John Hardy

John Hardy

Hardy has won several accolades for his work and was named the most successful 12-month forecaster for 2015 among over 30 of FX Week’s regular contributors. His forex market column is often quoted and he is a regular guest and commentator on television, including CNBC and Bloomberg. 

Japanese Yen (JPY) Rise. Energy Prices Are Finally Falling!?

Japanese Yen (JPY) Rise. Energy Prices Are Finally Falling!?

John Hardy John Hardy 16.08.2022 10:05
Summary:  Weak data out of China overnight, together with a surprise rate cut from the PBOC and collapsing energy prices later on Monday saw the Japanese yen surging higher across the board. Indeed, the two key factors behind its descent to multi-decade lows earlier this year, rising yields and surging energy prices, have eased considerably since mid-June with only modest reaction from the yen thus far. Is that about to change? FX Trading focus: JPY finding sudden support on new disinflation narrative Weaker than expected Chinese data overnight brought a surprise rate cut from the Chinese central bank and seems to have sparked a broadening sell-off in commodities, which was boosted later by a crude oil drop of some five dollars per barrel on the news that Iran will decide by midnight tonight on whether to accept a new draft on the nuclear deal forward by the Euro zone. In response, the Chinese yuan has weakened toward the highs for the cycle in USDCNH, trading 6.78+ as of this writing and  (there was a spike high to 6.381 back in May but the exchange rate has been capped by 6.80 since then), but the Japanese yen is stealing the volatility and strength crown, surging sharply across the board and following up on the move lower inspired by the soft US CPI data point. US long yields easing considerably lower after an odd spike last Thursday are a further wind at the JPY’s back here. In the bigger picture, it has been rather remarkable that the firm retreat in global long-date yields since the mid-June peak and the oil price backing down a full 25% and more from the cycle highs didn’t do more to support the yen from the yield-spread angle (Bank of Japan’s YCC policy less toxic as yields fall) and from the current account angle for Japan. Interestingly, while the JPY has surged and taken USDJPY down several notches, the US dollar is rather firm elsewhere, with the focus more on selling pro-cyclical and commodity currencies on the possible implication that China may be content to export deflation by weakening its currency now that commodity prices have come down rather than on selling the US dollar due to any marking down of Fed expectations. Still, while the USD may remain a safe haven should JPY volatility be set to run amok across markets, the focus is far more on the latter as long as USDJPY is falling Chart: EURJPY As the JPY surges here, EURJPY is falling sharply again, largely tracking the trajectory of longer European sovereign yields, which never really rose much from their recent lows from a couple of weeks back, making it tough to understand the solid rally back above 138.00 of late. After peaking above 1.90% briefly in June, the German 10-year Bund, for example, is trading about 100 basis points lower and is not far from the cycle low daily close at 77 basis points. The EURJPY chart features a rather significant pivot area at 133.50, a prior major high back in late 2021 and the recent low and 200-day moving average back at the beginning of the month. After a brief JPY volatility scare in late July and into early August that faded, are we set for a second and bigger round here that takes USDJPY down through 130.00 and EURJPY likewise? A more significant rally in long US treasuries might be required to bring about a real JPY rampage. Source: Saxo Group The focus on weak Chinese data and key commodity prices like copper suddenly losing altitude after their recent rally has the Aussie shifting to the defensive just after it was showing strength late last week in sympathy with strong risk sentiment and those higher commodity prices. Is the AUDUSD break above 0.7000-25 set for a high octane reversal here? AUDJPY is worth a look as well after it managed to surge all the way back toward the top of the range before. The idea that a weak Chine might export deflation from here might be unsettling for Aussie bulls. The US macro data focus for the week is on today’s NAHB homebuilder’s survey, which plunged to a low since 2015 in June (not including the chaotic early 2020 pandemic breakout months), the July Housing Starts and Building Permits and then the July Retail Sales and FOMC minutes on Wednesday. With a massive relief in gasoline prices from the July spike high, it will be interesting to see whether the August US data picks up again on the services side. The preliminary August University of Michigan sentiment survey release on Friday showed expectations rising sharply by over 7 points from the lowest since-1980 lows of June, while the Present Situation measure dropped a few points back toward the cycle (and record) lows from May. Table: FX Board of G10 and CNH trend evolution and strength. The JPY is the real story today, but as our trending measures employ some averaging/smoothing, the move will need to stick what it has achieved today to show more. Watch out for a big shift in the commodity currencies in coming days as well if today’s move is the start of something. Elsewhere, the JPY comeback is merely taking CHF from strength to strength, although even the might franc has dropped against the JPY today. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs. Big momentum shift afoot today and watching whether this holds and the JPY pairs and pairs like AUDUSD and USDCAD to see if we are witnessing a major momentum shift in themes here. Also note NOK pairs like USDNOK and EURNOK here. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1400 – US Aug. NAHB Housing Market Index 0130 – Australia RBA Meeting Minutes Source: FX Update: JPY jumps on deflating energy prices, fresh retreat in yields.
Dollar (USD) Became Stronger, Not Enough Yet. Fed Better Meet Expectations!

Dollar (USD) Became Stronger, Not Enough Yet. Fed Better Meet Expectations!

John Hardy John Hardy 12.08.2022 14:23
Summary:  US treasury yields at the long end of the yield curve jumped higher yesterday to multi-week highs, a challenge to widespread complacency across global markets. The USD found a modicum of support on the development, though this was insufficient to reverse the recent weakening trend. It will likely take a more determined rise in US yields and a tightening of financial conditions, possibly on further Fed pushback against market policy expectations, to spark a more significant USD comeback. FX Trading focus: US yields jump, not yet enough to reverse recent USD dip A very interesting shift in the US yield curve yesterday as long yields jumped aggressively higher, with the 30-year yield getting the most focus on a heavy block sale of US “ultra” futures and a softer than expected 30-year T-bond auction from the US treasury. The 30-year benchmark yield jumped as much as 15 basis points from the prior close, with the 10-year move a few basis points smaller. We shouldn’t over-interpret a single day’s action, but it is a technical significant development and if it extends, could be a sign of tightening liquidity as the Fed ups its sales of treasuries and even a sign that market concern is growing that the Fed will fail to get ahead of inflation. As for the market reaction, the USD found some support, but it was modest stuff – somewhat surprisingly in the case of the normally very long-US-yield-sensitive USDJPY. Overnight, a minor shuffle in Japanese PMI Kishida’s cabinet has observers figuring that there is no real determined pushback yet against the Kuroda BoJ’s YCC policy, with focus more on bringing relief to lower income households struggling with price rises for essentials. Indeed, BoJ policy is only likely to come under significant pressure again if global yields pull to new cycle highs and the JPY finds itself under siege again. As for USDJPY, it has likely only peaked if long US yields have also peaked for the cycle. Chart: EURUSD EURUSD caught in limbo here, having pulled up through the resistance in the 1.0275+ area after a long bought of tight range trading, but not yet challenging through the next key layer of resistance into 1.0350+. It wouldn’t take much of a further reversal here to freshen up the bearish interest – perhaps a dip and close below 1.0250 today, together with a bit of follow through higher in US yields and a further correction in risk sentiment. Eventually, we look for the pair to challenge down well through parity if USD yields retest their highs and beyond. Source: Saxo Group Elsewhere – watching sterling here as broader sentiment may be at risk of rolling over and as we wind our way to the conclusion of the battle to replace outgoing Boris Johnson, with Liz Truss all but crowned. Her looser stance on fiscal prudence looks a sterling negative given the risks from UK external deficits. Her instincts seem pro-supply side on taxation, but the populist drag of cost-of-living issues has shown her to be quick to change her stripes – as she has often been, having reversed her position on many issues, including Brexit (was a former remainer). Today’s reminder of the yawning trade deficit (a current run rate of around 10% of GDP) and the energy/power situation together with dire supply side restraints on the UK economy have us looking for sterling weakness – a start would be a dip below 1.2100 in GBPUSD, which would reverse the reaction earlier this week to the US July CPI release. The week ahead features an RBNZ on Wednesday (market nearly fully priced for another two meetings of 50 basis points each). NZDUSD has looked too ambitious off the lows – there is no strong external surplus angle for the kiwi like there is for the Aussie – might be a place to get contrarian to the recent price action if global risk sentiment is set to roll over again finally now that the VIX has pushed all the way to 20 (!).  A Norges Bank meeting on Thursday may see the bank hiking another 50 basis points as it continues to catch up to inflationary outcomes. The US FOMC minutes are up next Wednesday and may be a bit of a fizzle, given that the bulk of the easing financial conditions that the Fed would like to push back against came after the meeting. Table: FX Board of G10 and CNH trend evolution and strength. The US dollar hasn’t gotten much from the latest development in yields – watching the next couple of sessions closely for direction there, while also watching for the risk of more sterling downside, while NZD looks overambitious on the upside. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs. The EURGBP turn higher could follow through here – on the lookout for that development while also watching GBPUSD status in coming sessions and whether the EURUSD move higher also follows through as per comments on the chart above. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1400 – US Fed’s Barkin (non-voter) to speak 1400 – US Aug. Preliminary University of Michigan sentiment Share Source: FX Update: US yield jump brings USD resilience if not a reversal.
US Income Is Rising But The Dollar Is Still Falling. What To Do?

US Income Is Rising But The Dollar Is Still Falling. What To Do?

John Hardy John Hardy 11.08.2022 09:30
Summary:  The market was happy to adjust US yields higher recently on stronger than expected US data points, but failed to take the USD lower, which in perfect hindsight suggests that the USD was set for a sharp drop on a soft CPI print today. And that’s what we got, with the headline CPI figure flat on month-on-month comparisons and the core rising less than expected. But how far can the market run on a single data print as data reactions have been fickle and fleeting of late. FX Trading focus: USD bears celebrate weak CPI print, but… The US CPI print came in weaker than expected for both the headline and for the ex Food and Energy figure. The headline softness was driven by huge drops in energy prices from June levels, with the entire energy category market -4.6% lower month-on-month and gasoline down -7.7%, much of the latter on record refinery margins collapsing. The ex Food & Energy category was up only +0.3% vs. the +0.5% expected, with soft prices month-on-month for used cars and trucks (-0.4%) and especially airfares (-7.8%) dragging the most on figure. Risk sentiment is off to the races as this fits the market’s Goldilocks soft-landing scenario, particularly given recent stronger-than-expected activity data. It’s hard to tell how far the market can take the reaction function to a data point like this when we are trading in an illiquid month and some very volatile categories are behind the surprise inflation number today, and recent data reactions have failed to hold beyond the end of the day. But for now, the USD has triggered lower and taken out some important local support. We suspect it is far too early in the cycle to call the aggressive shift from the Fed that the market has been pricing, as this July CPI data point has seen the market marking the September FOMC decision down close to 50 basis points now and taking more of the tightening out of the meetings beyond. The market’s interpretation of a profound shift in the Fed, the Fed’s own protestations notwithstanding, has driven a strong easing of financial conditions since mid-June. Could this result in the economy showing a heating up in the coming months, also as the shock of higher gasoline price in particular may have eased the pressure on consumer sentiment? The preliminary Aug. University of Michigan Sentiment survey could be an interesting test on that front. For now, USDJPY posted the biggest reaction to the data point today as one would expect on the big move in treasury yields – more on USDJPY below. EURUSD has broken above the local resistance just below 1.0300, but faces a more significant resistance level in the 1.0350 area – one that could lead to a return to 1.0500+ if this move sticks through the Friday close. Again, as mentioned recently, it is too early to call an end of the EURUSD bear – the market’s view will have to play out as currently priced, with all of the Goldilocks implications, etc., for the USD to shift to a sustained and broad bear market here. Elsewhere, AUDUSD has vaulted above 0.7000, the tactical bull/bear line, with a huge zone up into 0.7150-0.7250 the more structural area of note for direction. Gold not holding above 1,800 in reaction to this data point as of this writing is already a weak performance, and I am watching much of the treasury market kneejerk reaction higher seeping out of the US treasury market as well – so some of the reaction is already fading fast – stay tuned! A US treasury auction is up today at 1700 GMT – the longer end of the US yield curve may be the most important coincident indicator for all markets here – if yields pull back higher, for example the US 10-year benchmark moving back above 2.87% and especially toward 3.00%, today’s reaction in the USD and the JPY, etc.. should quickly reverse. Chart: USDJPYThe bottom dropped out of USDJPY on the softer than expected US July CPI data this afternoon, just as it vaulted higher on Friday on the stronger than expected US July jobs report – with US yields the key coincident indicator. On that note, the US Treasury market reaction fading fast in the wake of today’s data point suggests USDJPY bears should be cautious here – if the US 10-year benchmark closes back above 2.75% and especially above 2.87% in coming days, this move may be quickly neutralized, although if we do close down here well south of 133.50, the candlestick looks rather bearish for a test lower. If the pair closes back well above 134.00, the next step would be a move above 136.00 to suggest the bull market is back on (likely as US 10-year treasury yields pull to 3.00% or higher). Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strength.Let’s have a look at how the market behaves after the knee-jerk reaction to the US data point today before drawing conclusions. As noted above, some important coincident indicators for the US dollar are suggesting caution for USD bears here. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Today’s USD moves important if they stick into the close today and the close to the week – data reactions have been fickle and fleeting of late – so some patience may be required. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1600 – UK Bank of England economist Pill to peak 1700 – US Treasury to auction 10-year notes 1800 – US Fed’s Kashkari (non-voter) to speak 2301 – UK Jul. RICS House Price Balance 0100 – Australia Aug. Consumer Inflation Expectations Source: FX Update: : Soft US CPI sparks significant kneejerk USD selling, but...    
Euro eyes Services PMIs

FX Update: FOMC kneejerk fading fast.

John Hardy John Hardy 28.07.2022 19:07
Summary:  The kneejerk to the FOMC meeting was a weaker US dollar and rally in risk sentiment, as the market felt the FOMC delivered little relative to expectations, though the kneejerk has faded sharply in Europe today. Powell made it clear that the Fed does not want to provide explicit forward guidance on rate moves from here and will yielding to incoming data, which will aggravate volatility around key data releases. FX Trading focus: FOMC kneejerk fading fast The FOMC meeting was an interesting test of market psychology as the statement and Fed Chair Powell refused to deliver much, leaving the market to its own devices – having to decide whether its own expectations on where the economy will be by late this year and into next year are correct and whether the incoming data in that period will see the Fed able to slow its rate tightening and then even begin to cut already starting perhaps by mid-year next year. The market puffed out its chest with confidence late yesterday that Fed Chair Powell had not pushed back strongly enough on the market forecast, but seems to be second-guessing the knee-jerk reaction by lunch-time in Europe today. My initial reaction to the FOMC meeting in an internal memo just after the conclusion of the presser last night was as follows: The FOMC statement provided very little to go on – really only the addition at the beginning of the statement that “Recent indicators of spending and production have softened. Nonetheless.. [repeats strong labor market views, etc.]” In the Q&A, Fed Chair Powell dodged every attempt to make a point that could be considered solid forward guidance – he even specifically stated that the Fed won’t issue any “clear guidance” on future rate moves and that the June FOMC rate forecasts are the only thing on offer for a likely path of rates (even after WSJ’s Timiraos specifically poked Powell to answer whether he thought it was fair that the market is pricing the Fed to cut rates next year after a peak by the end of this year.) For the September FOMC meeting, Powell said that further “unusually large” rate increases (read: 75 bps vs. 50 bps) will depend on incoming data, with two CPI prints before that September 21 meeting. Market currently priced at +58 bps. The general lay of the land is this: Fed sees some evidence of heat coming out of the economy, but refuses to provide new guidance and will be ruled by the data – this will mean extreme sensitivity to US data releases from here (the stronger the US economy and/or inflation the worse for the market) The initial market reaction is that this has sparked aggressive risk-on as it solidifies the market confidence in its own forecast: that inflation is set to recede and growth slow, allowing the Fed to peak out with the Fed funds are about 100 basis points higher still, but rolling over to cuts on a weak economy/recession next year. We consider this path highly unlikely, and the significant easing of credit spreads and fall in yields all along the curve since mid-June (timing of prior FOMC meeting) will likely mean risks of higher inflationary readings from here. The Fed is asleep at the wheel….and we don’t trust the initial market reaction, even if it could extend in the very short term (if at all beyond today’s session – big earnings could be negative distraction as market essentially got what it wanted – permission to indulge in its own forecast of how the economy will shape up, with Fed not leading, but reacting. We have to remember as well, that Fed will mechanically begin reducing liquidity via QT as it moves toward peak pace of $95 billion of balance sheet reduction per month by September (maximum achieved so far only $35 billion reduction over last four weeks) and that August is traditionally a poor month for liquidity…. The action in Europe by late this morning is already casting a shadow over the kneejerk reaction to the FOMC meeting, for EURUSD in particular, with the broader USD picture quite mixed since yesterday. Given the dismal reality facing the EU heading into the fall, I have a hard time supporting the euro in any currency pairing. Note EURNOK slamming lower as it should, given Norway’s total insulation from the energy woes (I do wonder about how Norway deals with the PR long term of the kinds of incredible profits it is reaping from this situation). I can’t see why EURNOK shouldn’t fall to 9.50 and even 9.00 eventually on a miserable winter situation for power/gas prices in Europe in coming months. EURJPY looks heavy, too, which it should be, given the tremendous tightening of yield spreads and the ugly overhang of economic and semi-existential (Italian populist uprising redux at coming election) angst. On the latter, noting the 136.87 area. Elsewhere, the USD reaction has not faded as much – still need to give ourselves through tomorrow’s close (post-PCE inflation data) for a sense on whether the market got this FOMC reaction “right” for a larger move. Chart: EURJPYEURJPY is nearing critical technical levels as the euro is the sick currency of the world at the moment, stealing the JPY’s recent thunder as the easing in bond yields globally, and especially in Europe, has the negative attention slowly pivoting away from Japan (note tonight sees July Tokyo CPI out of Japan). A drop through the 136.87 level could quickly open up for a test toward the 133.00 area noted and last test in May and even 130.00 eventually if the news flow doesn’t improve for Europe. Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strength.Euro weakness deepening here, while we still hold our breath a bit on USD direction until the Friday close. NOK leads the pack for good reason as oil and gas prices are both resurgent, while AUD is a strong runner-up on that gas prices, but also as industrial metals are a bit resurgent and coking coal is on a tear. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.EURNOK is dropping like a stone and EURSEK is mulling the 200-day moving average break (recently, I have argued that SEK may break its slavish correlation to simple risk sentiment). The USDJPY has flipped negative as of the current print – let’s see if that move sticks through the weekly close. EURGBP is powering lower, but I am reluctant to get on board the recent flip of GBPUSD to a rising trend. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1200 – Germany Jul. Flash CPI 1230 – US Q2 GDP Estimate 1230 – US Initial Weekly Jobless Claims and Continuing Claims 1300 – ECB's Visco to speak Source: FX Update: FOMC kneejerk fading fast. | Saxo Group (
University Of Michigan Sentiment Index Is Released Today

This Week's Hit Is Fed's Decision. What Can We Expect From US Dollar's Liquidity? Europe: What's Going On With Gas?

