FX Update: Market touchy on yields, cue FOMC next Wednesday
Summary: Yesterday saw the USD moving sharply higher and sustaining an intraday move for the first time in a while. A stronger than expected US Retail Sales report seemed to show how touchy the lowest yielding CHF and JPY are to anything that prompts a sharp move in US treasury yields. Next week is chock full of central bank meetings, highlighted by the FOMC meeting, but including potentially pivotal meetings from Sweden, Norway and the Bank of England.
FX Trading focus: USD surges on modest yield rise, suggesting
The US dollar was higher yesterday as US yields surged in the wake of a much stronger than expected Retail Sales report, particularly for the robust ex-Auto and Gas core reading of +2.0% month-on-month vs. 0% expected (even if it was flattered significantly by a -0.7% downward revision of the July data). The USD popped higher on the news, particularly against the lowest yielding CHF and JPY, but with EURUSD also dropping to the lows of this consolidation. The sensitivity to the single data point perhaps reveals where the market is more sensitive to next week’s FOMC (much more below on that) than to the specific scale of the surprise in this data. Later today, will watch the preliminary US September University of Michigan survey with interest after the terrible August reading that came in below the worst pandemic outbreak months early last year. As noted in today’s Saxo Market Call podcast.
Elsewhere, the unfolding Chinese situation should demand considerable attention, and the fairly strong CNH is interesting relative to the negative news flow and weak performance of Chinese assets. There is some talk of tightness in funding driving CNH strength due to the contagion from property developer Evergrande’s woes and the PBOC overnight offered more liquidity in a repo operation than it has in a while. But given China’s policy directions laid out in recent months and the implications for whole categories of equities, it is difficult to drum up a positive narrative for the currency – could we have seen the lows in USDCNH for now?
Chart: USDCHF
Yesterday’s session saw USDCHF suddenly vaulting clear of the recent range highs that had held back prior attempts higher, though there a prior range high still blocks the open area toward the major 0.9475 area pivot from back near April 1 – not coincidentally the day of the highest long US treasury yields as those were sharply repriced during Q1. Interesting on that note to see that this move is “outperforming” the sharp rise in the US 10-year treasury yield yesterday as we have a break higher in the price action here even with the US yields bogged down in the range. A major contributing factor to the CHF weakness here is likely the situation in EU yields rising to new local highs and EURCHF slipping above 1.0900 – a local high and coincidentally at the 200-day moving average as well.
Initial preview of FOMC meeting next Wednesday. The highlight of the week next week is the FOMC meeting on Wednesday, which will see the latest set of Fed projections on inflation, employment, GDP and rate forecasts in the dot plot. To recall, the June FOMC meeting saw a sharp shift higher in Fed expectations on the fed forecast dot plot shift and the general sense that the Fed is moving in the direction of tightening. Since the June FOMC meeting, expectations have triangulated to the very middle of the range established back before and after the June meeting, suggesting that the market is not leaning in either direction at all and thus perhaps that the bar to a hawkish surprise is quite low, with that stance in part encouraged by Fed Chair Powell’s dovish Jackson Hole speech in late August. I suspect we are set for a decent hawkish surprise as the Fed would like to get this taper rolling to have a more nimble stance next year if employment surges into the end of the year.
A long list of additional central banks next week. Besides the Fed next week, we have the BoJ also up next Wednesday, with little expected there as interest in Japan will likely only pick up on new fiscal initiatives on the other side of the election set to take place on or before November 28. More important in terms of the potential to affect price action are the Riksbank meeting on Tuesday (guidance after the hot August Sweden inflation data) and the Norges Bank meeting on Thursday – with a 25-bp rate hike expected, with further guidance the key after this hike has been flagged. The Bank of England is also up on Thursday, with a heavy lean from the market on anticipation of further guidance in the direction of removing accommodation sooner rather than later. (BoE expectations out in 2022 at the highs for the cycle here). EM watchers should note the Hungarian Central Bank meeting on Tuesday, China’s PBOC Wednesday, Brazil late Wednesday, Turkey on Thursday and South Africa on Friday.
