FOREX 5 minutes to read

All focus on QT hints at FOMC

John Hardy

Head of FX Strategy

Summary:  Markets look complacent heading into an important event risk today as the FOMC is set to roll out its latest policy statement and Powell will face tough questioning, particularly on the Fed’s rhetoric discussing the QT programme in the wake of the December FOMC meeting.


Markets look complacent and uninspired heading into an important Federal Open Market Committee meeting and despite the news yesterday that the US has formally requested the extradition of Huawei’s CFO from Canada. The latter now has a month to weigh the US’ charges and decide on whether to move forward with the extradition. Could it be more of a “coincidence” that we are also about a month from the deadline for US-China trade talks before Trump’s new 25% tariff schedule is supposed to go into effect on March 1?  US Treasury Secretary seems to think things are going swimmingly as he tosses out (is prompted to issue) a positive comment at regular intervals and markets are clearly hopeful for a breakthrough. 

The market may be most sensitive to any discussion of the Fed’s QT programme in Jerome Powell’s press conference this evening if nothing specific is mentioned in the statement (I suspect that any change to policy guidance will be very vague in the statement itself at this phase at best). So be prepared for a two peaks in the event risk reaction tonight – the issuance of the statement itself and any alterations it contains and then how Powell responds to questions on the policy outlook in the press conference.

The market appears quite confident that it has tamed Powell’s prior hawkish tendencies after the market so viciously rebelled on the message delivered at the December FOMC meeting. A great article discussing the market’s behaviour as the Fed has tripped over its guidance since that meeting was The Macrotourist’s “Once a caver, always a caver” post. This article discusses the market’s very enthusiastic reception of the Wall Street Journal discussing the potential for a Fed turnaround on QT that boosted markets last Friday.

So it looks like the market is positioned for a Fed thaw on QT even if it expects a two way message on rate guidance. And if the Fed does deliver a clear dovish message on QT we may even get a further melt-up in risk assets if US-China trade deal hopes remain strong.

I strongly agree with the Macrotourist post that if, on the other hand, the Fed completely fails to deliver the impression that it is set to shift its attitude on QT for now and continues to see gradual rate increases as the most likely policy trajectory, we could be in for a sharp consolidation in risk appetite. The risk is that the market may get the feeling that the Fed is only ready to dance to is message when it is on its knees begging for mercy.

Outside of the entire FOMC angle to today’s action, the uncertainty surrounding the outlook for China and what it will do about its currency and the course of US-China trade negotiations may exercise more gravity for now than anything the Fed says today, as long as the FOMC statement and press conference are within the bounds of expectations.

The Aussie is bid again after headline Q4 CPI came in a bit hotter than expected at +0.5% QoQ and 1.8% YoY, both exceeding expectations by 0.1%, while the “trimmed mean” was in-lin with expectations at 1.8% year-on-year. The more important drivers of a bounce in the currency’s fortunes overnight were another boost to the renminbi, which has reached new highs versus the US dollar top level US-China trade talks are set to get under way in Washington today. Any reports of stimulus plans, and even possible relaxation of pollution controls, may be behind a very steep rally in Chinese iron ore futures, which has also boosted the large Australian mining stocks.

We are still negative on the Aussie from a Reserve Bank of Australia policy risk perspective on the risks of a domestic credit crunch, but near term squeeze potential certainly can’t be ruled out if markets continue to put a positive spin on the outlook for key commodities linked to renewed Chinese stimulus efforts. The renminbi direction also plays an important role.

Chart: AUDJPY

JPY crosses shifted from a terrifying descent ending in a flash crash early this year to a tight, sideways range trade. In several JPY crosses, including here in AUDJPY, the upside resistance level is well defined at the previous lows for the cycle as markets have clutched at straws for trading themes. Upside likely the side of least resistance if the market remain confident on the idea that global central banks will pull out all of the stops to keep asset market confidence supported, and that the Bank of Japan may be one of the first central banks to innovate with new policy (fiscal – more explicit monetisation, for example), given that its yield-curve-control policy is already failing (10-year JGB’s trading near zero percent).

Others would argue that the Bank of Japan would only have the leeway to make a more pronounced move if it can demonstrate more forcefully that deflation risks have returned – for example prompted by a fresh round of JPY strength. Either way, we find it hard to believe that the JPY will refuse to make a statement for much longer.
Source: Saxo Bank
The G-10 rundown

USD – note our discussion of the FOMC above – the higher volatility scenario would be a more hawkish Fed than expected on the QT discussion.

EUR – nothing to like about the trajectory of the EU economy – makes the euro look a neutral currency passive to the impulses of strength and weakness in other currencies. 

JPY – yen crosses likely to show high beta to risk appetite, with a dovish FOMC message likely seeing JPY crosses pouncing higher (not including USDJPY) and perhaps the opposite on a hawkish surprise.

GBP – we are none the wiser after yesterday, as the amendment votes give May a weak mandate for renegotiating and parliament can still conjure a delay from its hat at the last moment even though it voted against debating a delay this time around last night. The EU’s response to May’s attempt to reopen talks the next step.

CHF – failing to see what is driving the pointed CHF weakness other than perhaps hopes that we are set for geopolitics to step away from the brink and for central banks to encourage the carry trade with a new shift toward easing. Technically interesting that EURCHF breaks above 1.1350 yesterday.

AUD – the Aussie bid for the reasons we list above – we like fading AUDUSD strength eventually, but for now, downside optionality looks the safest way to trade this, with options expiring post March 1, the supposed deadline for US-China trade talks.

CAD – the oil sell-off reversed and keeps USDCAD looking lower if the pair can take out the sub-1.3200 supports after tonight’s FOMC meeting.

NZD – looking like 1.0500 is a tough nut to crack on a sustained basis for AUDNZD – is this a base for now? 

SEK – EURSEK trying above resistance this morning – a weak Euro Zone economy weighing more heavily here than anticipation of the end of negative rates, with the Riksbank’s shift already seeing sharp deterioration in housing prices.

NOK – fresh bounce in oil continues to feed resilience as market ignores weak Retail Sales data this morning – NOKSEK trending nicely. 

Upcoming Economic Calendar Highlights Today (all times GMT)

1300 – Germany Flash Jan. CPI
1315 – US Jan. ADP Employment Change
1900 – FOMC Rate Decision
1930 – US Fed Chairman Powell Presser
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