John Hardy John Hardy 26.07.2022 14:13
Summary:  The event of the week for FX traders is tomorrow’s FOMC meeting, for which the market is clearly positioned for a “dovish hike” as the market has both lowered and brought the peak Fed funds rate forward since the June FOMC meeting. Even if the Fed guides for a range of outcomes, USD liquidity will continue to shrivel due to the preset plan to accelerate balance sheet reductions through the end of next month. Elsewhere, the Eurozone and the euro are beset with tremendous pressure from the natural gas Sword of Damocles hanging over it. FX Trading focus: Market pricing a dovish hike from the Fed. The market appears priced for “dovish hike” from the Fed tomorrow, with a 75-basis point hike fully priced for the meeting, but the path thereafter having received a sharp adjustment lower after the June FOMC meeting, with the downdraft in US treasury yields late last week taking us back to the lower range of Fed expectations for the cycle since that June meeting. It is too early for the Fed to pivot on policy guidance, even if wants to retain some flexibility after today’s hike takes the Fed to the cusp of the highly theoretical “neutral rate” of 2.50%. The market figures that about 100 basis points of further tightening are likely through the December meeting – with more than half of that coming at the September FOMC. Perhaps more important for market outcomes, the Fed’s QT is theoretically set to accelerate on schedule and won’t reach its maximum level until the end of next month, but the four weeks from June 22 to July 20 only saw a $35 billion reduction in the Fed’s balance sheet, slightly only a third of the pace of $95 billion/month set for September. Signs point to continue USD strength until the Fed relents, and it looks too early for that to transpire here on the same month that the official CPI data series reached a new 40-year high. But the Fed is only one of the market’s many irons in the fire, with the power/natural gas situation in Europe the most pressing issue for any economic region as discussed in the EURUSD chart caption below. Taking the USD out of the equation, if the Fed fails to inspire much of a reaction in longer yields, the EURJPY looks far too high here on a yield spread basis even if Japan is to a very considerable degree also pressured by the natural gas price situation (Japan actually consumes more total natural gas than Germany, even if current), as LNG cargoes are priced with only about a 30% discount to the latest, very high 1-month forward prices in Europe. And, of course, EURCHF already got the memo – trading to new lows for the cycle today.   Today's FX Update as market leans hard for Fed guidance deceleration at #FOMC tomorrow and NatGas noose is cinching tighter around EU economy's neck. #forex — John J. Hardy (@johnjhardy) July 26, 2022 Chart: EURUSDThe sword of Damocles is hanging over the Eurozone economy in the form of Putin’s threat to further reduce gas flows through the Nord Stream 1 pipeline after these were halved yesterday from levels that were already driving fears of an energy calamity this winter. It was surprising yesterday that the euro didn’t more immediately react to the latest natural gas flow reductions. Yesterday’s July German IFO release saw the Expectations component dropping 5 points to the second worse reading since 2008, only exceeded by a single month during the 2020 pandemic outbreak, and a Eurozone recession looks inevitable without a drop in power and natural gas prices for Europe. Even if the FOMC merely delivers as expected, EURUSD may be ready to probe back toward parity, with a significant test below that level in sight if the Fed entirely fails to indicate a less hawkish shift and Putin tightens the natural gas noose (yes, I am mixing metaphors…). Certainly, the upside resistance at 1.0250-70 is well etched here, with parity merely a psychological downside level. Source: Saxo Group Sterling is getting a modicum of respect in some crosses on the more hawkish Bank of England message in the most recent comments, but the UK is beset with the same cost-of-living challenges as the rest of Europe and higher heating prices are set to kick in. Watching the Truss-Sunak leadership battle for the Conservative party – with Truss offering a different and more populist message on her fiscal stance – low tax and low regulation. But GBPUSD looks ready for a trip lower on the same pressures affecting Europe and could trade below the panic lows during the pandemic outbreak below 1.1500 before we find a cycle low. The status of the EURSEK trend is one to watch in coming days. The recent surge in risk sentiment and the solidly hawkish recent Riksbank have helped the pair to fall from 10.80 to test the 200-day moving average near 10.40. If the FOMC surprises hawkish tomorrow or if sentiment shifts more distinctly negative, the pair is likely to consolidation higher within the range. Still, longer term, watching for the potential that the SEK trades with some premium to the euro on the latter’s possibly mounting existential risks as the Italian election approaches and Putin’s abuse of the Eurozone natural gas vulnerabilities is likely set to continue. Elsewhere, AUD looks a bit too ambitious given commodity prices and the weakening global outlook – looks like 0.7000 may not get tested for now if the greenback gets a boost post-FOMC. Table: FX Board of G10 and CNH trend evolution and strength.The euro is weak but could get weaker still and sterling should follow generally in its wake. Elsewhere, watching for the potential for the USD to surge again after it has lost its upward trajectory on a medium-term trending basis. And are the AUD, and perhaps CAD too strong here? Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.EURNOK and EURSEK are interesting at their respective 200-day moving averages – will the EU existential risk premium for the Scandies of 2011 and 2012 return? Elsewhere, watching the USD pairs in the wake of the FOMC meeting – note that the GBPUSD downtrend status just barely survived the recent squeeze. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1200 – Hungary Central Bank Rate Decision 1300 – US May S&P CoreLogic House Price Index 1300 – US Jul. Richmond Fed Manufacturing Index 1400 – US Jul. Consumer Confidence 1400 – US Jun. New Home Sales 0130 – Australia Q2 CPI Source: FX Update: Market leaning too hard for Fed deceleration? | Saxo Group (
Crypto: Oh My! Look How Many US Dollars (USD) Has Tornado Cash Laundered!

FX: Why can the Fed never catch up and what turns the US dollar lower?

John Hardy John Hardy 06.07.2022 23:49
Summary:  At the Federal Open Market Committee (FOMC) meeting on 15 June, the Fed hiked rates by 75 basis points (bps) for the first time since 1994. It’s on the path to tightening policy at the most rapid pace since the Volcker Fed in the early 1980s, all while also shrinking its balance sheet, a factor that was not in play in that era. The US dollar has surged in correlation with the steady repricing of ever more Fed tightening. It will likely only find its peak and begin a notable retreat once either the economy lurches into a disinflationary demand-induced recession or the market realises that the Fed can never catch up with the curve, because if it did, it would threaten the stability of the US treasury market. Peak USD only once the runaway inflation train has crashed?  The nearly unprecedented pace of Fed tightening this year has seen the Fed hike rates 150 bps in the space of three meetings, and the market has priced another 200 bps of tightening for the 2022 calendar year. If tightening proceeds as expected, that will be a total of 350 bps in a brief space of a nine months. Consider that it took Yellen and Powell three years to hike 225 bps and Greenspan and Bernanke nearly two years to hike rates 425 bps—and that’s without the quantitative tightening (QT) of the post-global financial crisis (GFC) era. In short, the Fed has not moved at this pace since the early 1980s.   And yet, the Fed still tries to push back against over-the-top tightening expectations even after its tardy start to the hiking cycle. At the FOMC meeting on 4 May, Fed Chair Jerome Powell specifically pushed back against the idea of hikes larger than 50 bps, only to hike by that much on 15 June, after what many believe to be the Fed guiding the market via a WSJ op-ed. Then, at the 15 June press conference, Powell tried to float the idea that the July hike might be 50 bps instead of 75. Clearly, the Fed retains the fervent hope that the current high inflation levels will still eventually prove transitory. This is in abundant evidence in the latest Fed staff economic projections as well, where the June FOMC meeting refresh still puts the 2024 expected personal consumption expenditures (PCE) core inflation at 2.3 percent. This is no change from March, although the Fed actually lowered the projected core inflation reading for 2023 and the headline inflation for 2024 by -0.1 percent. As we express in this outlook, the risk is that inflation is a runaway train and the Fed is still chasing from behind the curve, never able to catch up, as I argue below. One argument for how the US dollar might peak and begin its turn lower despite the Fed’s tightening regime is that many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve. This very development has been behind a few emerging market (EM) currencies like BRL and MXN already posting the kind of resilience one might never have thought possible in an environment of rapidly rising US yields and a stronger US dollar this year. But within a G10 FX context, outside of the important exception of USDJPY, most US dollar pairs haven’t shown much correlation with the developments in yield spreads driven at the front end of the curve by central bank policy expectations or at the longer end of the yield curve. Take a pair like AUDUSD, where the Reserve Bank of Australia (RBA) hiking expectations have now caught up and surpassed Fed expectations for the coming nine months, and where the 10-year Australian government bond yield (as of late June) traded 80+ bps higher than its US Treasury Note counterpart, compared with a range of 0 to 50 bps for the first few months of this year. This leads us to believe that the dominant strong US dollar driver in this cycle is the US dollar’s global reserve status and the simple directional fact of US inflationary pressure requiring the Fed to continue to tighten. This wears on sentiment and global financial conditions. If that is the case, then the USD will only begin turning once economic reality finally flounders, sufficiently reversing inflation via a demand-induced recession. Only then will the US dollar finally roll over after its remarkable ascent to its highest level in more than 20 years.   Why the Fed can never catch up  With the huge fiscal outlays to combat the pandemic in the US in 2020 and 2021—some $5 trillion in total—came strong new fears about the fiscal sustainability of the US government. Fast forward to 2022 and we discover that the booming asset markets in 2020 and especially 2021, as well as record boosts in personal income from the huge pandemic cash splash, brought enormous tax revenues, helping to ease these budget concerns, even if only temporarily. While things don’t look too alarming for this calendar year, the next few years will likely prove a different story. That’s because since the 1990s, tax revenues have become increasingly correlated with asset market returns—and these are looking a bit ugly for this year, to say the least. The brief 1990 recession and bear market saw nominal tax revenues actually rising 2 percent in 1991, but that compares to rises of revenue of 9 to 10 percent in the two years prior. Compare that with the wake of the tech bust of 2000 to 2002, when nominal tax revenues fell for three years running from 2001 to 2003 by a total of 12.3 percent, despite a nominal economy that continued to grow. The 2008 nominal US tax revenues did not recover to a new high until 2013. The 2022 US budget deficit is forecast to only reach -4.5 percent of GDP this year and maybe even less, up from a projected -6 percent at the beginning of the year. The fiscal turnaround is so vast that the US Treasury may even reduce the size of some of its treasury auctions this year, helping offset some of the pressure on the market to absorb treasury issuance as the Fed actively reduces its balance sheet at a rising pace until reaching $95B/month in September.  But the pandemic-era asset market returns ginned up by maximum monetary and fiscal policy support were a one-off that are not set for a repeat any time soon, as both the Fed and the Treasury tighten their collective belts to rein in inflation. So even without a recession, assuming at best that US asset markets trade sideways to slightly up for the rest of this year, next year’s budget balance will deteriorate badly as capital gains tax revenues shrivel and the cost of servicing existing debt skyrockets on all maturing and new Treasury debt resetting to sharply higher yields. Throw in an eventual recession sometime next year and the US Treasury will be in trouble, challenged to fund its spending priorities. In all likelihood, due to the lack of investment to improve the supply side of the economy, inflation won’t have fallen much by then and won’t allow the Fed to ease as forcefully as it has in the recent cycles since 2000. At the risk of getting ahead of ourselves, we will have to consider the next recession policy response. And in that environment, the Fed may be sidelined as the US Treasury reaches for stronger medicine. An example would be implementing capital controls to keep savings at home and/or financial repression through forcing a percentage of private savings into US treasuries that offer savers negative real yields because of caps on nominal treasury yields. In other words, monetary policy is rapidly becoming irrelevant as it can’t keep up with inflation risks. If it did, it would challenge the stability of the sovereign. To watch the Fed is to look in the rear-view mirror.  The G10 roundup  FX volatility climbed to its highest level since early 2020 in Q2 of this year, with some remarkable performance divergences in G10 FX. The chief development was the surge in the US dollar on the violent repricing of the pace of Fed tightening and the weakness of the Japanese yen as the Bank of Japan (BOJ) refuses to budge on its yield curve control (YCC) policy, transmitting all of the pressure that normally would have been applied to Japanese government bonds (JGBs) to the yen itself. (See Charu’s excellent article in this outlook that breaks down the mounting pressure on the Japanese yen and BOJ policy.)  Another subplot worth noting as the quarter wore on is the fading Aussie strength toward the end of the quarter, despite a massive jump in RBA hiking intentions, as the market frets the fall-off in industrial metal prices and China’s intentions for the coming winter due to its zero Covid policy and the risk of further shutdowns in the country. Elsewhere, even commodity currencies were limping into the end of Q2 on likely premature concerns of an eventual recession and/or due to tightening financial conditions, which weigh on a currency like CAD, even if the Bank of Canada is expected to match the pace of Fed hikes. The oil price is north of $110/barrel and Canada is rapidly on its way to clawing back its current account surplus status after the GFC sent it tumbling deep into external deficit mode for more than a decade.   Last quarter, we were far too early in trying to predict a euro recovery, a view that was motivated too much by the hope that the war in Ukraine would wind down quickly, taking the excess pressure off the EU from divergently high power and gas prices. Also, while the European Central Bank (ECB) tried to move ever so cautiously toward policy tightening, it was stunning to see how quickly the bank touted the need to suppress peripheral spreads by shifting its balance sheet holdings at the same time it was supposedly set to exit the negative rate era. The ECB will lag behind everyone, save for the BOJ. The euro will have a hard time rebounding if Chinese demand for its exports remains sidelined, the war in Ukraine grinds on and the US tightening on global liquidity continues. The sterling is in the same boat, and it remains difficult to conjure an upside scenario for that currency, given the country’s extreme supply side limitations and the enormous external deficits aggravated by high import prices for energy. At least the Bank of England continues to talk tough and can hike rates more easily than the ECB. In GBPUSD, watch the enormous 1.2000 chart level after it was challenged in June.  Finally, there was the shock 50-bps hike from the Swiss National Bank (SNB) at its June meeting that shifted the narrative on the Swiss franc, suggesting the SNB is now less concerned with always lagging behind the ECB in its policy moves and a moderating of exchange rate concerns, at least on the CHF level versus EUR. After all, a strong franc is one tool that can help ease inflationary pressures after the core Swiss consumer price index (CPI) surged to 1.7 percent in May, its highest in decades, save for a single month in 2008. EURCHF reset lower to sub-1.0200 levels after trading between 1.04 and 1.05 before the SNB meeting. Watch parity there for how tolerant the SNB remains for a stronger franc.  Source: Bloomberg Special focus: CNH, and especially CNHJPY, likely to command our attention before year-end  We noted in the Q2 update that the seemingly managed USDCNH exchange rate, under which China allowed its currency to closely track the performance of the US dollar even as the latter soared versus the Japanese yen, was taking the CNHJPY exchange rate to its highest since 2015. This creates enormous tension in the region, as Japan’s exports become far more competitive. (Yes, as Charu wisely points out in her piece on the Bank of Japan and the JPY, this argument has its limitations because so much of Japanese production now is sourced from all over Asia, including China.) It was around the time that the CNHJPY level reached 20.00 back in 2015 that China executed a major overhaul of its exchange rate regime. It is likely no coincidence that it was also on the very day after this exchange rate hit 20.00 this year that China engineered significant volatility in the USDCNH rate by allowing the latter to break firmly above its former, very tight range. As of this writing, the Bank of Japan has just dug in its heels on maintaining the YCC at its 17 June meeting and the CNHJPY rate has traded just above the intraday high of 20.17 from March. Previously, we predicted that China would only move to weaken its currency if inflationary risks were fading, which would require a significant drop in commodity prices. Regardless, CNH could prove the most important currency to watch as a significant potential new source of market volatility if China makes a move to weaken it this quarter or the next—possibly also helping set up the end of a stronger US dollar.Explore currencies at Saxo Source: Why Forex can never catch up and what turns the US dollar lower? – Outlook Q3 | Saxo Group (
FX Daily: Sell the fact, not the dollar

FX Update: A summer of volatile discontent?

