Market needs to choose a direction Market needs to choose a direction Market needs to choose a direction

Market needs to choose a direction

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Last week’s FOMC saw a brief risk-on celebration of the Fed’s new easing move followed by a single very ugly session on Friday. It’s time for the market to make up its mind whether it is going to celebrate the Fed punchbowl or fret that the party is already over.

In the UK, Monday saw a day of considerable drama in Parliament as Prime Minister May has effectively lost control of the Brexit process after a cross-party group of parliamentarians seized the reins with an initiative to allow a series of indicative votes on where to take the process from here. This could mean anything from a much softer Brexit to a “Norway plus” arrangement followed by a referendum, but seems less likely to lead to an immediate, cliff-edge no-deal.

The explicit threat from those voting in favour of this initiative is clearly to avoid brinkmanship. Sterling is generally steady but will struggle to maintain a pronounced directional move until there is more clarity on where this leads.

I want to take a brief moment to discuss a great post by Kevin Muir at The Macro Tourist discussing the current market sentiment, whether it is particularly important at this moment to fret the yield curve inversion and to which past market setups we should be comparing the current setup. He argues, as I have, that a yield curve inversion is a profoundly important and usually very negative harbinger for the economy and for markets, but one that offers very little precision on timing. Think of the yield curve inverting already in early 2006, for example, while markets didn’t roll over until late 2007. Further, Muir wonders whether instead of the Fed having arrived too its dovish stance too early, it has merely panicked, just as Greenspan panicked over the Asian financial crisis and LTCM back in 1998, a move that helped turbocharge the last phase of the tech stock craze into early 2000.

This is a provocative stance and arguably has merit – particularly if the economic data over the next couple of cycles fail to show further deterioration. I struggle to imagine a 18-month, blow-off bull market extension of the post-crisis bull market (this is not Muir’s base case, he just raises the idea that there are parallels), but a smaller version is entirely possible... perhaps three or six months?

If so, bears will suffer a merciless squeeze, the USD would likely be weak and the JPY even weaker as long-dated Treasuries come back under some pressure (slight yield curve steepening again). One thing to keep an eye on this week that may offer clues as to the market's stance is the series of very sizable US Treasury auctions this week. 

One small aside: Russia has put boots on the ground in Venezuela. I won’t speculate where this could lead, but the US side has to see this as an extreme provocation and the proximity of Venezuela to the US makes this a very different kettle of fish from a Ukraine or a Syria. 

Trading interest

Reducing JPY longs by half and tightening stops slightly until we get a sense of which way this market will run – the total lack of follow-through after Friday’s weakness gives pause.

One-week, at-the-money NZDUSD calls cost a bit over 40 pips and are an idea for the Reserve Bank of New Zealand meeting in case the RBNZ fails to wax sufficiently dovish to scare the market and global equity markets start to lean towards the scenario outlined above. If you don’t agree or lean the other way on the outlook, consider one-month puts at strikes about a figure out of the money – NZD vols are cheap.


The broad inter-market setup here looks pivotal and JPY crosses likely offer some of the highest beta exposure to how the markets turn from here – further risk-on and weaker long US Treasuries as the market continues to celebrate the Fed’s dovish turn and perhaps incoming economic data fail to encourage the view that a recession is imminent. Or do we see the opposite – rising concern that the Fed already overreached and further easing is only linked to very bad economic news?
Source: Saxo Bank
Upcoming Economic Calendar Highlights (all times GMT)

• 12:30 – US Feb. Housing Starts / Building Permits
• 13:00 – US Jan. S&P CoreLogic Home Price Index
• 14:00 – US Mar. Consumer Confidence
• 17:00 – US two-year note Auction
• 19:05 – UF Fed’s Daly (Non-Voter to Speak)
• 01:00 – New Zealand RBNZ Official Cash Rate


The Saxo 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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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 (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.