Head of FX Strategy
Summary: King Dollar took a breather Thursday as today's first Q1 GDP estimate and next week's FOMC meeting rose into view. The market appears to be awaiting signals of further Fed easing bias (read: rate cuts), and has begun pricing in these risks starting later this year.
US yields are stable in the wake of a large and indifferent seven-year US Treasury auction after the chunky drop on Wednesday. US initial jobless claims jumped back higher to 230,000 after the prior two weeks set record lows for claims on a population-adjusted basis. US equities managed to maintain an even keel even as chip giant Intel was out with very weak guidance for the year ahead. Ahead of the weekend, the USD rally will need to navigate the Q1 GDP estimate today, which is expected to show growth at an annualised 2.3%.
The risk for USD traders without a significant new data spark is that we get bogged down in a tight range if the market is waiting for signals from the Federal Reserve at next Wednesday’s Federal Open Market Committee meeting. The focus at that meeting will be the degree to which the Fed’s policy shift on inflation will see the Fed signal a rate cut soon, even as equities have roared back to all-time highs and the economic data are arguably not yet weak enough to spur action.
Some might say it is odd for the Fed to shift policy to allow inflation to run hot when PCE core inflation never reached the 2% target on a sustained basis since 2008, but they could leverage the same logic to argue that inflation needs to rise above the “symmetric” target for some time to compensate for the long period when it was below.
In any case, Fed rate cut anticipation has risen sharply this week, though we’re not yet back at pricing the high odds of a rate cut by December that the market priced in after the March FOMC meeting. Current odds for the December FOMC meeting are over a 60% probability of a lower Fed funds rate.
Before we all decide that equity markets will always celebrate a rate cut, consider that markets are usually in their worst state during the active Fed easing period as the central bank fights to contain the damage and is actually behind the curve.
On the other hand, 1998 has been proposed as an interesting parallel with the current situation, and in that case the Fed was merely reacting to a market mishap. At the time, the Greenspan Fed offered its support in the wake of the Asian financial crisis and after the LTCM debacle with three rate cuts following a brief intense correction in equity markets and spike in financial fear levels, even as the US economy was growing at 4% clip (though to be fair, inflation had been in free-fall for years and core PCE inflation had below 1.5% at the time). The rate cuts were seen as a key factor in sparking the subsequent 18-month run in tech stocks.
So the USD outlook will likely hinge on whether the Fed has sufficiently pulled itself back ahead of the curve or already took QT and interest rate hikes too far and isn’t easing as quickly as it needs to if a recession and tightening offshore USD liquidity are to be avoided.
USD longs: EURUSD short stance, but preferred USD longs perhaps GBPUSD as long as price action stays below 1.3000 and AUDUSD as long as south of the 0.7100 region. USDCAD is a long above 1.3400.
Buying EURSEK on dips: We are looking for a test of 10.70+ as long as price action remains north of 10.55.
Longer-term trade: Selling AUDCAD rallies as long as price action remains south of the 0.9550 area for an eventual run at 0.9200 or lower.
The Swedish krona took it on the chin yesterday after the Riksbank served up its version of pushing rate hike guidance out over the horizon, moving the timing of its next hike to later this year or early next, which the market understood as 'never'. The move came even as the central bank upgraded growth forecasts for this year.
EURSEK jumped at the surprise, with the inclination to move so aggressively perhaps hinted at recently when a rather SEK-supportive backdrop had failed to see EURSEK breaking down through the 10.40 support area. This move begins effectively rejects the “triple top” chart argument and the pair could march to new highs not seen since the financial crisis, particularly in the event concerns about the EU economic outlook remain in place and risk appetite rolls over.
USD – see above... the greenback has broken higher locally and more profoundly in some cases, but the move needs to hold on the other side of next week’s FOMC meeting and needs to flout China’s heavy hand on the USDCNY semi-peg.
EUR – Spanish election at the weekend – a muddled outlook there and tough to get excited about the euro’s prospects with the German 10-year yield at zero and EU existential and Brexit questions hanging heavy.
JPY – the yen can only thrive on misery and low yields – may show high beta upside if the recent EM pain worsens, though we’re not seeing a general aggravation of EM credit spreads (the weakest of the weak like ARS and TRY are struggling notably and volatility in the actual exchange rates has risen markedly, however).
GBP – sterling meandering here, awaiting new inputs and next week’s activity surveys and BoE meeting. Are Carney and company ready to signal potential for a supportive rate cut down the road? There has been no sign of this so far, but why not?
CHF – interesting USDCHF support doesn’t arrive until around 1.0130, but the focus on this pair’s rally not likely to return unless we see a return of higher yields – otherwise, watching whether the EURCHF rally is done as the pair has consolidated back to its 200-day moving average.
AUD – AUD stubborn at the d0.7000 area in AUDUSD again as traders have at least one eye on the USDCNY stick in the mud. But note that AU short rates have collapsed and the Australian mining giant stock prices have stumbled badly since the news broke of China easing its stimulus focus.
CAD – has oil peaked for the cycle? Would certainly help USDCAD bulls as the pair has consolidated a bit back toward 1.3468 first support – with 1.3400-ish the downside pivot.
NZD – the kiwi overachieving here tactically on the AUD’s woes, but like reloading on the NZDUSD downside anticipation as long as price remains below 0.6700. Also like AUDNZD upside exposure on dips, but wide stops needed there.
SEK – the Riksbank dovish signal was significant and the market responded. EURSEK looking higher for a test of the multi-year top above 10.70 as long as we trade above 10.50-55.
NOK – EURNOK toying with the 200-day moving average as oil corrects a bit. A further squeeze higher is the risk If that correction becomes a more profound slide and risk sentiment consolidates back lower.
Today’s Calendar (all times GMT)
07:30 – Sweden Mar. Retail Sales
08:00 – Switzerland SNB’s Jordan to Speak
10:30 – Russia Central Bank Key Rate Announcement
12:30 – US Q1 GDP Estimate
14:00 – US Apr. Final University of Michigan Sentiment
Events next week
Monday: US Mar. PCE Inflation
Tuesday: China Apr. Manufacturing and Non-manufacturing PMI, Euro Zone Q1 GDP Estimate, Germany Apr. CPI, Canada Feb. GDP, Mexico Q1 GDP
Wednesday: New Zealand Q1 Employment report, UK Apr. Manufacturing PMI, , US Apr. ADP Employment Change, US Apr. ISM Manufacturing, US FOMC Meeting
Thursday: Euro Zone Apr. Manufacturing PMI, UK Bank of England Meeting,
Friday: UK Apr. Services PMI, Euro Zone Apr. CPI, US Apr. Change in Nonfarm Payrolls, US Apr. Average Hourly Earnings, US Apr. Unemployment Rate, US ISM Non-manufacturing, US Federal Reserve speakers at Hoover Institute Policy Conference