiations and whether the December 15 US tariff schedule on Chinese goods will go forward or if a phase one trade deal (likely the best we can ever hope for) can get done here. Second, the market is poorly positioned here for any weak economic data and finally, the end-of-year USD liquidity issue, where risks could worsen on any budget
The UK election results are set to roll in this evening, with excellent coverage from Bloomberg on the timing of the results and what to look for from key districts as the night wears on. The reaction may be priced in very quickly if the exit poll available at 2200 GMT when polls close gives an unambiguous sign of a strong Tory victory – say north of 350 seats (326 is needed for a majority in the 650-seat House of Commons). Last time around the exit poll was out showing 314 to the Conservatives and 266 to Labor, with the final result showing 317 to 262. Otherwise, sterling might be all over the map from minute to minute as results roll in all night. I lean for high probability of a clear majority with an ensuing quick reaction and assume (with very low confidence) that something on the order of 1.3500 is possible in GBPUSD and perhaps 0.8250 in EURGBP if the result is clear.
One of the most enthusiastic moves both before and after the FOMC meeting last night was in the Aussie, which galloped higher against the US dollar on USD weakness, but also as hopes seem to be reviving that policymakers have turned the tide quickly enough to avoid a recession. Copper has pulled sharply higher to new highs for the cycle over the last few sessions, for example. Regardless, the last news item this pair needs is an indication that the US and China are headed for détente in their ongoing trade row and technically, to break out of this persistent descending channel that has dominated the price action for so long – starting at around 0.6900. If we are headed for a relief rally in all things Aussie – this pair could have potential into 0.7200+, which would merely take it back to the 38.2% retracement of the early 2018 top.
The G-10 rundown
USD – tempting to call the USD lower here, but we still have to clear the uncertainty around the December 15 tariffs and the year-end, so forced to continue to keep considerable powder dry on the near term outlook after so many false starts both way for the greenback over the last 12 months and more.
EUR – the EUR may be up versus the USD and JPY, but wouldn’t expect notably strong performance against higher yielders, though any turn for the better in the Chinese outlook is EUR supportive. The first technical break higher not there yet for EURUSD and comes in at 1.1180.
JPY – the least supportive possible backdrop for the yen, as yields are pulling back higher at the long end of the yield curve amid widespread complacency.
GBP – strong consensus that we see a solid Tory majority after today’s UK election – with options market clearly signaling that the volatility will be enormous to the downside on a surprise outcome that results in a hung parliament.
CHF – pass, and a bit of a head-scratcher that the franc maintains relative strength in this environment.
AUD – as we indicate above, the Aussie showing sensitivity to the pick up in key commodity prices and some signs that China is turning on the stimulus. But to believe in the rally here, we need to see the clearing of trade war uncertainty for the near future at minimum.
CAD – USDCAD fading back lower in line with other USD pairs and has reversed the negative reaction to the weak payrolls Friday – note that Bank of Canada governor Poloz set to give a major speech late today with a press conference to follow.
NZD – the kiwi turning lower versus the Aussie finally after AUDNZD was getting oversold and as AUD has higher beta to any further turn in sentiment on all things China/commodities/global growth hopes.
SEK – the krona enjoying further strength here on widespread complacency and a hope that the global economy is turning the corner, even as Sweden, widely seen as a sensitive leading indicator is mired in weakness.
NOK – the backdrop is just too supportive at the moment to keep NOK down and EURNOK is busy reversing yesterday’s rally, a sign that the side of least resistance is lower as long as we don’t lurch into sudden risk-off or a crude oil market meltdown on negative US-China trade news or other.
Today’s Economic Calendar Highlights (all times GMT)
- 1000 – Euro Zone Oct. Industrial Production
- 1030 – Turkey Central Bank Rate Announcement
- 1245 – ECB Interest Rate Announcement
- 1330 – ECB President Lagarde Press Conference
- 1330 – US Nov. PPI
- 1330 – US Weekly Initial Jobless Claims
- 1730 – Bank of Canada’s Poloz to Speak
- 1900 – Bank of Canada Poloz Press Conference
- 2350 – Japan Q4 Tankan Surveys
- 2200 – UK Election – polls close, exit poll released