John Hardy John Hardy 30.06.2022 14:24
Summary:  The US dollar is on the rise again, even as US treasury yields drop, suggesting the safe haven bid is set to continue as long as risk deleveraging continues. The drop in yields has eased the pressure on the Japanese yen, while the broad pressure on the euro has picked up as EURCHF traded this morning below parity and at its lowest level in more than seven years. Today, we draw up a list of developments that will likely bring a summer of volatility for asset markets. FX Trading focus: Extra pressure on the Euro, USD as safe haven, summer volatility risks The Euro is under renewed pressure as the market second guesses the ECB’s ability to tighten in line with other central banks and the incoherence/awkward “anti-fragmentation” effort that prevents the kind of forceful balance sheet reduction operations that the Fed has committed to. EURCHF is the clearest expression of this lately, but EURUSD is under pressure – more in the chart discussion below. Elsewhere, the USD enjoys strength as a function of safe haven seeking in mushy asset markets, even as US longer dated treasuries are bid again and driving the 10-year Treasury yield toward the key 3.00% area. Here we are at the end of Q2 and just ahead of the heart of summer and for my sake, ahead of three weeks of holiday starting on Monday. Any hopes for quiet markets during July and August are likely misplaced as any number of things can spark fresh volatility. I was asked by someone this week to draw up a list of what investors should watch for over the summer months, and I cobbled together a list that will inevitably prove partial, but one hopefully worth presenting here: Geopolitics: the most urgent immediate question is the course of the war in Ukraine, and whether either side shows signs of emerging with the other hand, and if not, if that means the negotiation table is a possibility. Also key is whether Russia raises the stakes by cutting off even more of its gas deliveries into Europe, which will require rationing for industry. China. Assuming all things are quiet as public relations require a smooth path toward the November party congress and Xi Jinping’s official securing of a third term. But if the USD continues an aggravated rally, the CNH deserves close watching Covid. It is spreading again and already starting to have an impact on travel, not to mention China. Could we see an echo of the 2020-21 impacts through the coming winter with new supply disruptions and subsidies for idled companies and people that drive fresh inflationary risks? Bank of Japan to be tested to the limit? Likely the issue with the most volatility potential for FX traders. There are enormous volatility risks for the Japanese yen if global yields pull back higher, and possibly even if they merely stay elevated (think relative balance sheet developments) as the Bank of Japan may try to hold the line on its yield curve control policy but then be forced to capitulate if the pressure on the Japanese yen gets even more extreme (for example sending USDJPY well north of 140.00 after it already hit highest levels since 1998 above 135 recently) Recession now or recession later? the market keeps pulling forward when it expects the Fed funds rate to peak as it feels a recession is incoming fairly soon. Market currently pricing the Fed’s peak policy rate to arrive between December 2022 and March 2023 – but if inflation fades less than expected over the summer and the economic data looks less bad than feared, the market may need to readjust – ironically meaning that “good” economic news may be bad news in the near term for equity markets because of the implications for Fed- and other central bank policy tightening. Oil prices: the worst outcome for global markets is if oil prices continue to rise on the ongoing supply woes led by embargoes on Russian imports and as demand destruction is slow to offset. Ever higher oil prices would keep inflation levels high and tie central banks’ hands to ease off the pedal. A steep fall in the oil price only looks possible if demand is collapsing – i.e., because the economy is spiraling into recession. Q2 Earnings: too optimistic – stay tuned to our Peter Garnry on this issue as we look ahead. Credit markets: One key spread I track of US corporate credit spreads has risen above levels that, pre-pandemic, were last visited in late 2018, shortly after which the Fed relented in its balance sheet tightening and rate tightening. This is a one-mandate, inflation fighting Fed, credit pain and bankruptcies will be ignored until inflation is falling or the unemployment rate rises above some unknown level that re-engages the dual mandate. FOMC July 27: Fed has to juggle all of the above factors in setting policy and guidance from here and as it approaches what it believes is the “neutral” policy rate of 2.50% (a rate hike of 75 basis points would take the Fed funds target range to 2.25-2.50%). Right now, the Fed is a “single mandate” central bank, only fighting inflation, so inflation/earnings releases will be most important in determining whether Fed hikes 50 basis points or 75 basis points again at the late July meeting and how it guides for further policy tightening after hiking the most since 1994 at the June FOMC meeting. Chart: EURUSDThe euro is looking weak on multiple fronts as EURCHF trades south of parity and to new 7-year lows this morning, the EURGBP rally faltered yesterday and as EURUSD has slipped well below the tactical 1.0500 sticky zone. The brutal pressure from rising natural gas prices on Europe continues, and the ECB’s difficult tight-rope walking act of “anti-fragmentation” simultaneous with the incoming policy tightening makes for an ugly mix for the single currency. Keeping an eye on the 1.0350 cycle lows now for whether the path toward parity is opened up here – interesting to see the US dollar achieving at this level as treasury yields drop, suggesting is retains its safe haven appeal for now. The next test for the pair is over today’s US May PCE inflation data (elevated or very low month-on-month core reading would be the most interesting development.) Source: Saxo Group I almost choked on my sip of water when I saw the reported June Unemployment Rate in Germany tick up to 5.3% from 5.0% and the Unemployment Change out at +133k until the details reassured me that this was due to Ukrainian refugees joining the tallies for those seeking work. One bit of hopeful news for the world perhaps more than the EU this morning, was the Russian announcement of a withdrawal of its troops from Snake Island, a small island in the Black Sea that lies south and west of the key Ukrainian port city of Odessa, and a move that was positioned as a good will gesture from the Russian side that will help facilitate grain exports (but apparently also perhaps because Ukraine bombed the island in recent days). Around the same time, we get the news that the EU says the Kaliningrad exclave (small, isolated bit of Russia sandwiched between Lithuania and Poland on the Baltic coast) will be excluded from logistics sanctions, which will allow goods to travel by rail again through Lithuania to supply the territory. If neither side can make further gains on the front, can the situation switch to peace negotiations? Russia is bristling at NATO plans to post a huge troop presence closer to its borders. The Swedish Riksbank hiked the policy rate by 50 basis points to 0.75% as was nearly universally expected, although the market was not impressed with the guidance for the rate to “be close to 2% at the start of next year”. Swedish rates dipped a few basis points in the wake of the release of the statement this morning. The Riksbank also stated it would accelerate its pace of balance sheet reduction for the balance of this year. It is remarkable to note the bank’s confidence that its rate tightening will bring down inflation to two percent “from 2024.” EURSEK pressured slightly higher after the statement release, likely mostly in line with very weak risk sentiment in today’s European equity session. Watching EURSEK resistance area at 10.74, which is now in play. but SEK will continue to move in line with the outlook for the EU economy and broad risk sentiment. Table: FX Board of G10 and CNH trend evolution and strength.The Euro fading, the USD trying to keep pace with the soaring CHF, and JPY chaos kept at bay for the moment on declining safe haven yields. CAD worth watching for downside pressure if yesterday’s oil correction the start of something bigger – 1.3000+ a huge area in USDCAD. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Watching for USD pairs to break ranges, especially EURUSD, with GBPUSD downside, AUDUSD downside, USDCAD upside also in play within G7 FX. Also watching JPY pairs if US long yields push lower. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US May Personal Income and Spending 1230 – US May PCE Inflation 1230 – Canada Apr. GDP 1230 – US Weekly Initial Jobless Claims 1345 – US Jun. Chicago PMI 2200 – New Zealand Jun. ANZ Consumer Confidence 2330 – Japan Tokyo Jun. CPI 2350 – Japan Q2 Tankan Survey 0145 – China Jun. Caixin Manufacturing PMI Source: FX Update: A summer of volatile discontent? | Saxo Group (
FX Daily: Reports of sterling’s demise are exaggerated

FX Update: USD jolted higher on fitful safe haven bid. JPY risks mount.

John Hardy John Hardy 29.06.2022 14:16
Summary:  The US dollar has generally risen in recent months on the increasingly rapid pace of Fed tightening and perceived changes to that pace, so it was interesting yesterday to note that the US dollar rose purely as a function of weak risk sentiment in the wake of an ugly US Consumer Confidence number for June, as treasury yields and Fed expectations actually dropped modestly on the day. Elsewhere, the JPY is looking nervous again for testing the BoJ. FX Trading focus: Hard to find any path to sustained US dollar weakening. The equity market lurched suddenly into risk-off mode yesterday, just two days after one of the strongest rallies this year, showing an unsettling volatility of volatility. In Q1, the market rallied steeply in March, but rolled over starting on the second to last day of the quarter. This quarter, we found a bottom in sentiment right around the FOMC meeting and rallied steeply, only to roll over (so far) on the third to last day of the quarter. Are these portfolio rebalancing effects and are they already fading ahead of the new quarter? In any case, the jolt weaker in risk sentiment offered traditional safe-haven support for the US dollar, which has generally traded since late last year as a function of Fed tightening anticipation. The USD won’t roll over durably, I argue in our upcoming Q3 outlook, until the Fed is seen as launching into a sustained easing again. So, although yesterday saw a modest apparent safe-haven bid into treasuries, we also had Fed officials out staying on message for further tightening (Cleveland Fed’s Mester: Fed is “just at the beginning” of raising rates) and we have a QT that is on autopilot to continue tightening financial conditions. One key data point that spooked the market yesterday was the huge drop in expectations component of the US Consumer Confidence reading for June, which fell to 66.4 from the revised 73.7 in May (revised down from 77.5!). This is the worst for that data point since 2013 and further inverts the Expectations-Present Situation spread. But we’re not really “there yet” in terms of clear recession unfolding until the Present Situation is moving clearly negative. Technically, nothing has broken down among USD pairs – the EURUSD has merely shied away from the key 1.0600 resistance and traded back toward the pivotal 1.0500 area, the AUDUSD is having a look at a minor consolidation triangle support, but is still above the 0.6829 cycle low and GBPUSD finally halted its string of days of nearly unchanged daily closing levels at six and lurched lower yesterday, but traded nearly two figures above the cycle lows below 1.2000 this morning. So let’s wait and see for the next round of data to test USD direction and whether it has potential higher again. The easiest upside path would be US data that proves less bad than expected or even distinctly inflationary on earnings next week (the Citi economic data surprise index for the US is about as negative as it ever has been over the last several years, if we remove the pandemic outbreak months from consideration), together with a fresh leg higher in crude oil, all of which supports the USD from the Fed policy outlook side and safe-haven angle, if risk deleveraging continues . Good data is likely bad for risk and good for the US dollar, while very very bad for the JPY, as discussed below. Chart: USDJPYA decent little retreat in US treasury yields, and yet here we are pegged near the highs in USDJPY – possibly ready for an aggravated ascent in coming days if the US data fails to confirm the “recession incoming!” scenario and US yields tick back up higher toward the 3.50% level for the US 10-year treasury yield benchmark, for example. While US yields have remained rangebound recently, we also have to consider the relative balance sheet situation of the two central banks as the BoJ has added to its balance sheet at a record pace recently to defend the yield-curve-control policy and has effectively lost control of its balance sheet in a rising yield environment, while the Fed is set to accelerate the shrinking of its balance sheet (QT) from here. We have a potentially explosive situation on our hands that could lead to a spike higher in USDJPY to well above 140 and possibly even 150, which could then lead to the Bank of Japan to finally capitulate and driving a 10% or greater boomerang move in the opposite direction. Beware volatility potential in both directions! Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strength.JPY fading to the weak side again – will BoJ be forced to capitulate before other central banks change direction/yields in general roll over? USD comeback nothing to write home about just yet – watching through next US data points as noted above. But sterling weakness is picking up again, while CHF is riding highest and EURCHF is pushing on parity. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Interesting to note the USDCNH poking back into an “uptrend”, although really there was just the one-off move from the base there and then a subsequent period of range-trading. Elsewhere, note more sterling pushing to negative in more place - yesterday on the close versus SEK and NOK. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1200 – Germany Flash Jun. CPI  1300 – Central Banks speakers at ECB Conference: Fed Chair Powell, BoE Governor Bailey, ECB President Lagarde  1500 – ECB President Lagarde to speak  1530 – US Fed’s Mester (voter) to speak  1705 – US Fed’s Bullard (voter) to speak  2350 – Japan May Industrial Production  0100 – New Zealand Jun. ANZ Business Survey  0130 – China Jun. Manufacturing and Non-manufacturing PMI Source: FX Update: USD jolted higher on fitful safe haven bid. JPY risks mount. | Saxo Group (
NFP Is Released On Friday! FX: What Level Does USD/JPY Eye? What Made US Dollar To Japanese Yen Rise?

FX Update: JPY and CHF stretch in opposite directions amidst quiet elsewhere.

John Hardy John Hardy 28.06.2022 14:19
Summary:  Outside of interesting JPY and CHF moves, FX is in a tight holding pattern just as the powerful rise in global yields has paused. The market seems to be casting about for evidence on how aggressively recession risks are building and whether these should be celebrated because it will lower the path of central bank tightening, or feared because traditionally the worst bear markets for risk unfold as central banks are actually in easing mode to catch up with a failing economy. FX Trading focus: JPY and CHF stretch in opposite directions. Quarter-end and next week’s calendar the next test for whether volatility will revive this summer. While CHF and JPY moves are remarkable here, USD traders are grasping at straws for the next significant event risk to spark a new move as the main driver of volatility over the last few months, global bonds, have shifted into range trading territory. More thoughts on that below. For now, the focus within G10 is on the renewed pressure on the Japanese yen, even as the chief coincident indicator for JPY, long US Treasury yields, are fairly quiet, if rising again within the range. Some JPY crosses are moving close to or beyond recent ranges – consider EURJPY as discussed below. And really, while the volatility across FX is quite muted in USD pairs, the Swiss franc story is still alive and could impress further if EURCHF moves to test parity. Meanwhile, the weak JPY together with that powerful SNB shift to tightening at the June 16 meeting has set the CHFJPY to new modern-era highs save for those posted during the illiquidity mess intraday when the SNB removed the EURCHF floor back in early 2015. Elsewhere, a pair like GBPUSD shows the market’s indecisiveness here: GBPUSD has posted a remarkable string of six days with almost no daily change in the closing price level, even as intraday volatility hasn’t been extremely quiet over the last week. Technically, the pair is poised in a pivotal area after collapsing to 1.2000, a massive long-term chart level, with the recovery since taking it the pivot zone ahead of 1.2400-50, which it needs to vault to suggest a bullish reversal of the last sell-off leg. Of course, the pause in the price action already helps unwind downside momentum but increases uncertainty. EURGBP is in a similar state – having posted a bearish reversal earlier this month, but one that has remained unconfirmed since, such that the technical relevance of that reversal has faded. Today, EURUSD had yet another go at the 1.0600 level – one that failed, but let’s have a look on the Friday close where that pair stands. Chart: EURJPYEURJPY is pushing on the upside resistance above 144.00 today as EU core yields rose sharply again and are closer to their respective top than, for example, US yields. As long as the ECB insists on rearranging its balance sheet to prevent peripheral yields from rising, it means the market will have to absorb far more core EU bonds, and a higher yield of those bonds. On the one hand, this is euro-supportive versus the yen from a yield-spread perspective, given the Bank of Japan’s cap on yields out to 10-year JGB’s, but at some point, existential concerns could creep back into the picture for the EU. If yields are set to rise again everywhere, EURJPY and other crosses could be set for further aggravated gains until the Bank of Japan is forced to go down in flames and relent on its policy, sooner or later (with the risk of violent bouts of ministry of finance interventions, verbal and actual). Source: Saxo Group Today’s US Consumer Confidence survey is an interesting one to watch, as discussed in this morning’s Saxo Market Call podcast, as the tension between inflation (high levels extremely confidence negative) and employment (good labor market conditions key for confidence) plays out. Traditionally, the confidence survey and the unemployment rate show a very tight correlation, with changes of trend in confidence leading those of unemployment. But this Conference Board survey having dropped from 128 to 106 (with 100 expected today) since June of last year even as the US unemployment rate has fallen to and stabilized near record lows is the most divergent episode in the modern era. The weekly jobless claims suggest some softening in the US labor market and we will watch all data labor market related for a sense of when the Fed might shift back to its dual mandate stance form its current single-minded focus on inflation. Otherwise, the focus is on whether the always tardy PCE inflation release on Thursday (because it comes nearly three weeks after the official CPI data point for the same month) ruffles any feathers, but more interestingly, whether the ensuing start to a new quarter animates market volatility again, especially as we get the key data points of the month through next Friday, including the ISM Manufacturing this Friday (some very weak regional surveys like yesterday’s Dallas Fed survey suggest downside risk, and the preliminary S&P Global US Manufacturing PMI dropped to 52.4 – a sub-50 ISM manufacturing is a risk soon), the ISM Services next Tuesday and employment and earnings data next Friday. A small subplot I am curious to watch the impact of the Riksbank decision this week as the bank is nearly certain to hike rates 50 basis points to take the policy level to +0.75%. Will EURSEK only trade as a function of the EU economic outlook and risk sentiment or doesn’t the SEK deserve a bit more respect versus the single currency on the bank going a long way to claw back some credibility? Table: FX Board of G10 and CNH trend evolution and strength.The Swiss franc rally remains the most prominent trend and watching the parity level in EURCHF to see if it can hit a new gear, while USDCHF is also a focus in the 0.9500-50 area. Elsewhere, JPY downside is the second most intense trend, with other currencies in muddled cross-currents. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.The AUDNZD new downtrend attempt getting checked heavily today, but chart very rangebound there. Elsewhere, the EURUSD “trend” is non-existent as we keep bumping up against 1.0600 and await important data and calendar catalysts in coming days. Watching SEK crosses over Thursday’s Riksbank meeting this week. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1200 – Hungary Central Bank Rate Decision 1230 – US May Advance Goods Trade Balance 1245 – ECB President Lagarde Press Conference 1300 – US Apr. S&P CoreLogic Home Price Index 1400 – US Jun. Consumer Confidence 1700 – US 7-year Treasury Auction 0130 – Australia May Retail Sales Source: FX Update: JPY and CHF stretch in opposite directions amidst quiet elsewhere. | Saxo Group (
University Of Michigan Sentiment Index Is Released Today

FX Update: Currencies awaiting a new catalyst.

