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USD set for breakdown on new Fed easing cycle?
John J. Hardy
Global Head of Macro Strategy
Résumé: The US dollar has broken lower against several G10 currencies and looks on the verge of doing so against the euro single currency and the Japanese yen. There is no hawkish scenario tomorrow for the Fed, so what can stand in the way of dollar sellers?
USD sellers having a hard time waiting for the FOMC
The US dollar is on the verge of a broad breakdown today, with the most important USD pairs EURUSD and USDJPY threatening to spill over today (EURUSD is actually already pushing to local highs as of this writing above 1.1780, while USDJPY has a bit more range to worth with below 147.00 – a double low near 146.20) and signal the decisive breakdown in the greenback, which has already broken lower elsewhere – versus sterling, the Aussie, and Swedish krona and Norwegian krone. One reason the market may be having a hard time waiting until it sees the white of Jay Powell’s eyes at the Fed press conference tomorrow before taking decisive action is that it is hard to impossible to come up with any hawkish scenario for Fed policy for the next 12 months – it’s a political imperative for the Fed to get rates lower to help the treasury save coupon payments on the trillions in short-term bills that will be rolled over the coming year and beyond.
The Fed is seen very unlikely to cut 50 basis points tomorrow, but the rare prospect of three dissenters on the board likely wanting a larger cut and the conditional forward guidance could encourage the market to price the risk of a larger cut at the October and/or December meetings, currently not even fully priced to deliver 25 basis points of further easing at each meeting. It makes far more sense for the Fed to go ahead and kick off its easing cycle with a larger cut and for the guidance to be more cautious on a continuation of easing as incoming data is awaited – either way, again – there is no hawkish scenario.
Also worth zooming in on one of the recent holdouts in the weak column: the Canadian dollar. Yesterday saw a decisive USDCAD reversal back lower, perhaps on the perspective that the Bank of Canada is set to wind down its easing cycle at one of the coming meetings after another 25 basis point chop tomorrow (which would take its rate to 2.50%), while the Fed is just getting started on its new easing cycle.
Chart: USDJPY
If range-bound activity is meant to indicate a “storing of energy” for a coming breakout, then USDJPY has about as much potential energy stored up as it ever has. It’s about time for the Bank of Japan to get more specific on its forward guidance for its next hike at this week’s meeting. The market has been emboldened to continue indulging in JPY carry trades as strong global risk sentiment and strong emerging markets have been a boon to carry traders. But aside from that and aside from a possible modest hiking cycle from the Bank of Japan incoming, the FOMC’s cutting plans and lower longer US treasury yields already point to a lower USDJPY. Could the pair quickly make an assault on at least 142.00 on a breakdown through 146.00 today?
Looking ahead
The euro has underperformed recently, in part likely on concerns of French political stability. Indeed, a buyers strike on French debt would prove an ugly challenge to the ECB and the original in of the Eurozone – multiple sovereigns with one central bank. But so far, Germany-France yield spreads are orderly, so no actual market pressure beyond the initial surge in that spread in late August. With or without any destabilization of French sovereign bonds, I am still waiting for EURJPY to wake up and smell the misalignment with long-term fair value – i.e., lurch into a massive sell-off. There is little to encourage the bears here save perhaps for the hope that we are seeing a local double top and a massive double top if we look back to the highs of the summer of last year.
Of the central banks in play this week – besides the FOMC tomorrow and the Friday BoJ guidance (we assume no actual policy move this Friday), we have the Bank of Canada tomorrow (again, a likely cut, with key anticipation on the guidance for where the BoC sees the rate easing cycle ending), the Bank of England on Thursday (no change expected) and Norges Bank on Thursday as well (the market is most divided here on the prospect for a cut – feels like we are due for another cut, with NOK repricing strongly higher in recent weeks, not that a cautious cutting move will do much damage to the krone).
FX Board of G10 and CNH trend evolution and strength.
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The US dollar downtrend is strengthening, with AUD, SEK and NOK the strongest currencies – giving off a distinctly risk-on vibe. Note that while CAD has the same negative trend strength reading as the US dollar, it’s momentum has turned sharply less negative over the last few days. The JPY is putting up a bit more fight over the last 24 hours as well.
Table: NEW FX Board Trend Scoreboard for individual pairs.
The new USD downtrends are in NZDUSD a couple of days ago and in USDJPY, which is trying once again to get something going after a 6-week walk in the desert for trend traders. As noted above, that pair need a close south of 146.20 for better confirmation of a persistent trend. The 136-day bull trend in EURJPY is a true outlier – one to watch into next week for whether it can survive.
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