Fed in focus: Meet the new boss...

John Hardy

Head of FX Strategy
John Hardy joined Saxo Bank in 2002 and has been Head of FX Strategy since October 2007. He focuses on delivering strategies and analyses in the currency market as defined by fundamentals, changes in macroeconomic themes, and technical developments.

Everyone is poring over Federal Reserve chair Jerome Powell’s comments during the question-and-answer session before a House Financial Committee yesterday for the actual trigger that saw US yields pull higher, the USD up, and risk appetite down. 

It seemed to be his “personal” view that the economy is in increasingly good shape and confidence in the return of inflation that set things in motion, sparking headlines of “four hikes more likely than three” this year. Indeed, much was made of his making clear his personal views, but this makes some sense as he wouldn’t want to be seen as speaking for all Federal Open Market Committee members with every comment on the economy, and he underlined elsewhere that the FOMC decisions are a group effort. 

Still, speaking in such a transparent manner is a dramatic style contrast from former chair Janet Yellen in particular and suggests we could see a Fed leader who is a bit more candid than we were used to in the 12 long years of Bernanke/Yellen. 

One of the ways that some are spinning this transition to the Powell era: it is almost as if the Fed has been handed a copy of Nassim Taleb’s Antifragile. In this book, Taleb decries, among other things, the mentality of constantly bailing out bad actors and moral hazards rather than allowing things to stand on their own and therefore either strengthen and even become “antifragile”, or fail, depending on their ability to survive the stressors that are hurled at them – the subtitle "Things That Gain from Disorder" says it all. 

Making this general point in a great FT piece overnight (paywall), a hedge fund manager quoted by author John Authers floats the idea that the Fed was actually rather spooked by the recent volatility episode and might actually like to see market volatility as a needed condition to ensure more antifragility. in this model, the Fed saw the recent volatility event as one driven by market overconfidence in the Fed's own hyper-vigilance in supporting the market at every turn. 

In other words, has the Fed’s “third mandate” of constantly bailing out financial markets at the least sign of trouble taken on a new twist? Is it better to save the market from itself? In any case, the S&P 500 suddenly found itself back below the key resistance area broken on Monday, so bad market nerves have returned until proven otherwise.

Chart: USDCAD

USDCAD is the first of the G10 USD pairs to cross above its 200-day moving average, with USDSEK and AUDUSD the other two pairs having a look at this key resistance level for the greenback. 

It appears that the USD is the new risk appetite barometer, together with US yields, which may move in negative correlation with risk appetite from here if the pattern established yesterday in the wake of the Powell testimony repeats.

The G-10 rundown

USD – the USD is picking up some steam in the wake of the Powell testimony, theoretically on a kind of uncertainty premium and perhaps whether the market’s confidence in the 3% “terminal rate” for Fed funds remains well-anchored.

JPY – ugly data from every corner for Japan overnight, whether Retail Sales, Industrial Production or Housing Starts, but the JPY remains resilient in relative terms as risk appetite wobbled on the hawkish Fed.

EUR – there is some holding of breath for the event risks of this weekend, especially if the Italian election polls are very badly wrong, but the key problem for euro longs is one of positioning. EURJPY broke below a big support level overnight as well as the 200-day moving average – watching for a possible extension.

GBP – sterling lost in the range; GBPUSD getting more interesting on the USD bid and we are watching the recent 1.3850 area pivot low. Brexit is a morass.

CHF – the franc picking up a modest bid on weak risk appetite – we should know the lay of the land better once we get to the other side of this weekend’s EU-related event risks (Italian election and Germany SPD vote), assuming no mishaps.

AUD – we single out the Aussie as one of the G10 currencies that should be the most vulnerable if the current set of circumstances continue. Weak China PMIs overnight didn't help.

CAD – USDCAD the first of the G10 currencies to break below the 200-day moving average versus the US dollar. Not entirely sure why it is being singled out given rate expectations and central bank signaling, would have thought AUD a more deserving candidate. But this could open for USDCAD to look toward 1.3000 if the USD remains firm.

NZD – is AUDNZD going to tease higher again? We like it higher eventually, but perhaps 1.0850 the first sign of a rejection of the recent downside sequence. NZDUSD not far from its own 200-day moving average test.

SEK – the krona still reeling from the weak Swedish CPI print last week and a weak Consumer Confidence survey perhaps added a bit of insult to injury as EURSEK has burst above the 10.00 level and likely shaken complacent SEK longs. USDSEK looks to be the second USD pair to break the 200-day moving average after USDCAD.

NOK – given the risk off tone, NOK could be vulnerable here, particularly if US oil inventories halt the recent crude oil comeback in its tracks.

Upcoming Economic Calendar Highlights (all times GMT)

   • 0745 – France Q4 GDP Estimate 
   • 0745 – France Feb. Flash CPI 
   • 0830 – Sweden Q4 GDP 
   • 0830 – Sweden Jan. Retail Sales 
   • 0855 – Germany Unemployment Change/Rate 
   • 1000 – Eurozone Feb. CPI Estimate 
   • 1330 – US Q4 GDP Revision 
   • 1445 – US Feb. Chicago PMI 
   • 1530 – US DoE Weekly Crude/Product Inventories 
   • 1905 – US Fed’s Kashkari (Non-voter) to Speak 

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