John Hardy John Hardy 24.06.2022 15:31
Summary:  Commodity markets are commanding the most attention across markets and may be dragging bond yields down on the implications for easing inflation. In turn, then, shouldn’t JPY find a bit more support, as it did today when EU core bond yields cratered on weak flash June PMIs? Also, today the Norges Bank surprised many with a 50 basis point hike, although the NOK price action in the wake of the decision is underwhelming. FX Trading focus: Waiting for the next FX catalyst when historic moves in yields see little more than a polite nod. Yesterday’s weak flash June PMIs from the Eurozone and the US triggered a massive rally in bonds. By later in the day, the German 2-year Schatz yield had fallen the most in a single day (25 basis points) since the day after Bear Stearns was sold to JP Morgan – so the most in 14 years. And back then, the German 2-year was over 300 basis points versus just over 100 bps before yesterday’s rally in safe haven bonds on the weak data. US yields were also marked sharply lower, with the 10-year event trading all the way to 3.00%, but that move has been chopped in half from yesterday’s lows. Given the recent focus on the immovable Bank of Japan policy that caps Japan’s yields for 10 years and shorter, one would have expected a historic rally in EU bonds and chunky rally in US treasuries to support a fairly solid rally in the JPY on the reduction of pressure on EU-Japan and US-Japan yield spreads. The JPY did rally, but the scale of the rally was distinctly underwhelming in light of the underlying spread adjustment. This lack of reactivity is remarkable and has me reserving judgment on the potential for a more significant JPY rally here, even if I’m happy to revisit JPY upside potential if USDJPY droops through the 134-133.50 zone. As I discuss in what has moved the remarkable USDCAD chart over the last month, I suspect FX traders are caught in the crossfire of narratives that is keeping us rather bottled up in the ranges for most USD pairs. On the one hand, the profound reversal in Fed expectations out the curve is quite USD bearish, but on the other, if we are headed for a weaker global economy on still-tightening financial conditions, the USD could yet prove a safe haven until the Fed is not only marked to hike less, but to actually actively ease policy. Far too early for the latter. Next week will prove interesting, with the next round of data, including the June ISM’s from the US, and whether these corroborate the private initial June PMI’s from this week. As well, we’ll get a look at the May PCE indicator, even if markets are looking more at commodity prices, especially energy, as a forward inflation indicator. Chart: USDCAD over the last monthFrom late May through early June, the USDCAD pair broke down through key support and the 200-day moving average on the persistent rise in crude oil and as US equities had rebounded sharply from the lows of May. CAD was the strongest G10 currency for much of this period. Then, things suddenly turned south for CAD and USDCAD launched a sharp rally higher from nearly 1.2520 to 1.3000 when global stocks suffered an ugly rout from June 9-11, accelerated by the US May CPI release on June 10 that send US and global yields soaring in anticipation of a tighter Fed and the WSJ tip-off that the June 15 FOMC meeting would deliver 75 basis point hike. USDCAD peaked (and risk sentiment bottomed) on June 17, two days after the FOMC. Since then, the WTI crude oil benchmark has backed off from highs well north of 120 dollars per barrel to as low as 101.50 before rebound to about 106 as of this writing. That is extremely CAD negative, and yet USDCAD has traded in a tight range over the last week because off-setting that is the USD-negative sudden mark-down in Fed hiking expectations accelerated yesterday by weak flash June PMI data that mimicked the weak EU flash June PMI data. The market has marked the peak rate from the Fed by around 50 basis points and pulled the anticipated peak in the policy rate into very early next year. So what is to drive USDCAD from here? As long as yields continue falling and risk sentiment prefers to celebrate that fact rather than fact that this is an expression of the fear of recession, the pressure for the USD to rise fades. But if the next batches of economic data show that the Fed can’t back down any time soon due to persistent inflation readings from services inflation, rising rents and/or a still-tight jobs market, the USD could yet rise on a re-adjustment back higher of Fed tightening anticipation. On the other hand, if risk sentiment begins to falter on recession concerns, the US dollar may trade higher as a safe-haven. Technically, the comeback of the last couple of weeks is remarkable and trend-followers will look for a solid fall of the very well-defined 1.3000 area to indicate and next leg higher toward 1.3500. The tactical situation to the downside is rather more uncertain due to the huge swings in both directions within the range in recent weeks. Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strength.The CHF enjoying the falling yields here and is the strongest of G10 currencies of late. Watching the relative fortunes of the commodity currencies on the recent wobbles and the USD and JPY as discussed above. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.EURCHF is poking aggressively lower and looks set for a test of parity and USDCHF is eyeing major range lows. Watching the status of individual JPY pairs after the big rate shock yesterday failed to drive as much JPY volatility as one might have expected. For USD pairs, USDCAD and AUDUSD look the most pivotal in terms of the proximity of major levels (1.3000+ for USDCAD and 0.6830 for AUDUSD). Source: Bloomberg and Saxo Group Source: FX Update: Currencies awaiting a new catalyst. | Saxo Group (
Dollar (USD) Comes Back? Latin America's Currencies Perfomance

FX Update: Commodities to lead bonds to lead JPY? - 23.06.2022

John Hardy John Hardy 23.06.2022 14:27
Summary:  Commodity markets are commanding the most attention across markets and may be dragging bond yields down on the implications for easing inflation. In turn, then, shouldn’t JPY find a bit more support, as it did today when EU core bond yields cratered on weak flash June PMIs? Also, today the Norges Bank surprised many with a 50 basis point hike, although the NOK price action in the wake of the decision is underwhelming. FX Trading focus: Fresh pressure on JPY as BoJ losing control. USD triangulating. The JPY jumped overnight in the wake of comments by a prominent ex-Ministry of Finance official suggesting that intervention from the MoF can’t be ruled out, though he indicated the bar is high for intervention as it generally requires a sense of crisis. This price action came after the USDJPY rate managed to peak out at 136.70 on Tuesday despite softer US treasury yields this week, yields that are breaking down further today, as the 10-year benchmark US Treasury yield looks like it is in reversal mode, though a more profound sense of reversal would require a drop through 3.00% (trading near 3.10% as of this writing). Today, the weaker than expected flash June PMIs in Europe (France: 51.0 Manufacturing and 54.4 Services vs. 54.0/57.5 expected and 54.6/58.3 previous and Germany 52.0 Manufacturing and 52.4 Services vs. 54.0/54.5 expected and 54.8/55.0 previous, and Eurozone at 52.0 Manufacturing, 52.8 Services and 51.9 Composite) have brought EU core yields tumbling aggressively and taken EURJPY down several notches, a deserved re-alignment with the fundamentals. With or without intervention jawboning from Japan (and this is from an ex-official with no contact to the MoF personnel actually in charge), shouldn’t BoJ YCC policy per se should only pressure the JPY as a function of rising global yields, and when these head lower, the pressure should come off the JPY, after all? A massive sell-off in crude oil, even if a big chunk of the fall was retraced since late yesterday, is also a nominal JPY positive. Longer bond yields are likely in part reinforced by weak commodity prices as the latter are seen at the forward edge of the inflation drivers. And then the question becomes – if inflation pressures are seen as receding, will risk sentiment eventually celebrate that development or fret the reasons that price pressures are abating: on fears of recession? The easiest read is that commodity-related FX should struggle as long as the narrative is that commodity prices are retreating due to recession-induced demand destruction. On that note – watching the 1.3000 area in USDCAD and the cycle lows in AUDUSD near 0.6830. Chart: EURUSDEURUSD is weighing back on the 1.0500 area that has been the approximate mid-point of the range since 1.0600 fell about two weeks ago after weaker than expected flash June PMI survey figures out of the EU this morning. Interesting as well that EURUSD is breaking down as the key US 10-year treasury benchmark it breaking down through local support, but that is likely on core European yields beating an even more severe retreat on the soft data this morning. The EURUSD sell-off here likely to correlate with general risk sentiment and is showing signs getting any real downside momentum until we are closer to threatening the 1.0400 area, with the latest price action emphasizing the tactical importance of the 1.0600+ resistance. Source: Saxo Group Norges Bank hiked the deposit rate 50 basis points, a nominal surprise as observers were split on whether they would hike 25 bps again or 50 bps. I imagine USDNOK trading near 10.00 and EURNOK trading near the 10.50 area weighed in the decision to go with the bigger hike, as a weak currency is doing the Norges Bank’s inflation fighting intentions no favors. Governor Wolden did note that the krone has been weaker than expected. Interesting in the Norges Bank forward economic projections that the bank is far more concerned about persistent inflation than the ECB and Fed are, as the 2023 “underlying” CPI forecast was raised to 3.3% from 2.4% and the 2024 forecast was raised to 3.0% from 2.5%. GDP forecasts were lowered and the path of the policy rate was steepened and raised: in March, the Norges Bank forecast the policy rate to 2.5% at the end of 2023, and today’s statement sees the rate at “around 3.0% in the period to summer 2023. The NOK pulled off support, but the price action was not overwhelming, likely on the massive turmoil in the oil market. Table: FX Board of G10 and CNH trend evolution and strength.While the CHF posts the strongest trend reading, nothing has happened in the key EURCHF And USDCHF pairs since the shock SNB move to hike 50 bps last week. Watching the commodity currencies, AUD in particular, for more downside risk if the recent commodity corrections deepen – and as a flip-side of that, whether the JPY could start flipping positive in places as well. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Lots of odd crosses criss-crossing trends – chief focus on JPY pairs like AUDJPY and CADJPY if commodity correction continues, and on whether the USD rally is set to extend. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1100 – Turkey Rate Announcement 1230 – US Weekly Initial Jobless Claims 1345 – US Jun. Flash Services and Manufacturing PMI 1400 – US Fed Chair Powell to testify before House Panel 1800 – Mexico Rate Announcement 1800 – ECB's Villeroy to speak 2301 – UK Jun. GfK Consumer Confidence 2330 – Japan May National CPI Source: FX Update: Commodities to lead bonds to lead JPY? | Saxo Group (
Markets await the July inflation report in the US

1 GBP Price To Increase!? Is British Pound Going To Rally!? How Has USDCHF Changed After SNB Meeting? | Saxo Bank

John Hardy John Hardy 17.06.2022 14:47
Summary:  The Bank of Japan continues to swim against the stream of global central bank tightening as it maintained course overnight with its policy mix of negative yields and yield-curve-control, triggering a wave of fresh JPY weakening that was only moderated slightly by a sharp drop in US treasury yields. Elsewhere, the Swiss franc remains firm after the SNB-inspired spike and sterling is taking a stand after the Bank of England meeting yesterday. FX Trading focus: BoJ not for turning, GBP takes a stand. USD status check. The Bank of Japan refused to budge overnight, standing pat on its policy of yield-curve-control and announcing daily operations in the bond market to defend the policy, with no guidance suggesting a change of course, though a brief comment on foreign exchange was inserted into the policy statement: Concerning risks to the outlook, there remain extremely high uncertainties for Japan's economy, including the course of COVID-19 at home and abroad and its impact, developments in the situation surrounding Ukraine, and developments in commodity prices and overseas economies. In this situation, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices. That suggests that there is some level of JPY weakness at which the Bank of Japan may be forced to revisit its policy commitments, but that we aren’t there yet. Two key points to make in the wake of this announcement: first, additional JPY weakness from here is likely only a function of global yields continuing to trend higher, something we did not at all see yesterday as a weak batch of US data drove a strong rally in US treasuries and punched the US 10-year benchmark yield back toward the pivotal 3.20% area. Second is the CNHJPY rate, which has traded north of 20.00 in the wake of this BoJ meeting and whether China is set to make another move to prevent further JPY weakness relative to the renminbi after it appeared that the threat of the 20.00 level prompted China to weaken CNH sharply relative to the US dollar after a long period of stagnant USDCNH price action just at the point when CNHJPY hit 20.00 back in April. Elsewhere, we continue to digest the repercussions of the Swiss National Bank 0-basis point rate hike, which continues to reverberate. While the Bank of Japan pulls in the opposite direction as a country that is willing to risk further deterioration in the real value of its currency, the SNB has done the opposite with this move, allowing itself to front-run the ECB and establishing the franc’s purchasing power as a key consideration and going a long way to buying real yield credibility. Looking ahead, the concern will likely arise as the cycle plays out that the Fed simply can’t raise rates sufficiently drive solidly positive US real yields. USDCHF has suffered a complete derailing of the former up-trend as discussed in the chart below and when looking at the USD versus European currencies, at least, from SEK and GBP to CHF and EUR, we could suddenly be at a turning point here. Where is that turning point “confirmed”? We are already there in USDCHF, but a broader, at least tactical turn lower in the USD would require a pull higher and close above 1.0600 in EURUSD and perhaps 1.2500 in GBPUSD (the day after I thought GBPUSD might be in danger of a meltdown below 1.2000 on the small BoE hike…). Until then, the USD sell-off may be a one-off result of titanic USDCHF flows on the SNB decision. Chart: USDCHFThe bulls found their case broken all in one go in the wake of the SNB meeting, as USDCHF has been crushed seemingly irrevocably lower, suddenly creating a double-top formation. But the huge brushback may not yet lead significantly lower unless the USD is capitulating elsewhere (levels for other major USD pairs noted above) and the full break down here requires a capitulation down through the 0.9545 low and the old range highs below 0.9475. Source: Saxo Group Sterling rallied hard yesterday in the wake of the Bank of England meeting yesterday, with UK rates and the currency focusing more on the hawkish guidance the meeting produced rather than due to the small 25-basis point hike. The bank said it would react “forcefully” if inflation doesn’t develop as hoped (which will take some doing – the Bank of England expecting the CPI to hit north of 11.0% before falling back after October) which suggests the willingness to hike by 50 basis points even if the economic outlook is not promising. The price action post-BoE took GBPUSD well away from the cycle lows of 1.2000 posted earlier this week, trading as high as 1.2406 late yesterday, just above a major local 61.8% Fibonacci retracement of the recent sell-off at 1.2387 and far above the prior low-water mark from May of 1.2156. As noted above, a full reversal in GBPUSD requires another rally surge through 1.2500, while the bears will only feel comfortable here again if the price action punches back down through 1.2200. Elsewhere, sterling hopefuls should have a look at EURGBP, where the latest leg higher above 0.8600 has been sharply reversed, carving out a more well-defined reversal. Watching the 0.8500 area for whether we follow through lower and back into the range extending below 0.8300 again there. Table: FX Board of G10 and CNH trend evolution and strength. The JPY is reversing sharply back lower after last night’s BoJ – note the huge new momentum in CHF, while sterling is trying to shift out of negative territory in broad terms. CAD looks very heavy. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Interesting to note sterling pushing back and trying to flip to a positive trend against not only JPY, but also AUD and CAD here. Elsewhere, watching 1.3000 on the USDCAD and noting AUDCAD rolling over – is CAD in for a broader drubbing? Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1200 – Poland May Core CPI 1230 – Canada May Teranet/National Bank Home Price Index 1245 – US Fed Chair Powell to make opening remarks at a conference 1315 – US May Industrial Production / Capacity Utilization 1430 – UK Bank of England Chief Economist Pill to speak Source: FX Update: BoJ not for turning. GBP takes a stand. | Saxo Group (
Australian dollar roars higher

FX Update: Fed set to super-size hikes, but BoJ to steal the show?

John Hardy John Hardy 14.06.2022 23:56
Summary:  The market has now fully priced a super-sized hike for tomorrow’s FOMC meeting, after Fed Chair Powell pushed back against the very idea at the early May meeting. With the Fed always seeming to chase and never leading, will the meeting tomorrow have much impact on the US dollar outlook? Elsewhere, the Bank of Japan on Friday could easily steal the shown and induce fresh volatility if it finally signals a shift away from YCC. FX Trading focus: Super-size hikes from Fed now priced, but could BoJ steal the show? It looks like a 75-basis point Fed rate hike, the largest since 1994, is a done deal according to market pricing after yesterday’s further meltdown in US treasuries, a move that has reinverted the 2-10 portion of the US yield curve and which in turn is beginning to see the market pull forward the anticipation of a US recession into the first half of next year. The Wall Street Journal’s Fed watcher Nick Timiraos wrote the obligatory article on the Fed’s intent to hike 75 basis points (the Fed only does as priced, never wanting to surprise, seems to be the Fed mantra). He noted as we did prominently yesterday that the big jump in the June University of Michigan Sentiment survey’s 5-10 year inflation expectations is a game changer for the Fed on concerns that inflation expectations are becoming “de-anchored”. Timiraos’ article also cites a New York Fed survey released yesterday showing a jump in short term inflation expectations as well as that the “distribution of household’s longer term inflation expectations was more varied than in the past.” These are strong new inputs prompting the Fed to backtrack on its own guidance at the May 4 meeting, when it seemed confident enough to set the speed limit for rate hikes at 50 basis points. Conditions are leading the Fed by the nose, and this recent embarrassment for the Fed could mean that the market is less sensitive to what the Fed says it is going to do tomorrow when it is not in control and lagging so badly. Trading a Bank of Japan capitulation Following are ideas only – not trade recommendations. Interestingly, with this latest leap higher in yields, USDJPY is stuck dead in its tracks and the JPY is firming nearly everywhere else – I suspect as the market is warming up for a possible Bank of Japan capitulation on its yield-curve-control policy even after it announced new operations to stem yield rises as the 10-year JGB tested above the 25 basis point level overnight. Some thoughts on how to trade a JPY jump higher with all of the usual caveats below. The most straightforward to trade for the Bank of Japan to crater on its commitment to the YCC policy sooner rather than later could be via a long JPY/short risky currency pairing, so something like shorting AUDJPY. That looks a technically interesting trade here already, as the recent attempt above the prior 95.75 area high has now been strongly rejected, even if the follow through lower is not yet complete. With current volatility levels, it is difficult to run anything but a small position in that currency pair. Otherwise, and for a more leveraged trade that keeps a sustained exposure in the market, options are generally the way to go for more sophisticated traders. One strategy discussed on this morning’s Saxo Market Call podcast is a long USDJPY put spread. The put spread example I took assumed that something may not happen this week, but could happen over the next three months. The example was buying a 3-month 128.00 USDJPY put and selling a 3-month 124.00 USDJPY. Priced earlier this morning at slightly higher price levels (and lower vols – vols are rising rapidly for JPY!), the structure cost about 80 pips, meaning about 320 pips of maximum profit should USDJPY trade 124.00 or below by the expiry, a solid 4 x 1 reward/risk ratio that does, of course, require a massive spot move to get it there. As mentioned on the podcast, one can tinker with the price levels and time frames to achieve higher reward vs. risk (which likely means USDJPY has to move even more, etc.). The disadvantage of a spread versus a basic long option trade is two-fold: first, the profit is maxed out and can go no higher once the strike price of the short leg of the spread is hit. Second, hedging the position once it starts to move into profit is tricky for non-experts and psychologically annoying. Yes there is an overall delta for the spread structure, but it is far more straightforward to hedge a simple long option position, especially once in the money. The advantage of a long put spread versus a simple long put is that the break even price is far higher for a put spread and the position doesn’t have to move as much to achieve a decent multiple of reward versus risk. Using only the long 128.00 USDJPY put mentioned up above, the 4 x 1 reward to risk ratio if bought at 150 pips where it was trading earlier this morning, would not be achieved until 120.50. Chart: USDJPYChart technicals are a bit pointless when the direction in the near term in USDJPY will likely come down to whether the Bank of Japan shows any signs of capitulating on its yield-curve-control policy due to the pressure cooker from global yields or insists on hanging in there for now. Certainly, the sharp rises in US Treasury yield all along the curve this week is doubling down on the pressure on Governor Kuroda and company to make a move. In recent days, we have seen a period of “doji” candlesticks suggesting the market is having second thoughts on bidding up USDJPY further – particularly interesting given the sharp rise in yields adding pressure as noted above. Implied options volatilities are rising rapidly, meanwhile, and risk reversal show that puts are now being bit up more than calls, providing headwinds for further upside. This is a very dynamic situation and the JPY could be in a very different very soon. Stay tuned and stay careful. Source: Saxo Group Sterling is under pressure this morning, with GBPUSD poking to new lows toward 1.2100 and EURGBP clearing the important 0.8600 level and thus in breakout mode. The nudge higher in the UK April unemployment to 3.8% despite a strong surge in payrolls and mixed earnings data (showing, however, the worst fall in UK purchase power in the more than two decades the survey has existed) adds little to the Bank of England expectations equation for Thursday – but with the violent repricing of the Fed, the sterling is suffering. As I mentioned yesterday, I wonder when and if the FX situation enters into the BoE’s deliberations. Table: FX Board of G10 and CNH trend evolution and strength.As noted above, watching the JPY situation very very closely – note the huge momentum change of the last week. This could prove far more volatile than the USD situation through Friday’s BoJ meeting. Also noting that the CNH has become more volatile in recent sessions, with the CNHJPY demanding attention at the 20.00 level. Elsewhere, sterling is under renewed pressure that could intensify with the EURGBP breakout. AUD losing altitude fast, too. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.EURAUD is threatening a breakout follow through local and more profoundly if it works above 1.5275. Watching the most vulnerable of the JPY crosses after many of these have failed to stick new highs recently for new downtrend potential. Note the AUDJPY chart and GBPJPY charts for starters. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US May PPI 1700 – ECB's Schnabel to speak 0030 – Australia Jun. Westpac Consumer Confidence 0120 – China Rate Decision 0200 – China May Industrial Production/Retail Sales Source: FX Update: Fed set to super-size hikes, but BoJ to steal the show? | Saxo Group (
FX Daily: Data sensitivity to keep FX volatility high

FX Update: Yields on fire with bevy of CB meets ahead.

