Forex in the shadow of the Fed

John Hardy

Head of FX Strategy

Risk appetite worsened after the Friday close, perhaps as one of the banner “tech” leaders Facebook is under fire for possibly illegally storing user data and, most risky for the company, the fact that the data was exploited by Trump campaign consultants during the 2016 election season. The risks to Facebook’s business model are multiplying by the day, it seems. The risk-off tone has supported the JPY, as one would expect and the US dollar as Fed expectations are pushing back toward the cycle high ahead of this Wednesday’s FOMC meeting. The JPY is getting an added boost as Japan’s Prime Minister Shinzo Abe finds himself facing alarming fresh declines in his popularity rating and even in his own party’s trust due to a corruption scandal that simply won’t go away.  

This week should be thick with Brexit headlines as an EU summit is set for this Thursday-Friday and the UK political leadership hopes to get some kind of transition agreement in place that would guarantee policy stability for 21 months beyond the Brexit data to maintain some semblance of business confidence. The process faces the usual chicken-and-egg problem of the Ireland border issue, which the EU wants in place before agreeing to a transition deal. EU negotiator Michel Barnier and Brexit secretary David Davis will be holding a press conference later today in Brussels.

The FT’s Münchau rightly points out (paywall), as I have in a more general sense, that exporters are at greatest risk in a trade war, particularly Germany and any threat that might arise to its car industry from tariffs. So let’s all remind ourselves that trade wars are bad for economic growth in general and bad for risky assets – but they are particularly bad in GDP terms for big exporting economies. That goes for Japan eventually as well, at least once the JPY has repriced a bit further from its very under-valued levels.

I have no visibility on the Fed meeting this week, but let’s look back to the early February market mishap and how the Fed responded with a shoulder shrug to suggest that the tendency for the Powell Fed will be to lean on the rate hike lever per default unless there is a string of convincing and glaring economic data points that point to downside risks for the economy. Perhaps the most interesting bit of guidance at this Wednesday’s press conference will be any comments in the question and answer on the implications of the flattening US yield curve and how the Fed views this.

Chart: AUDUSD – weekly

I have long wondered at the Aussie’s resilience, given the lack of support from any shift in the Reserve Bank of Australia guidance, and finally we are seeing the cracks beginning to show as Australia bank stocks are under pressure (some eyeing eventual pressure on housing market) and commodity prices have generally also failed to provide much support recently. The RBA minutes up tonight are hardly likely to provide a catalyst. Later this week we have the latest batch of Australia jobs data (one of the bright spots, but employment is a badly lagging economic indicator). In general, the Aussie will likely remain vulnerable on any deepening of weak risk appetite this week, particularly if some of this is linked to a more hawkish Fed and we continue to see USD consoildation, which could take AUDUSD all the way to some significant range mileposts lower. There are many of these, from the late 2017 low near 0.7500 to the cycle low in early 2016 below 0.6900. Note the big, choppy channel that has reigned as the chief technical feature since those lows.

audusd
Source: Saxo Bank 

The G-10 rundown

USD – everything keying off the Wednesday FOMC statement, accompany materials (forecast shifts and any dot plot shifts), and press conference. The intangibles are important this time around due to a new personality at the helm. Another wildcard factor here is the dramatic ramping in the Libor-OIS spread, linked to offshore USD liquidity problems.

EUR – as noted last week, the “convergence story” lacks any fundamental support as European Central Bank policy anticipation has mostly gone in the wrong direction lately. Italian government coalition formation attempts are a minor focus, with few euro-positive outcomes. Meanwhile, any showdown over trade would generally not be euro-supportive as it would likely hit Europe squarely in its current account surplus.

JPY – the JPY “safe haven” in full swing, though the path to upside made possibly less certain if US Fed rate expectation continue to pull higher after the FOMC meeting.

GBP – sterling is poking to the strong side and could make a powerful surge this week if we get any hint of a positive turn in Brexit negotiations. The 0.8700 area is a massive level in EURGBP.

CHF – franc traders are on holiday in EURCHF, but somewhat interesting that the EURCHF not following EURJPY In any directional sense recently.

AUD - As noted above, the Aussie getting the negative attention it deserves, though bears may have a tough time of it if the latest jobs data is particularly strong later this week. Iron ore prices near a 3-month low close are not good news.

CAD – CAD downside continues amidst the USD resurgence, but noting that other currencies beginning to win the race to the bottom – we noted last week that the CAD felt a bit unfairly singled out. With the 1.3000 break in USDCAD, the way looks open to 1.3500+ as long as the Fed keeps US rate expectations on the boil.

NZD – the kiwi is pushing to the bottom of the zone in AUDNZD as Australia has receive fresh negative focus. Kiwi up for a wake-up call for stale longs, however, if we get another risk off blast and NZDUSD, for example, heads below the pivotal 0.7.

SEK – hawkish Riksbank dissenter Ohlsson will be out speaking later today as EURSEK has settled down toward the first support areas ahead of the pivotal 10.00 level.

NOK – EURNOK has maintained its break lower from late last week post Norges Bank, keeping focus lower toward 9.30 and beyond as long as the break holds and we don’t see a mishap in global energy markets to derail the move.

Upcoming Economic Calendar Highlights (GMT)

10:00 – Eurozone Jan. Trade Balance 
12:00 – Sweden Riksbank (hawk) Ohlsson to speak 
13:40 – US Fed’s Bostic (FOMC Voter) to speak 
18:00 – ECB’s Mersch to Speak 
N/a    – Brexit press conference with Barnier / Davis in Brussels 
00:30 – Australia RBA Meeting Minutes 

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