CAD not fretting the election on Monday. Canadian prime minister Justin Trudeau’s gambit to take advantage of apparent popularity in the polls and reap a ruling majority in a snap election has backfired badly, with oddsmakers about 50-50 on whether Trudeau’s liberals or the now more centrist Conservatives will win the election, with a minority government likely in either case and the Conservatives turn toward the center on climate likely meaning less contrast, particularly with a minority government, than outcomes in past elections.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
FX Trading focus: USD surges on modest yield rise, suggesting
The US dollar was higher yesterday as US yields surged in the wake of a much stronger than expected Retail Sales report, particularly for the robust ex-Auto and Gas core reading of +2.0% month-on-month vs. 0% expected (even if it was flattered significantly by a -0.7% downward revision of the July data). The USD popped higher on the news, particularly against the lowest yielding CHF and JPY, but with EURUSD also dropping to the lows of this consolidation. The sensitivity to the single data point perhaps reveals where the market is more sensitive to next week’s FOMC (much more below on that) than to the specific scale of the surprise in this data. Later today, will watch the preliminary US September University of Michigan survey with interest after the terrible August reading that came in below the worst pandemic outbreak months early last year. As noted in today’s Saxo Market Call podcast.
Elsewhere, the unfolding Chinese situation should demand considerable attention, and the fairly strong CNH is interesting relative to the negative news flow and weak performance of Chinese assets. There is some talk of tightness in funding driving CNH strength due to the contagion from property developer Evergrande’s woes and the PBOC overnight offered more liquidity in a repo operation than it has in a while. But given China’s policy directions laid out in recent months and the implications for whole categories of equities, it is difficult to drum up a positive narrative for the currency – could we have seen the lows in USDCNH for now?
Chart: USDCHF
Yesterday’s session saw USDCHF suddenly vaulting clear of the recent range highs that had held back prior attempts higher, though there a prior range high still blocks the open area toward the major 0.9475 area pivot from back near April 1 – not coincidentally the day of the highest long US treasury yields as those were sharply repriced during Q1. Interesting on that note to see that this move is “outperforming” the sharp rise in the US 10-year treasury yield yesterday as we have a break higher in the price action here even with the US yields bogged down in the range. A major contributing factor to the CHF weakness here is likely the situation in EU yields rising to new local highs and EURCHF slipping above 1.0900 – a local high and coincidentally at the 200-day moving average as well.
Initial preview of FOMC meeting next Wednesday. The highlight of the week next week is the FOMC meeting on Wednesday, which will see the latest set of Fed projections on inflation, employment, GDP and rate forecasts in the dot plot. To recall, the June FOMC meeting saw a sharp shift higher in Fed expectations on the fed forecast dot plot shift and the general sense that the Fed is moving in the direction of tightening. Since the June FOMC meeting, expectations have triangulated to the very middle of the range established back before and after the June meeting, suggesting that the market is not leaning in either direction at all and thus perhaps that the bar to a hawkish surprise is quite low, with that stance in part encouraged by Fed Chair Powell’s dovish Jackson Hole speech in late August. I suspect we are set for a decent hawkish surprise as the Fed would like to get this taper rolling to have a more nimble stance next year if employment surges into the end of the year.
A long list of additional central banks next week. Besides the Fed next week, we have the BoJ also up next Wednesday, with little expected there as interest in Japan will likely only pick up on new fiscal initiatives on the other side of the election set to take place on or before November 28. More important in terms of the potential to affect price action are the Riksbank meeting on Tuesday (guidance after the hot August Sweden inflation data) and the Norges Bank meeting on Thursday – with a 25-bp rate hike expected, with further guidance the key after this hike has been flagged. The Bank of England is also up on Thursday, with a heavy lean from the market on anticipation of further guidance in the direction of removing accommodation sooner rather than later. (BoE expectations out in 2022 at the highs for the cycle here). EM watchers should note the Hungarian Central Bank meeting on Tuesday, China’s PBOC Wednesday, Brazil late Wednesday, Turkey on Thursday and South Africa on Friday.
CAD not fretting the election on Monday. Canadian prime minister Justin Trudeau’s gambit to take advantage of apparent popularity in the polls and reap a ruling majority in a snap election has backfired badly, with oddsmakers about 50-50 on whether Trudeau’s liberals or the now more centrist Conservatives will win the election, with a minority government likely in either case and the Conservatives turn toward the center on climate likely meaning less contrast, particularly with a minority government, than outcomes in past elections.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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