John Hardy John Hardy 13.06.2022 14:12
Summary:  The US CPI and inflation expectations data on Friday jolted the US dollar back higher as the market sharply raised the Fed rate hike trajectory at coming meetings. Liquidity conditions are looking dire for the riskiest assets here and EM- and G10 small currencies are suffering aggravated weakness on the general deleveraging fallout. A string of important central bank meetings up this week, led by the FOMC meeting Wednesday, but the SNB Thursday and BoJ Friday could also provide fireworks. FX Trading focus: US data jolts US dollar higher ahead of FOMC. SNB, BoE and BoJ also this week. The market was clearly ill-prepared Friday for signs that US inflation is proving stickier than anticipated. First, the May US CPI data out Friday saw a +0.6% MoM ex Food and Energy reading versus a drop to +0.5% expected, and the headline was a whopping +1.0% vs. 0.7% expected, and this took the headline year-on-year reading to a new multi-decade high of 8.6% rather than staying steady at 8.3%. Second, the preliminary University of Michigan Sentiment reading for 5-10 year inflation expectations jump 0.3% to 3.3%, breaking the 3.0% range high that was only violated once since 2011 and posting the highest reading since two months of 3.4% in 2008, in turn the highest readings since the early 1990’s. The latter is easily as critical a factor in the FOMC deliberations this week as the UMich inflation expectations series is one of the inputs into Fed models and is suddenly flashing a far deeper shade of red since first reaching the 3.0% range high all the way back in May of last year. It is also possibly setting up an embarrassing situation for the Fed after Powell pushed back against the idea of 75 basis point rate hikes at the May 4 FOMC meeting. The market is already second guessing the Fed here, pricing 119 basis in total for the next two meetings combined, and leaning a bit more for the possibility that July sees a larger-than-50 bps hike. The US treasury yield curve was flattened by the move, with the 2-10 slope reaching zero at one point today. Already the EuroDollar strip is pricing for the Fed to begin easing rates by H2 of next year after the aggressive move higher in short yields on Friday’s data. With US yields delivering a crushing blow to liquidity and sentiment, the USD has accelerated aggressively higher since late last week and could be ready for more if the Fed “capitulates” to the market’s pricing and makes it clear that it will continue to ratchet its policy mix ever tighter until the inflationary rise is clearly abating. Chart: GBPUSDSterling is weak on its general vulnerability in times of stress. Interesting to note that EURGBP is crawling back toward that key 0.8600 level after the market is marking European yields sharply higher despite a rather cautious ECB, suggesting that the market is telling the ECB it is risking a policy mistake that will take EU yields sharply higher. GBPUSD has rolled over badly and this sets the cycle lows below 1.2200 in focus before most other USD pairs have reached their respective extremes (notable exception: USDJPY). The UK was out with some fresh weak data today, including a -0.3% GDP number for April and a -1.0% drop in Manufacturing Production in April, together with the latest reminder of the dire levels of the country’s trade deficit (-£20.9B in April). If the general risk deleveraging continues here, the focus will quickly shift to the 1.2000 level that the pair has only traded below for about a week during the extreme environment of early 2020 during the pandemic shutdown panic and intraday briefly on a few prior occasions, particularly after the Brexit vote. The market is about 50/50 on whether the Bank of England goes 25 bps or 50 bps at this week’s meeting, but surely has to bite the bullet with sterling at these levels and go with the bigger move? Source: Saxo Group The focus on the Bank of Japan should be intensifying rapidly ahead of the Friday BoJ meeting if the Fed confirms this latest rise in tightening expectations and if the longer end of the US yield curve also trades to new highs for the cycle and above the late 2018 mark of 3.26% (already at 3.2% as of this writing). Is the clock ticking on the Bank at least tinkering with its policy levels or will Kuroda double down once again? I lean for the SNB to go ahead and hike this week together with a small minority of analysts that are now looking for the same. It makes sense given the long wait for the next quarterly meeting in September and as the ECB is currently priced to hike over 150 basis points by year end.  Not entirely sure how much this will impact CHF as it has already rallied a bit and we can hardly expect strong leadership in this hiking cycle, but a hint that it is ready to reach 0% in September could be a strong signal, while the baseline may be a hike of 25 basis points at every meeting for a while. US data this week includes the US May Retail Sales up Wednesday, an interesting data point to watch relative to soaring gasoline prices and cratering consumer confidence levels (besides the inflation expectations portion of the UMich Sentiment survey, the overall survey posted a shock 8.2 drop to a record low in the 44-year history of the survey at , a full 5.1 points below the GFC low and clear of the prior all-time low mark in May 1980 at 51.7). Table: FX Board of G10 and CNH trend evolution and strength.The bringing forward of recession timing anticipation (the Fed priced to cut some time in H2 next year next year, for example) has kept the JPY from spiraling lower in a broad sense, but we still need to watch long yields globally. The USD has risen to the top of the heap and among the weaklings if this environment is set to persist for a while, I would watch for risks to the G10 smalls in general, AUD in particular and for GBP is in a heap of trouble. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Note the very positive Canadian jobs on Friday offering zero support for CAD, as oil prices have corrected and risk sentiment is in the dumps and now USDCAD is trying to flip to a positive trend after quite a comeback. Elsewhere, interesting to note EURAUD bidding for a new breakout and uptrend. The GBPCHF also interesting to track this week as Thursday features both an SNB and BoE meeting.Source: Bloomberg and Saxo Group Source: FX Update: Yields on fire with bevy of CB meets ahead. | Saxo Group (
Today (USD) US Dollar May Skyrocket And Stock Market May Do The Opposite! | What's Possibly Ahead Of EUR/USD And GBP/USD?

FX Update: ECB jolts yields higher, but Euro drops. US CPI focus today.

John Hardy John Hardy 10.06.2022 13:12
Summary:  The ECB meeting saw the central bank’s rate hiking intentions marked sharply higher, and yet the euro fell sharply by the end of the day, likely as the ECB has no real plan for quantitative tightening, and more immediately as EU peripheral yield spreads blew sharply wider yesterday. Today, the focus pivots to the US May CPI print, and particularly whether core CPI continues to roll over or proves stubbornly high. Fed tightening expectations for the remainder of this year are at the highs of the cycle ahead of the data release. FX Trading focus: ECB jolts yields higher, but Euro drops. Focus pivots to US CPI today To answer the question from yesterday’s FX Update, the ECB did indeed clear the bar of expectations for rate tightening at yesterday’s meeting. While there was the mildly dovish fact that the statement explicitly guided for a 25-basis point lift-off in July, it left the potential for a 50-bp move open for September, cancelling out the July guidance. More importantly, the new staff projections lifted the 2023 CPI forecast to 3.5% and the 2024 forecast to 2.1%, so above the target rate. As well, the “ex Food and Energy” forecast for 2024 was raised to 2.3% from 1.9%, an even more marked signal for the ECB taking the rising inflation threat more seriously. In reaction, the German 2-year Schatz yield rose as much as 13 basis points to a new cycle high above 80 basis points. Alas, the euro weakened, perhaps because we still have no general sense that the ECB can ever mobilize a proper real quantitative tightening and more immediate as peripheral sovereign yield spreads blew sharply wider despite promises to shift PEPP reinvestments to avoid “fragmentation”. The Germany-Italy 10-year yield spread trades 223 basis points as of this writing, a rise of over 20 basis points from the level before the ECB meeting. EURCHF was knocked back lower after teasing the 1.0500 resistance and a more hawkish SNB next week could cement a fall back into the lower range for that pair. Chart: EURUSDEURUSD rolled over badly in the wake of the ECB meeting, as did EURCHF and EURJPY. The correlation with risk sentiment is notable, and a higher than expected US CPI print today that both raises Fed hike expectations further and sees equities threatening to challenge the market lows could see this pair pushing down to the cycle lows again if the 1.0500 area support can’t halt the slide. Source: Saxo Group The US May CPI data point up later today is critical here as it appears the market is getting nervous that the prior hopes for fading core inflation may be fading. The nominal expectations for today’s core US CPI print (ex food and energy) is +0.5% MoM with hopes that the YoY figure is set to drop to 5.9% vs. 6.2% in April and the cycle high of 6.5% in March. A cluster of strong CPI readings in April through June of last year are driving hopes that we are on the path lower core inflation prints, but a hot number today will spook this market and could drive another surge in the US dollar. A big pick-up in the US weekly jobless claims number to 229k raises the risk that the US labor market is rolling over (highest weekly print since January) and we are entering a stagflationary environment. Worth noting technically that AUDUSD breaking local support yesterday near 0.7150 and USDCAD reversing harder after the release of the Bank of Canada Financial System Review yesterday saw yields nudging lower. Comments on housing were prominent, as the review noted that many Canadians stretched to buy a home during the pandemic and sees heavily leveraged households as a key risk for the economy. Next week we have an FOMC meeting on tap and leading indicators on the US housing market, like the NAHB survey for June. We also hear from the SNB on Thursday, which at minimum should be signaling a September rate hike. This morning, Czechia reported a staggering 16.0% CPI rate for May, a new cycle high above the April 14.2% level. The Czech central bank remains one of the more credible in setting its rate policy and with a tremendous pot of reserves if the need arises for their mobilization. I would normally like the EURCZK carry trade with the Czech central bank backstopping CZK longs, but Czech president Zeman yesterday named three new central bankers to the central bank and refused to extend terms for two more hawkish central bank members. Last month, the president appointed a vocal dove, Ales Michl, to the governorship of the central bank starting in July. Zeman believes that inflation is due to external shocks and that a steep tightening trajectory could drive inflation higher still. Sounds a bit too Erdogan-esque for comfort.  EURHUF is another CEE situation to watch as it pokes at record highs – negative real rates in Hungary are likely to get far worse. The signals from Japan are worth watching more than ever next week, most obviously at the Friday Bank of Japan meeting, but we got signs already today that the discomfort level with the weak JPY is rising. A meeting of the BoJ, MoF and FSA today produced a statement saying that they would act appropriately if needed – likely meaning that anything resembling the price action we saw this week will elicit an escalating response if the market is not immediately impressed with first verbal intervention, then currency intervention, etc. Only a strong backing down of global yields or a Bank of Japan will do the trick in firmly resetting the JPY higher – volatility will prove more two-way from here. Table: FX Board of G10 and CNH trend evolution and strength.The euro’s budding wings clipped yesterday in the wake of the ECB. Watching whether the US dollar fully recovers its wings in the wake of the US CPI today. As noted above, the ability of the JPY weakness to intensify may be difficult as the intervention threat rises.  Elsewhere, watching whether the CAD speed-bump develops into something more significant. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Note AUDUSD tilting lower again today – a fall below 0.7000 sets the momentum more firmly negative there and is still some way off. USDCAD has been in for a shock after yesterday, but it takes more time to shift the trend positive, as well as a move back well above 1.2800. EURUSD, USDNOK and USDSEK round out the USD/G10 pairs pointing to a USD shift back higher here – key today whether US CPI release confirms the development. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – Canada May Payrolls Change/Unemployment Rate 1230 – US May CPI 1400 – US Jun. Flash University of Michigan Sentiment Source: FX Update: ECB jolts yields higher, but Euro drops. US CPI focus today. | Saxo Group (
USD To JPY: This Forex Forecast May Catch You By Surprise! What Can We Expect Form (US Dollar To Japanese Yen)?

FX: Can Anything Help (Japenese Yen) JPY? Let's Look At CNH/JPY Chart | Saxo Bank

John Hardy John Hardy 08.06.2022 14:07
Summary:  Global bond yields, and especially US treasury yields, consolidated lower yesterday and yet the JPY weakening move that has been nominally coincident (inversely) with the direction in global bond yields kept ride on trucking. This suggests that aggressive speculative flows in JPY are behind at least some of the move. And it is worth noting that the CNHJPY exchange rate is pushing at the range highs that stretch back several years and have twice signaled major shifts in the CNH. FX Trading focus: JPY drop extends despite consolidation in global bond yields The Japanese yen weakening move continued apace overnight in the wake of an upward Q1 GDP revision and a solid uptick in the May Eco Watchers Survey. The aggressive extension lower in the currency looks slightly odd, given that global bond yields, and especially US Treasury yields, saw a solid consolidation lower yesterday. Looking at the origins of this latest leg lower in the JPY, the move in USDJPY began on May 31, the day when US long treasury yields halted their slide lower and lifted off from their consolidation lows as well. But a good friend and far-more-clever market observer than I argues that the move makes sense in light of a shift in the wording on that very day of a new fiscal draft away from a commitment to balancing the budget by 2025. This did merely make explicit something that was widely considered unlikely anyway, and other countries are hardly likely to get their fiscal houses in order before the next recession strikes (presumably well before 2025), but it is an FX negative, together with other recent signs the PM Kishida has few qualms with the current BoJ policy mix and is therefore more likely to nominate someone like him when Kuroda’s term expires next year. But the aggressive move lower in the JPY also has a clear speculative element, as is visible in rather stretched speculative US futures positioning and indications that “Mrs. Watanabe” is enjoying the strong carry trade as the JPY weakens, going long other currencies like the AUD and especially BRL in recent months. This speculative element and the Japanese external capital flows focus driving a good portion of the JPY weakness (as has so often been the case in the past) is covered very well in a column from Bloomberg’s John Authers today. The question is how late in the game we are here – is this the beginning or middle of a climax phase or do we have months to run? It is hard to tell, the higher yields go and the lower the JPY goes, the more explosive the blowback when and if either the BoJ is forced off the YCC commitment, or the speculative bubble plays itself out.   Chart: CNHJPYInteresting to watch the JPY move in isolation, but also the CNHJPY exchange rate in coming days as it is interesting to note that China chose to allow its currency to weaken just as the CNHJPY cross was poking at the 20.00 level for the first time since 2015, which was near the time frame in which China chose to dramatically rework its foreign exchange policy. If the USDJPY rate continues higher, we should expect a renewed bout of volatility in the USDCNH rate as well. Source: Saxo Group The low-yielder theme is also prominent in EURCHF today as EURCHF challenges above its 200-day moving average, which it has generally traded below since July of last year. We’re seeing new highs in EU yields and pricing of the ECB heading into tomorrow’s ECB meeting (previewed in yesterday’s update) after an upgrade of the Q1 GDP estimate to 0.6% QoQ from 0.3% originally. Sterling was sharply strong yesterday after the gyrations before and after the Boris Johnson leadership vote, with the strength likely stemming from the rebound in risk sentiment yesterday together with promises of tax cuts for companies from Chancellor Sunak in the fall budget statement, but these latter sources of support are eroding fast today and still looking for the potential for a EURGBP break higher post ECB if Lagarde and company can support the repricing of the forward yield curve for the euro. Watch the 0.8600 area post-ECB tomorrow. The Turkish lira has been in for an ugly drubbing in recent weeks, with the deterioration picking up sharply today in the wake of fresh comments from Turkish president Erdogan, who has been out talking up interest rate cuts as the needed medicine for reducing inflation. This after the country posted a year-on-year inflation rate of 73.5% in May (although month-on-month it was 3.0% vs. 4% expected) After a tenuous period of stability when USDTRY traded below 15.00 from early March until early May, the currency has now moved over 12% lower in carry adjusted terms since early May versus the US dollar. At the same time, President Erdogan is complicating Sweden and Finland’s application to join NATO with claims that Sweden must stop supporting “terrorism”, with a single deciding vote in the Swedish parliament holding the Swedish government together an ethnic Kurd and former Peshmerga fighter. You can’t make it up. Table: FX Board of G10 and CNH trend evolution and strength.The pressure on the JPY continues to mount, with some fresh downside in the CHF as well. As noted above, curious to see if CNH responds to the JPY situation soon. Elsewhere, CAD is riding high on oil and Euro is in a holding pattern – let’s see what the ECB can deliver. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Watching USDCNH as a derivative of the CNHJPY and USDJPY situation and after the recent USDCNH new lows were rejected. USDCHF has also crossed back to positive. Source: Bloomberg and Saxo Group Source: FX Update: JPY drop extends despite yield consolidation. | Saxo Group (
Rates Spark: The plot thickens

FX Update: JPY dragged lower still on fresh bump in yields.

John Hardy John Hardy 07.06.2022 19:13
Summary:  Global yields posted new cycle highs nearly everywhere yesterday save for in the US, a factor that has held the US dollar back recently. That didn’t stop USDJPY from posting aggressive new highs, however, as the JPY remains under intense pressure from rising yields. Elsewhere, the RBA surprised with a larger hike than most expected, while the calendar focus this week is on the Thursday ECB meeting and Friday May US CPI reading. FX Trading focus: JPY dragged to new cycle low on fresh yield rise Rising global yields are punishing the Japanese yen once again, with all major JPY crosses surging higher again overnight on the fresh pop in yields. USDJPY posted a new 20-year high of 133.00 this morning as the next chart focus is on the 135.00+ highs of 2002 next, and this despite US yields lagging global peers of late (more below). If this rise in yields continues, the Bank of Japan will rapidly find itself in a political pinch due to its insistence on the yield-curve control (YCC) policy under which it caps 10-year JGB’s at 0.25%. Only a strong backdown in yields and commodity prices in coming weeks may be able to save Governor Kuroda from an embarrassing climb-down from its YCC commitment that would unleash tremendous volatility. Stay tuned and beware the volatility potential in JPY crosses. As discussed in Friday’s update, the latest leg of the rise in global bond yields has seen the rise in US yields lagging considerably, as these have not yet posted highs for the cycle even after yesterday’s strong surge, while yields elsewhere hit new cycle highs already late last week. The US dollar did get a bump on weaker risk sentiment yesterday and overnight, but the move has been modest and financial conditions have not tightened. The US dollar only seems to threaten on the strong side when rising US yields also drive a tightening of general financial conditions. We’re well off the highs in the US dollar, but I am reluctant to call a cycle top for the greenback until we get a sense of whether markets can absorb the Fed’s intended QT at its full intended pace of $95B/month by September 1 and we are beyond the trough of the bear market that we suspect is on the way. Among G-10 currencies only the USDCAD pair strongly suggests a cycle top for the US dollar. The AUDUSD pair is the possibly next shoe to drop if the US dollar continues to weaken. Currently, that AUDUSD chart is in limbo, for the USDCAD pair, the USD has capitulation lower. AUDUSD is the next possible focus for cementing a USD reversal if last week’s highs above 0.7250 fall. Chart: AUDUSDThe RBA hiked the policy rate more than most expected, choosing a full 50-basis point move to take the cash target rate to 0.85% rather than an odd-sized hike many were expecting of 40 bps to get the rate back on a “normal” 0.25% increment of 0.75%. This suggests more urgency to normalize policy than the market was expecting. The reaction in AUDUSD was modest even as AUDNZD, for example, jumped to new multi-year highs. Major AUDUSD resistance at the converging moving averages around 0.7230-60 held last week. The bearish case remains in limbo, however, after the pair reversed so aggressively back above the major 0.7000 chart level. A shift in the narrative on commodities (to the downside) and a weaker global growth outlook and/or a new tightening of financial conditions is likely needed for the old bear trend to reassert, with a move below 0.7000 to prove the point on the chart. Source: Saxo Group The ECB meeting this Thursday arrives after the market has raised the anticipated ECB policy trajectory aggressively over the last couple weeks. The bank has thoroughly guided for an end to  bond purchases this month, with the first hike to come in at the July meeting. Looking further out the curve, the ECB policy rate through the December ECB meeting is now marked at +0.66% versus below 0% as recently as early April. Since mid-May, the rise in the ECB yield trajectory at the front end of the curve has outpaced that of the Fed by around 25 basis points.  Can the ECB exceed these aggressive market expectations? Assuming that the ECB isn’t set to shock relative to its own guidance for July lift-off, a hawkish surprise would seem more likely to take the form of a surprisingly strong upgrade to staff inflation projections, which are due for a refresh after the March set of projections. In March the 2022-24 CPI was projected at 5.1%, 2.1%, and 1.9%. Particularly the 2024 projection being revised above 2.0% might be seen as a strong signal. This might have the market solidifying expectations for 50 basis points moves starting in September (market currently 50/50 on whether the September meeting will see a 25-bp or 50-bp move). The final versions of the various PMI surveys rarely see significant adjustments, but the final May UK Services PMI print out this morning showing 53.4, up from the flash estimate of 51.8. Oddly, this wasn’t what suddenly lit a modest fire under sterling this morning about a half hour before that data release. Sterling has been gyrating all over the place since Boris Johnson survived last night’s party leadership confidence vote 211-148. Political observers still suggest his days may be numbered, but the market implications of political uncertainty aren’t clear – still impressive that EURGBP has steered clear of the key 0.8600 area – may need to wait for the ECB reaction to get a firm sense of that pair’s next move. Table: FX Board of G10 and CNH trend evolution and strength.The JPY under massive new pressure on the rise in global yields, while CAD leads the charge higher, with AUD not far behind. In momentum terms, one of the more interesting developments is the CHF dropping sharply to start this week. Next week features an SNB meeting. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Interesting to note the weak Scandies as EURNOK and EURSEK have both recently been at tipping points to trend lower, but aren’t doing so. Elsewhere, the USDCHF attempt to flip the trend back higher and NZDUSD to flip lower despite the current status of AUDUSD and USDCAD are interesting subplots as well. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US Apr. Trade Balance 1230 – Canada Apr. International Merchandise Trade 1400 – Canada May Ivey PMI Source: FX Update: JPY dragged lower still on fresh bump in yields. | Saxo Group (
Dollar (USD) Comes Back? Latin America's Currencies Perfomance

FX Update: Biden set to give Powell a tongue lashing at the White House today? | Saxo Bank

John Hardy John Hardy 31.05.2022 14:00
Summary:  The US dollar got a boost overnight and today after comments from Fed Board of Governors member Waller, who argues for several more 50 basis point Fed rate hikes, rather than just the two (followed by smaller hikes thereafter) that that the market was getting increasingly comfortable with projecting. As well, US President Biden has invited Fed Chair Powell to the White House for a meeting today. Is this for a dressing down on the Powell Fed’s failure to move more aggressively against inflation? FX Trading focus: Watching for new shifts in Fed tone as Powell headed to White House meeting today We have the US dollar pushing back a bit higher today on two developments: the Fed’s Waller arguing for “several” 50 basis-point rate hikes, which has helped boost US treasury yields all along the curve, and as the risk bounce fades on that development, as well as on the impact of a significant further rally in energy prices. The latter was a product of the EU agreeing to a new package of sanctions that will see the elimination of all sea-borne imports from Russia over the next six months, which is about two-thirds of the usual import volumes. Pipeline flows could continue, keeping especially Hungary happy for now. Besides the Fed’s Waller helping bring back about nine basis points of tightening onto the 2022 calendar year, we also have the headline that US President Biden has invited Fed Chair Powell to the Oval Office, a rare event that between the lines suggests Biden will do everything he can to strong arm the Fed Chair into a more forceful policy stance. Let’s recall the inflation focus in the Fed Chair’s renomination speech, together with similar comments from then Vice Chair nominee Brainard. Can’t help but note the timing here as the invite coincides with the beginning of the US driving season and possible summer of discontent just after US gasoline prices have surged to a nominal record (still solidly below the prior peak on an inflation adjusted basis). Is the Fed set to double down? The answer to this question together with the reception of the US data through this Friday’s jobs report and the beginning of QT tomorrow and whether we are set for fresh pressure to the upside in longer US treasury yields and therefore the US dollar. Chart: GBPUSDIf the US dollar is set to take a stand here on a fresh rise in yields after Biden refreshes Fed Chair Powell’s memory today on the necessary Fed policy pivot that was the condition for his renomination (fight inflation and don’t worry about anything else), then the sterling looks like a good place to choose shorts versus the US dollar. Nothing has suddenly improved in the UK outlook over the last couple of weeks, we have merely seen a significant bounce after an epic rout from above 1.3000 to below 1.2200. A return of the price action below 1.2500 would suggest a local reversal here and a possible setup for a run to the important chart level at 1.2000. Source: Saxo Group Sweden’s economy supposedly hit a speed bump in Q1, with the estimate yesterday coming in at -0.8% QoQ vs. -0.4% expected, much of it on the drag from trade as high import energy prices weighed and exports looked relatively sluggish on upward revisions of prior numbers. But credit growth suggests domestic demand is humming along nicely, despite the most recent consumer confidence reading registering the lowest level in decades as is the case in many countries. A Bloomberg article today highlights  Sweden’s commercial property sector activity in freefall after a record year in 2021 and before the Riksbank has even managed to hike rates in earnest (although the bank did achieve lift-off in April and the forward curve has seen a massive adjustment higher on the Riksbank’s dramatic reassessment of the likely policy path). Traditionally, Sweden’s economy is very pro-cyclical as it is leveraged to external demand for its products. But all of the small open economies like Sweden (and including Denmark, Australia, Canada, etc.) have seen the most aggravated of property bubbles on the many years of zero/near zero and even negative rates since the global financial crisis. On the residential side, Statistics Sweden’s average housing price indicator has risen from about 3 million just prior to the pandemic to 4 million now and up from about 2 million just after the global financial crisis. Higher yields are a massive headwind for all of these economies through the asset valuation mark-down risks. Major studies by the US Federal Reserve among others have shown that property bubbles cause enormous long-term hangovers once they pop, and Sweden’s never came close to doing so. Back in 2010-11, the Riksbank thought it could normalize and tried to do so by hiking rates to 2.0% from 0.25%, but triggered an immediate recession that saw it backtracking and cutting the policy rate to -0.5% by early 2016. Back then, the global backdrop allowed such a move, as inflation was a non-issue, particularly after the collapse in oil prices in 2015. This time around, not so much. An interesting story out overnight flagged to me by my esteemed colleague Redmond Wong was the upward revision to 2.0% from 1.2% YoY in Japan’s March wage data, a potential game changer if similar levels or higher of wage growth are posted in coming months. The wage data series is somewhat erratic, so we can’t jump to conclusions, but it is the kind of data that would allow the BoJ to soften up its commitment to the existing yield-curve control policy.  In general, the political pressure on the BoJ can only continue to mount from her if oil prices continue higher and raise the cost of living in Japan, aggravated by the weak JPY which is almost 25% weaker in REER terms from two years ago. The JPY was a touch firmer overnight after dropping in the wake of the surge in US yields. Prime Minister Kishida is set to tout a “New Capitalism” policy push that seeks to shore up inequality risks. More to come on that effort.Table: FX Board of G10 and CNH trend evolution and strength.Too early for this USD bounce to show up on our trend indicator, but the USD trend status looks pivotal through Friday. The commodity currencies have been trying to get something going and AUDUSD is close to last gasp resistance areas and USDCAD has been interacting with the important 200-day moving average area. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Note the robust extension of the bounce-back in AUDNZD as a likely end to the NZD comeback attempt within than exchange rate. That pair may be ready to challenge near 10-year highs on a break of the 1.1100+ top.  Elsewhere, the Euro is suffering against commodity FX on the new Russia sanctions, EURCHF 1.0225-50 area bears watching. Finally, the GBPUSD trend reading will be easy to flip back to negative on a heavy couple of days of trading – and GBPJPY is even closer to flipping negative if the JPY perks up again. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1200 – Hungary Rate Decision 1230 – Canada Mar. GDP 1300 – US Mar. S&P CoreLogic Home Price Index 1345 – US May Chicago PMI 1400 – US May Conference Board Consumer Confidence 1430 – US May Dallas Fed Manufacturing Activity 0130 – Australia Q1 GDP 0145 – China May Caixin Manufacturing PMI Source: Saxo Bank
Asian equities fall once again

FX Update: USD still hanging in there. Next couple of sessions key. | Saxo Bank

John Hardy John Hardy 25.05.2022 14:31
Summary:  Weak data sees a significant drop in Treasury yields and a slightly weaker US dollar, with the USDJPY volatility distinctly underwhelming and the greenback fighting back this morning. With a chunky mark down in Fed expectations ahead of tonight’s FOMC meeting minutes, it may be hard for the market to mark Fed expectations lower for now and thus time for the US dollar to possibly take a stand. FX Trading focus: Fed expectations about as low as they can get for now? Yesterday saw a batch of weak US data points that shoved US yields lower all along the curve. The April New Home Sales dropped sharply to a 591k annualized rate versus 750k expected and a sharply downward revised 709k in March (from 763k). The S&P Global initial Services PMI for May came in weaker than expected at 53.5 vs. 55.2 expected and 55.6 in April, while the Manufacturing PMI was in line at 57.5 vs. 57.7 expected and 59.2 in April, a bit odd in that we have now seen three weak regional surveys after yesterday’s ugly May Richmond Fed manufacturing survey flashing -9 versus +10 expected and vs. +14 in April. The 2-year US treasury yield dropped over 15 basis points at one point yesterday in the wake of the data and the US dollar was taken to new local lows, although interestingly, it has put in a show of resilience today as discussed for the EURUSD chart below. With the FOMC minutes up tonight set to like see very little in the way of new changes to the Fed rhetoric, and perhaps reminding us on the contrary how hawkish the Fed has become (despite Powell tapping the brakes by ruling out 75-bp rate hikes at the May 4 FOMC presser), US yields may have bottomed out here or are very close to doing so now that the market is only looking for two further 50-bps for the next two meetings and then looking for the Fed to more likely switch to 25-bp hikes thereafter. It was particularly interesting to note that the big yield move at both the long and short end of the US treasury yield curve failed to generate much follow through lower in USDJPY, which only managed 126.36 on the 127.00 break and is trading right at 127.00 again as of this writing. Chart: EURUSDThe EURUSD rally managed a run to just shy of 1.0750 late yesterday on the tailwind of the ECB expectations solidifying for exiting negative rates by end Q3 (even if all of this fuss has not seen any notable adjustment in EU yields), while the Fed expectations have been marked down significantly, particularly after yesterday’s batch of weak US data. The strong turn in the price action this morning taking the pair back to where it was trading prior to that weak data yesterday suggests that the US dollar taking a stand here. The bearish reversal potential here picks up if the price action takes us back below 1.0600. Source: Saxo Group The UK reported a very ugly initial May Services PMI reading of 51.8 versus 57.0 expected and 58.9 in April – a vicious reversal of fortune. This underlines the risk that the UK is in the vanguard of economies set to weaken first for this cycle, as supply-side limitations and the higher cost-of-living pressures as well as the weakening fiscal impulse work their way into the economy. As we have emphasized, the UK economy also runs enormous structural deficits – GBPUSD could be ready for a roll-over already now and a look at the massive 1.2000 level eventually. The RBNZ hiked 50 basis points as a large majority of observers expected, taking the rate to a G10 leading 2.00%. The bank forecast the rate to reach 3.95% for the cycle versus 3.35% previously, triggering a solid bump at the front end of the NZ yield curve and boosting the kiwi overnight, with AUDNZD to new local lows, while NZDUSD got close to bumping up against the former range lows of 0.6530.  The reversal this morning that has taken back all of the overnight upside looks like a potential place for NZDUSD bears to set up shop for a run back lower as the global tightening, the recent mark-down in Fed expectations notwithstanding, will continue and as argued above, Fed tightening expectations may be bottoming out here. Table: FX Board of G10 and CNH trend evolution and strength.Trend reading levels are generally low. The Swiss franc has gotten far more out of the lower yields than the Japanese yen, somewhat curiously this time around (perhaps energy price related). The US dollar is down, but not yet out, and a strong rally bar could see something building there again as we emphasize that the USD has worked into some pivotal support areas. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.A few interesting pairs to watch for the status today include AUDNZD, where the drop lower signals a new downtrend potential if the move hold, while USDCAD continues to try to hang in despite dipping several times south of 1.2800 – an impulsive rally need there to set the focus back higher, but the bulls have not fully capitulated there. Finally, EURJPY is an interesting one to watch for the JPY potential to pick up if longer yields remain suppressed on concerns for the global economic outlook. The EURJPY chart certainly needs to resolve soon, one way or another. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1100 – US Weekly Mortgage Applications 1105 – Japan Bank of Japan Governor Kuroda to speak 1515 – UK Bank of England’s Tenreyro to speak 1615 – US Fed Vice Chair Brainard to speak 1800 – US FOMC Minutes 1800 – US 5-year Treasury Auction 2110 – New Zealand RBNZ Governor Orr to speak Source: Saxo Bank
Ebury Weekly Analysis: AUD, CAD, CNY | Ebury

FX Update: Rates trump risk sentiment as USD driver. | Saxo Bank

John Hardy John Hardy 23.05.2022 14:17
Summary:  The US dollar found only very modest support on Friday as US equity markets plumbed new cycle depths. As risk sentiment rebounded Friday and carried through higher to start the week today, the USD selling has become more aggressive. The fact that risk sentiment has only rebounded since Friday while the US dollar has been selling off for nearly two weeks suggests that US treasury yields, which peaked slightly ahead of the USD, may be the dominant market driver. FX Trading focus: Rates trump risk sentiment as USD driver. As noted on Friday, the near-term focus for FX traders is where and when the USD finds support, if it is going to find support. I suspect that the USD will only properly roll over for the cycle once the Fed has turned back toward easing – at least in a relatively sense, and perhaps this only becomes clear as a reduction in the perceived end-point of this rate hike cycle. In that sense, the market seems in a rush to declare that we have reached that point and that inflation is set to fade from here. Breakeven inflation rates peaked back In late March and have really swooned since the beginning of May. Yields at the short end of the US yield curve remain elevated, but are below the peak reached just before Fed Chair Powell took jumbo hikes of greater than fifty basis points off the table at the May 4 FOMC meeting. The longer end of the US yield curve has consolidated even more and I suspect the combination of the easing back of US yields and inflation expectations, combined with hefty long-USD speculative positioning, that have the USD on its back foot. I have a hard time that peak Fed rate expectations are in the rear view mirror a week before actual quantitative tightening has even begun, but let’s see From here, there is still some room for the USD to fall further without reversing the well-established bull trend, but the comfortable (for USD bulls) portion of that room has been about reduced by half in today’s trade. The yield-fixated USDJPY is in its own category (given BoJ yield-cap policy and the enormity of the move since the pair broke above the 116.35 range top back in March) . For other major USD pairs, the next major area for EURUSD is into 1.0800+, for USDCHF is 0.09525, for USDCAD last gasp support is into 1.2660-1.2715, AUDUSD is discussed below. GBPUSD has a little resistance at the 1.2638 pivot high, but has a lot more wood to chop to suggest a trend reversal, as this downtrend started on the break below 1.3000. Read next: Altcoins: Cardano (ADA) What Is It? - A Deeper Look Into Cardano (ADA) | FXMAG.COM Chart: AUDUSD The AUDUSD has carried through higher after bobbing back above the pivotal 0.7000 level, one that has served as both support and resistance on many occasions since early 2019. Supporting the AUD are the structural shift in the country’s external imbalances for the better, the recent rebound in risk sentiment, a solid recovery in some industrial metal prices associated with Australia’s traditional export mix, and hopes that China is set to stimulate. Working against the Aussie’s favor are a new left turn from the Australian government at the margin, rising concerns that the global economy is set to slow, and the risk that we are far from the end of the asset market deleveraging cycle. From here, bears, for an ideal fresh trading hook, need a quick rejection of today’s action and for the price action to dip back below 0.7000. On the flipside, if this rally persists into 0.7250+ area (most recent major pivot high in that area and just ahead of the 200-day moving average) the latest down-wave would have been rejected and this would suggest the softening up of the bearish risk has been neutralized for now – the next figure (100 pips) in either direction looks very important here for the pair. Source: Saxo Group ECB President Lagarde was out jawboning today on rate outlook, with her comments largely rhyming with market expectations, therefore triggering a modest pick-up from intraday lows in forward ECB expectations, but a rather more pronounced reaction in the euro itself, especially as EURUSD cleared the local pivot high of 1.0642. She basically spelled out that the ECB will hike in July due to the winding down of asset purchases and in saying that a negative interest rate policy will be over by late Q3, suggests that another hike will come at the September meeting. As background concerns continue to plague the Chinese economic outlook and a rise in Beijing Covid case counts has driven new fears of widening lock downs there, China has been out today touting new measures to encourage activity resumption elsewhere and other easing measures in the works, including SME loans and a tax cut on car purchases. Sentiment in general has also gotten a boost from increasing chatter that US President Biden could be set to roll back some of the China tariffs in the all-out effort to get inflation readings down ahead of the US mid-term election in November. Read next: Altcoins: Ripple Crypto - What Is Ripple (XRP)? Price Of XRP | FXMAG.COM Table: FX Board of G10 and CNH trend evolution and strength.For the trend window the FX Board operates with, the USD bull-trend has effectively been erased. As emphasized above, some USD charts still have more room to allow the USD to consolidated lower, but clearly USD bulls are down if not yet out. Otherwise, it is clear we are in flux when no trend reading has an absolute valuer greater than 2 save for NOK. By the way, Poland’s prime minister has been the first politician (that I have noticed) to call for Norway to share its windfall gains from high energy prices. Interesting to watch the political optics on this issue – certainly a forward risk for NOK. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.EURUSD is trying to cross into a positive trend reading today, but note that the chart context is important for trend status and the downtrend is so entrenched that it is too early to bite on this move. Likewise for USDCHF, although the USDCAD chart looks more credibly bearish on a weak close today. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US Apr. Chicago Fed National Activity Index 1415 – ECB's Holzmann, Nagel to speak 1415 – UK Bank of England Governor Bailey to speak 1430 – ECB's Villeroy to speak at Davos 2245 – New Zealand Q1 Retail Sales  2330 – US Fed’s George (voter) to speak Source: Saxo Bank
Forex Market: Technical Analysis - Euro To US Dollar - 26/07/22

FX Update: Powell brings back the hike-until-it-breaks narrative. | Saxo Bank

John Hardy John Hardy 18.05.2022 15:57
Summary:  After the odd tapping on the brakes at the May 4 FOMC meeting, when the Fed wanted to take the idea of 75-basis point rates off the table, Fed Chair Powell reminded the market of its mission to ensure that it will not let up on policy tightening until it has achieved a sustained drop in inflation. Elsewhere, the sterling squeeze is fading fast and the status of key USD charts is pivotal. FX Trading focus: Powell puts back on the hawkish hat, GBP squeeze fading fast, USDCAD spotlight Fed Chair Powell reminds us of the Fed’s mission in saying that the Fed “won’t hesitate at all” to take the Fed Funds rate above neutral, and that “what we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that.” Powell admitted that taking levels above neutral could bring some pain and a rise in the unemployment rate. End-2022 Fed expectations rose about 10 basis points yesterday and this morning were at 2.82%, just shy of the 2.88% cycle highs from before the May 4 FOMC meeting, at which Powell discouraged the idea of hiking more than 50 basis points at a time (why?). This only offered the USD a modicum of support overnight as risk sentiment absorbed the news without much fuss. GBP shorts caught in quite the squeeze yesterday, likely aggravated badly by positioning, which is quite heavily bearish in the US futures market and in general. Yesterday I mentioned the very strong payrolls data as a driver, but there was also the news that the UK government may be considering tax cuts, including a lowering of the VAT, as well as cost-of-living support for the most vulnerable citizens. In the first instance, this could eventually help ease inflation levels and thus allow the Bank of England to hike more than previously expected, but the follow-on thinking is that it could also keep demand higher than it would be otherwise and continue to driver extreme external deficits for the UK, eroding the sovereign UK balance sheet and therefore possibly trust in sterling as well. Sterling has surrendered much of yesterday’s gains – watching for a capitulation again in GBPUSD, while the EURGBP has bounced back above the existential 0.8450 area that  was pivotal on the way up. A very choppy chart there. USDCAD and US vs. Canada Housing spotlightThe CAD has received a double dose of support from the recent strong bounce in risk sentiment and crude oil prices pulling into the top of the range and beyond at times recently. But let’s look a bit further ahead at the inevitable gathering storm that is set to hit the housing market in coming months, after yields have lurched sharply higher. The headline is that if an ugly housing slowdown lies ahead, it will hit Canada’s economy with far more force than it will the US economy. Construction itself contributes about 75% more to GDP in Canada than the US (about 7.5% vs. 4.3%), and private balance sheets in Canada are far more levered, with notable local housing bubbles in Toronto and Vancouver making UBS world top ten list (at #2 and #6) of worst housing bubbles in 2021. The Greater Toronto area, by the way, represents over 17% of the Canadian population. I have better data on the US market and can see solidifying signs in leading indicators that the US housing market is set for a slowdown, including yesterday’s worst of the cycle drop in the NAHB for the May data point, which fell 8 points to 69 versus 75 expected and 77 in April. The latest Housing Starts and Building Permits data is up today (for April), although this lags the NAHB historically by about six months in directional terms. US Pending home sales have also rolled over as discussed in today’s Saxo Market Call podcast and are another leading indicator. So, while near term, an additional boost to sentiment and energy prices could see a break-down in USDCAD, the Canadian economy will face disproportionately large end-of-cycle pressures once the recession arrives, so clouds remain over the cycle outlook for the loonie. Chart thoughts below for USDCAD Chart: USDCADThe USDCAD chart has retreated to critical levels for bulls, as a significant punch below 1.2800 makes the chart look a lost cause for the bulls (arguably, the last, last gasp area is just ahead of 1.2700 at the prior pivot lows or even 1.2660 if using the 61.8% retracement and the 200-day moving average, although the reversal back down through 1.2900-50 has already been a disappointment after that level to the upside was broken. An impulsive recovery back above 1.3000 to put the momentum back on track higher. Source: Saxo Group Underwhelming wage price data for Q1 from Australia overnight, which rose a mere 0.7% QoQ and 2.4% YoY, both 0.1% below expectations. This is meant to be the key data that would drive the RBA to accelerate its tightening regime if it provided evidence of a wage price spiral. Alas, the AUD seems more focused on hopes for China lifting Covid restrictions and swings in risk sentiment. The 0.7000-0.7050 zone remains the tactical resistance focus, with bears possibly needing to retreat back to 0.7200-50 if it does not hold. Table: FX Board of G10 and CNH trend evolution and strength.The USD is losing steam in a trending sense, and would need a solid new impulsive move higher soon to avoid a further breakdown in key pairs, and versus the G10 currencies generally. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.USDCAD is on the verge of flipping into a positive territory on the trend readings if it can’t rally soon. Also note the EURGBP rally hanging on by a thread here. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US Apr. Housing Starts and Building Permits 1230 – Canada Apr. CPI 1230 – Canada Apr. Home Price Index 2000 – US Fed’ Harker (Non-voter) to speak 2350 – Japan Apr. Trade Balance 0130 – Australia Apr. Employment Data Source: Saxo Bank
Forex: Wow! AUD/USD Skyrocketed By 1.5% Yesterday!

FX Update: Euro waxes resilient as G3 horse-race steals focus. | Saxo Bank

John Hardy John Hardy 16.05.2022 23:08
Summary:  The Friday squeeze in equity markets saw the US dollar roll over after its most recent bout of strength. As market stumbled a bit to open this week after weak Chinese data in the Asian session overnight, the more interesting relative race to watch is the relative moves between G3 currencies as the euro shows signs of putting up a bit of a fight, at least against the Swiss franc to start, but EURGBP also found support at important levels. FX Trading focus: G3 horse race the focus as euro, JPY resilience creep into the picture The consolidation in treasury markets last week as risk deleveraging intensified at least briefly changed the narrative in FX, as the JPY enjoyed a massive comeback on Thursday on the safe haven appeal of long bonds finally kicked in. The short squeeze in equities on Friday saw that development reversing sharply, but the potential for JPY strength remains in play if we have seen at least a cycle high in bond yields for now. Both Fed tightening expectations and the longer end of the US yield curve have peaked recently and a follow through in 10-year yields below 2.75% opens up the next layers of resistance down to 2.50%. Today, after a brought bout of new JPY and USD strength overnight, the most interesting independent mover today is the euro, which finally found support against GBP at important levels in EURGBP (ahead of the 0.8450 area and 200-day moving average slightly lower that was a breakout zone on the way up) and against CHF, as EURCHF pulled back higher to threaten the 200-day moving average and the psychologically important 1.0500 level. The readily identifiable drivers for positive Euro outlook today are ECB governing council member Villeroy out warning that an eye must be kept on the euro, but also helping are the reversal of the most recent surge in Nat Gas prices, and for the longer term, Netherlands prime minister making a strong pro-EU comment Chart: EURCHFEURCHF jumped back higher today, likely in part on the ECB’s Villeroy warning on the euro, but the pair needs to punch higher through the psychologically key 1.0500 area and the 200-day moving average to suggest a further revaluation higher is afoot (the 1.0600 looks even more prominent, but we need to recall that the massive cycle low in early 2020 was also near 1.0500). Certainly, the ECB warning does point to limits in the ECB’s willingness to sit on its hands and could prompt the central bank to indicate a willingness to shift into a higher gear in its tightening regime.  There has certainly been a strong regime change in CHF of late, as USDCHF smashed through the range high in late April and has been testing well above parity lately, even with US treasuries in consolidation mode. Source: Saxo Group Data focus this week is on the US housing market indicators and the Apr. Retail Sales report up tomorrow. It took only three months for the US mortgage rate to go from the unprecedented range lows (relative to pre-pandemic levels) as late as the beginning of January to a more than 10-year high by late March, and we have headed another 50 basis points higher since then. This is the largest rate shock by a mile on this very important financial condition. The first places to look for signs that the housing market is rolling over are in the volume of transactions and a slowing in new builds. The NAHB Survey of new home buying interest has rolled over but it is still at extremely high levels (higher than during housing bubble peak of 2005), while New Home Sales peaked in early 2021 and Building Permits are still at cycle highs – a mixed picture but overall, significant loss of momentum. The headline expectations for Retail Sales look strong, but we have to remember the multi-decade highs in inflation here, meaning real growth in retail sales requires very strong numbers indeed. Given very ugly sentiment numbers (see below), would expected downside risks in real retail sales lie ahead. Friday saw a very weak US May preliminary University of Michigan sentiment reading at 63.6 for the “current economic conditions” half of the overall survey, a dramatic new cycle low and far below the 69.6 expected. Only three other readings in the 2008-09 cycle were lower still (record low in November of 2008). The overall index also made new lows for the cycle at 59.1. The longer term inflation expectations in the survey were stable at 3.0%. The last few days have seen new record high prices for gasoline in the US, which could affect the final UMich survey for the month and then inflation expectations bear watching for that survey and next month as an input for Fed policy. Table: FX Board of G10 and CNH trend evolution and strength.The Euro rally in broader terms has eased, but still positive, while interesting to note the divergence of JPY and CHF as the JPY retains some of the strength from the momentum introduced last week. What is gold indicating other than the cross-the-board challenge of recent USD strength? Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.The EURGBP and EURCHF pairs put in a rally today that keeps the positive trend for those two pairs alive – watching for follow through (or not) in coming days for the trend status there. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US May Empire Manufacturing  1255 – US Fed’s Williams (voter) speaking  1300 – Canada Apr. Existing Home Sales  1415 – UK Bank of England Governor Bailey and other MPC members to speak  0130 – Australia RBA meeting minutes Source: Saxo Bank
FX Update: Bond rally supercharges JPY comeback rally. | Saxo Bank

FX Update: Bond rally supercharges JPY comeback rally. | Saxo Bank

John Hardy John Hardy 12.05.2022 16:01
Summary:  An extension of the rout in risky assets has continued to drive the US dollar higher against the smaller currencies and most G10 currencies as well, but the Japanese yen has not only taken on a new shine, but is even sharply stronger against the strong US dollar as global bonds have suddenly rediscovered their safe haven appeal. Elsewhere, HKD is worth watching as the HKMA intervened for the first time of this cycle to maintain the top of the USDHKD band. FX Trading focus: JPY woke up and smelled the coffee. Watching HKD as USD presses upper level of USDHKD band. The JPY upside potential has been more fully realized since yesterday on the heavy weight of falling yields in global sovereign bond, which are finally serving their function as a go-to safe haven in an environment of generally risk deleveraging. The JPY is even handily outpacing the ongoing strength in the US dollar as the yield focus dominates. And the technical damage in JPY crosses is spreading: NZDJPY and GBPJPY, the latter our focus yesterday, are already trading back into old ranges that preceded the JPY sell-off sparked by the commodity rally in the wake after Russia invaded Ukraine. Now watching AUDJPY and EURJPY for whether the feat is repeated there (key levels around 86.00 and 134.00, respectively), and CNHJPY has come down hard, with more to come. More thoughts on the most important USDJPY pair below in the chart discussion. The JPY can continue higher, but the price is far “fairer” now relative to long term bond yields. Yields must extend lower still, possibly with a helping hand from crude oi and LNG prices for a full reversal of the JPY sell-off since late February.  Chart: USDJPYYesterday, our focus in JPY crosses was on GBPJPY, which took out the 160.00 and 158.00 area supports yesterday. Today we have a look at the big one: USDJPY and what levels might trigger a more notably slide. Arguably, the first of these has already been under strain today in the 128.50 area. Regardless, the direction of the US 10-year benchmark yield is the key coincident indicator, with global energy prices a secondary indicator. The next support area below is the 127.03 pivot low followed perhaps by the 125.00 area, which was a stopping point on the way up. Source: Saxo Group Sterling suffered a sell-off to new lows in the wake of the Q1 GDP data, which showed a +8.7% growth rate, slightly below expectations, but a -0.1% month-on-month figure for March, with weak production figures to boot. The March Trade Balance data was also out and showed a toe-curling negative £23.8B trade balance, a staggering figure. Still, after a run to fresh lows against the G3 currencies, the EURGBP rally reversed rather sharply, in part as EURUSD tipped over to new lows after a couple of weeks of defending the 1.0500 support area. All traders should monitor the crypto situation as a possible aggravator of additional volatility risk across markets. The TerraUSD “stable coin” broke its parity level with the US dollar earlier this week and traded as much as 70% below par. Then yesterday, a key Bitcoin support level at 30,000 broke, possibly inspiring the instability of the Tether stable coin, which is a commonly used as a kind of parking space between going in and out of crypto trades and in and out of the crypo market itself. The Tether coin traded as much as 5% below par against the US dollar this morning before the whole crypto-complex recovered. More directly pertinent to FX, we have to watch the Hong Kong dollar (HKD), as the USD strength has taken the USDHKD exchange rate to the upper limit of its band at 7.85 and has seen the Hong Kong Monetary Authority out intervening for the first time of this cycle overnight. The HKMA will also need to copy Fed policy to avoid the worst of pressure on the HKD, even with Hong Kong’s economy in a funk. The HKD band is one of those legacy set-ups that makes little sense here almost forty years after its creation, but Hong Kong remains a key gateway into and out of the mainland Chinese economy, and China probably doesn’t want to add HKD instability to its long list of challenges. Note the Chinese demand concerns continuing to weigh on the copper price, which has punched to the lowest reaches of the range since early 2021. This in turn weighs on the Aussie, which itself has punched to new lows for the cycle. The CAD has gotten off easy so far by comparison, perhaps as oil prices remain in the higher range here – but after breaking above resistance, if USDCAD loses its tethering to the 1.3000 area it is in danger of a sharp extension higher. Table: FX Board of G10 and CNH trend evolution and strength.We have noted the euro resilience of late, but signs of this crumbling today as EURUSD, EURCHF and especially EURJPY come under pressure. But the development of note here is the strong revival of the JPY momentum and outright positive trend measurement in recent days. Elsewhere, CAD looks too strong with this backdrop, although there is quite a race to the bottom of late among the weakest horses in G10 FX. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Note EURJPY and CADJPY trying to join other JPY crosses in flipping to the negative side after the sharp JPY rally today. All G10 currency pairs save for a few GBP pairs (due to Brexit-related events) are in the highest 10% of their ATRs of the last 1000 trading days, as shown in the dark orange shading for the ATR readings. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US Apr. PPI 1230 – US Weekly Initial Jobless Claims 1800 – US 30-year T-Bond auction 1800 – Mexico Overnight Rate Announcement
FX: EUR/USD Dangling. Falling Euro Accompanied By British Pound Which Is Influenced By Politics

FX Update: Waiting for broader JPY resilience, not Godot. | Saxo Bank

John Hardy John Hardy 11.05.2022 23:52
Summary:  Recent developments, especially the consolidation in global sovereign bond markets, have opened a solid window of opportunity for the Japanese yen to recoup some of the steep losses of the last couple of months. The CPI data today from the US may not set the tone for much longer as we all know that a bit of mean reversion lies ahead for inflation rates, but with extreme uncertainty on where inflation will be six to eighteen months from now, even if central banks wax confident. FX Trading focus: Solid conditions for JPY to take back some lost ground. Fed’s Williams provides optimistic inflation forecast…why? The JPY has posted a solid comeback, but the backdrop of lower energy prices and especially lower bond yields (more below) since the start of the week suggests that the JPY should be firmer still. Are traders waiting to get today’s US CPI data release out of the way or is something else preventing the JPY from a bit more mean reversion at minimum? Note the comments on GBPJPY technical in the case of GBPJPY below. The fairly powerful consolidation in global bond markets this week has seen the US 10-year Treasury benchmark yield pushed back down south of 3.00% after trading near the 2018 high of 3.25% at the start of this week. Hawkish rhetoric from Fed members yesterday, including FOMC voter Mester, who advocates keeping 0.75% hikes on the table if necessary, failed to see yields at the front end of the curve higher. We seem to have the market looking forward to today’s US Apr. CPI data suggesting a roll over in inflation as year-ago levels of 0.7%+ for a few months are possibly set to allow the CPI data series to drop up to a couple of hundred basis points over the next few months and feed into lower core inflation as well. But then we have the NY Fed’s Williams out yesterday expressing the belief that core inflation will ease to 4% this year and 2.5% in 2023! It feels like the Fed is far from having learned its lesson on the minefield of providing economic forecasts. The pattern suggests, however, that some at the Fed may be attempting to tap the brakes on market expectations after Powell ruled out 75 basis points at last week’s FOMC meeting and now this approach from Williams. Chart: GBPJPYGBPJPY is the major JPY pair closes to testing important support on this run higher in the JPY on lower bond yields and weak risk sentiment more broadly, while in relative terms, the pound is suffering on the Bank of England’s dour outlook on the economy, which has the market expecting that the Bank of England’s tightening regime will slow notably versus its peers. The big 160.00 level is in play here, which looks a bit of a head-and-shoulders formation locally. This lies ahead of the well-defined former range highs near 158.00, a move below which would begin to suggest the end of the bull run from the pandemic outbreak lows of early 2020. Source: Saxo Group Among G-10 currencies, the Norwegian krone has suffered the most over the last couple of weeks, according to our FX Board measure of trend strength (see below). Yesterday’s Norwegian April CPI release was far higher than expected at 5.4%, which is a 13-year high and makes the Norges Bank recent decision to continue with mere 25 basis point rate hikes every quarter an excessively slow pace. EURNOK traded briefly to a new high for the year above 10.23, having entirely reversed its run lower below 9.50 (!) as the commodity theme in FX has stumbled badly since an early-mid April peak. Inflation is high in the CEE countries, with Romania today reporting a CPI rise in March of 13.8% year-on-year and a month-on-month rise of a 3.7%, both far higher than expected.  Given that the most recent wage data from February in Romania shows wages rising at a greater than 10% pace, this is not as alarming, if still the highest inflation print I have seen anywhere in CEE or developed Europe. Which takes us to Hungary: I have spotlighted Hungary’s stunning +32% wage rise in March just ahead of the April election and inflation there is supposedly at 9.5%, actually south of what the Netherlands reported in both March and April (9.7% and 9.6%), much less what Romania is suffering in the way of inflation. To be fair, Hungary’s wage rises were at more like 10% for much of the last two years and some of the March figures were from one-off bonuses to public sector employees clearly meant to tilt the election in Orban’s favour, but the situation bears watching there even as forint (HUF) has taken all of this in reasonable stride, helped by the central bank’s 5.4% policy rate and 6.45% deposit rate. Note that Australian Westpac consumer confidence cratered in April to 90.4 from 95.8 in April, taking it near or below 90 for the first time since the pandemic outbreak months and before that in the global financial crisis years of 2008-09 with a single blip in 2011 below 90. Table: FX Board of G10 and CNH trend evolution and strength.The Euro getting some respect in the crosses even if attempts to bounce versus the strong US dollar have not impressed. The JPY momentum has turned net positive, but still not much of a signal there. Note NOK’s weakest-of-G10 status of the last couple of weeks. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.EURCHF has shied away from 1.0500 after a test yesterday – lower bond yields likely coming to the CHF’s aid there. The key trends to watch are the JPY crosses if bond yields press lower still, and then the status of AUDUSD and USDCAD after the breaks of important USD resistance in these pairs in recent days. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US Apr. CPI 1230 – US Apr. Real Average Hourly Earnings 1600 – US Fed’s Bostic (non-voter) to speak 1800 – US 10-year T-Note auction 2301 – UK Apr. RICS House Price Balance Source: Saxo Bank
FX: EUR/USD Dangling. Falling Euro Accompanied By British Pound Which Is Influenced By Politics

Fluctuations And Strengthening! Check Trends Of Forex Pairs - EUR/USD, GBP/USD, EUR/SEK And More! | Saxo Bank

John Hardy John Hardy 09.05.2022 15:21
Summary:  The slow motion melt-down in US long treasuries and melt-up in the US dollar is a double whammy that risks driving an escalating dysfunction in global markets until it is addressed the only way possible: by Fed easing. The FOMC meeting last week actually provided a modicum of easing relative to expectations. Is this a preview of coming attractions? Markets will force the Fed hand eventually. FX Trading focus: USD remains ascendant if off day’s highs The US dollar strength and higher US yields are the one-two punch continuing to drive risky assets into the red as the week gets under way, with US equity markets at new lows for the cycle ahead of the US open today. I suspect now that in the bigger picture, this cycle of USD strength only ends once US long yields begin falling, and falling because the Fed has exercised its put with new yield caps or because US pension- and/or other rules are changed requiring US savers to hold more treasuries, not because market forces at some point decide that long US treasuries are a superior long-term investment. For now, it would seem talk of such eventualities are premature, although if volatility continues at the current level for much longer, it will sharply bring forward the eventual policy response. As for market timing tactically if this recent deleveraging move is set to persist now or not until later this week, some have opined that “turnaround Tuesday”, the idea that bouts of market weakness often turned to the better on Tuesdays has been brought forward to Monday of late, and we are seeing signs of this in the early New York session today after the last three Mondays in a row saw snapback rallies from new local lows, even if the price action eventually faded again later in the week. Wednesday’s US CPI release is the data point of the week on the US economic calendar, and 3-, 10- and 30-year Treasury auction are set for Tuesday through Thursday. The euro continues to get solid respect in many crosses, with a chop-fest in EURUSD after ECB officials last last week upped their sense of urgency on achieving lift-off. As well, longer European yields are offering more for domestic savers as German Bund yields stretching aggressively higher since late last week – the Bund trades as of this writing at 117 basis points, up 20 basis points from last Wednesday’s close. Those willing to risk a sniff at Italian BTP’s have yields comfortably above 300 basis points now. The rise in yields clearly helping EURCHF higher as the CHF safe haven status is nowhere in evidence, a notable development. Today’s weekly SNB sight deposits grew aggressively last week – is Switzerland adding to the CHF weakening? Certainly, Swiss reserves held as gold and US stocks have been losing considerable altitude at the same time. 1.0500 is a significant EURCHF level now not far away. Chart: USDCADA number of USD pairs are at significant chart tipping point as this week gets under way. The most well defined of these is perhaps the 0.7000 level in AUDUSD, although USDCAD in the 1.2950+ area is quite remarkable as well – an area that has seen at least four prior touches, first as support just prior to the pandemic in early 2020 and then as resistance once the pair crashed back down through that level later that year. Oil prices are challenged from the demand side on Chinese Zero Covid lockdowns and budding behaviour change globally from skyrocketing diesel- and jet fuel prices. The range above there and above the psychological 1.3000 level is considerable – all the way to the double top of 1.4600+ from 2016 and 2020, but the bulk of the time, the 1.3650 area capped the action during those years. If oil suffers a more significant setback over this latest risk deleveraging event, that level could quickly come into play. The private debt leverage is far higher in Canada than in the US and one of the more sensitive sectors to rising rates is housing, which represents a far greater portion of the Canadian GDP growth over the last decade and a half relative to the US – interesting to watch the trajectory of the housing market in both countries after the enormous back-up in yields in recent months. Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strength.The USD strength continues, though note the solid pick-up in the euro, which does better than the smaller currencies when the focus is on liquidity. Also note that CNH isolated weakness has picked up a bit – is that set to accelerate? Table: FX Board Trend Scoreboard for individual pairs.Note the EURAUD up-trend establishing as a sign of China-linked concerns eclipsing Ukraine War collateral damage on the euro. Also, note CNHJPY flipping negative on Friday and following through today – more potential there if the rise in global yields eases/consolidates. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – Canada Mar. Building Permits  0130 – Australia Apr. NAB Business Conditions/Confidence survey
Last Time S&P 500 Had Such A Bad Half Back In 1970. Gold (XAUUSD) Has Gone Below $1800. US PCE Made Yields Decrease. Nitori Earnings Are Released Today

What Bank of Japan Is Going To Do? Solid USD Against Japanese Yen, SEK (Swedish Krone) To Be Supported By Riksbank Shortly?

John Hardy John Hardy 27.04.2022 14:15
Summary:  The Japanese government is rolling out a large fiscal package to ease cost-of-living pressures at a time when inflation in Japan supposedly remains muted. This is entirely out of step with the Bank of Japan doubling down on its accommodative policy mix, which has driven the Japanese yen sharply weaker this year. Will the Bank of Japan be forced to capitulate tonight? FX Trading focus: Bank of Japan meeting tonight as pressure on policy mix mounts, EUR and GBP in for fresh pressure on Russian NatGas threats, AUD and SEK ahead of Riksbank The JPY has found a bit of support this week on the consolidation in global bond yields. Yesterday saw a strong US 2-year Treasury auction that helped take yields lower at the front end of the curve as well, with risk-off finally strong enough in the background to see US treasuries serving as a safe haven. The falling yields factor by itself brings the JPY some relief, as has the Chinese decision to allow a so-far modest revaluation of its currency lower that will bring more relative support to the JPY if that move is extended. But to really reset the JPY level back higher after its runs to multi-decade lows in real-effective inflation-adjusted terms, we will need to see a policy change from the BoJ. The BoJ meets tonight, and while very few are expecting a shift, it wouldn’t take much of a hint to suggest the pressure on the BoJ via the weakening currency is becoming too strong to ignore. Even a hint that the Bank is mulling tightening without specifics could be enough to trigger a JPY rally, but spelling out that the bank is willing to tinker with its yield cap policy on 10-year JGB’s would likely spark an even sharper move. Meanwhile, the political pressure has to be mounting sharply as well: consider that overnight the Japanese government has passed a near JPY 6.2 trillion (approx. $50 billion) stimulus package aimed at offsetting cost-of-living pressures that are sorely felt by the most vulnerable in Japan. This at a time when inflation supposedly remains unsatisfactorily low. For whom the inflation bell tolls is an critical question both in Japan and globally as we have to consider that these cost of living pressures that may only measure in the mid- to high single digits nationally could weigh 20% or more for the consumption basket at the lower end of the income spectrum, in terms of rent, heating, food, etc. It’s an explosive cocktail for politicians and Japan is set for important lower house elections in July. The BoJ may not move tonight, but it can’t remain an immovable object in a rapidly moving world forever. Keep in mind that Japan is on holiday Friday and out for much of next week, so this could aggravate the volatility if the BoJ does deliver any new guidance or policy twists. Chart: USDJPY Watching the USDJPY pair and JPY crosses closely tonight over the Bank of Japan meeting for the reasons outlined above. Technically, the pair seems to have shied away from a test of the 130.00 level, while on the downside, any BoJ policy surprise could deliver tremendous intraday volatility – easily 125.00 or lower, given that the recent break level to the upside was all the way down at 116.35. JPY traders should tread carefully, considering long volatility plays in the options market if wanting to express a short-term view. JPY cross action may prove higher beta than the reaction in USDJPY itself. As well, Japan will be out on holiday over next week during the May 4 FOMC meeting so liquidity may prove thinner than usual. If we see Kuroda-san doubling down on the existing policy and a fresh surge in global yields, the uptrend could be reinvigorated for a try toward 135.00. It’s a pivotal week for USDJPY either way, in all likelihood. Source: Saxo Group Fresh euro woes. The euro touched new five-year lows versus the US dollar today, in part on general risk off, but perhaps even more so after Russia used Poland and Bulgaria as guinea pigs in its threat to cut off supplies of natural gas for importers unwilling to pay for the gas in rubles. Poland saw the writing on the wall on Russian gas a long time ago and had moved to reduce its reliance before the war in Ukraine and has considerable coal-based power it can mobilize to cover some  of the shortfall, so the impact on the zloty is considerable, but need not spin out of control. Alas, Germany is the chief focus as a full shutdown would crater German economic growth on the need to ration supplies. Meanwhile, ECB member Kazaks said yesterday he is in favour of a July ECB hike – looks like consensus is gelling on that timing for lift-off. The UK does not import Russian gas, but is under as much pressure as any other European country on the impact of any Russian supply disruptions because it is connected to the continent’s gas network and suffers the price rises together with the continental countries. An excellent commentary from Bloomberg’s Marcus Ashworth lays out the pressures on the UK economy here as it faces a “trilemma of high inflation, slowing growth and rising taxes”, with a collapsing currency possibly forcing the Bank of England to hike rates more than it would otherwise do (watching EURGBP as much as GBPUSD for the relative pressure on the UK as I would have already expected sterling to underperform more there than it has). GBPUSD looks set for a test of 1.2000 and possibly more to the downside if we are set for a significant deleveraging event across risky assets here. The Aussie tried to get a boost on news overnight that Chinese leader Xi Jinping called for an “all out” infrastructure building push to spark economic growth, but there are few details. As well, short Australian yields touched new cycle highs while yields elsewhere consolidated after the Q1 Australian CPI report came in far hotter than expected at 5.1% YoY vs. 4.6% expected and the core “trimmed mean” was out at 3.7% YoY vs. 3.4% expected. This has strongly raised the odds of a rate hike at the RBA meeting next Tuesday to above 70%. The solid drop in the trade-weighted AUD in recent days after it had spiked to near a 5-year high has likely helped the RBA to go ahead and just get started already. The Riksbank is widely expected to deliver its first rate hike since moving away from NIRP last year, with a 25 basis point move. Watch the rate guidance after Governor Ingves recently failed to push back against the market pricing a greater than 2% policy rate by the beginning of 2024 – while the February Riksbank meeting still forecast lift-off not to arrive until 2024! I like fading EURSEK upside, but the risk deleveraging here makes this hazardous tactically. Table: FX Board of G10 and CNH trend evolution and strength.Note especially the enormous positive momentum shift in the JPY head of tonight’s BoJ meeting – will BoJ deliver something that spikes momentum further or back to the downtrend? The USD uptrend reading of 8 is getting into extreme territory, but won’t necessarily calm if risk deleveraging continues/accelerates. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.The “hottest” market in a long while, as can be seen in all of the extreme ATR readings (the dark orange color indicates we are in the top decile of volatility in ATR over last 1000 trading days). Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1230 – US Mar. Advance Goods Trade Balance 1400 – US Mar. Pending Home Sales 1600 – ECB President Lagarde to speak 2100 – New Zealand RBNZ deputy Hawkesby to speak 2230 – Canada Bank of Canada Governor Macklem to speak in Senate testimony 2350 – Japan Mar. Industrial Production 0100 – New Zealand Apr. ANZ Business Confidence survey 0130 – Australia Q1 Export / Import Prices
Observing SEK, Riksbank, Bank Of Japan And EURUSD

Observing SEK, Riksbank, Bank Of Japan And EURUSD

John Hardy John Hardy 11.02.2022 12:14
Forex 2022-02-11 11:25 5 minutes to read Summary:  The latest US CPI data proved far hotter than expected once again, taking Fed rate hike expectations higher still. The US dollar actually shrugged this development off initially before rallying on a significant further boost to potential Fed tightening after a hawkish broadside from FOMC voter Bullard. Elsewhere, the Bank of Japan just doubled down on its yield-curve-control policy and the Riksbank threw the krona under the bus with a dovish meeting. FX Trading Focus: USD firming underwhelms, given massive further shift in Fed expectations, BoJ doubles down on YCC, Riksbank throws SEK under the bus. US dollar snaps back after whiplash-inducing sell-off post-CPI release. The January US CPI release came in hotter than expected, at 0.6% month-on-month for both the headline and ex-food-and-energy measures vs. +0.4%/+0.5% expected, respectively and at +7.5% / +6.0% year-on-year versus +7.3%/+5.9% expected, respectively. Both of the year-on-year numbers were the highest for the cycle and the highest in forty years and took Fed expectations higher still. Somewhat curiously, the USD kneejerk higher on the data release was quickly erased and the greenback actually sold off to new local lows before later rallying on a hawkish broadside from St. Louis Fed President and FOMC voter James Bullard. And even then, the USD strength looks underwhelming, as discussed in the EURUSD chart below. As noted, Bullard was out speaking yesterday in an interview with Bloomberg yesterday and said that he would like to see 100 basis points of Fed tightening “before July 1” which implicitly means that, if the hikes were to take place at regularly scheduled meetings, one of the three meetings between now and then would need to see a 50-basis point move. He would also like to see QT (balance sheet reduction) beginning in the second quarter and even brought up the idea of an emergency move between meetings. “There was a time when the committee would have reacted to something like this to having a meeting right now and doing 25 basis points right now...I think we should be nimble and considering that kind of thing.” The Fed hasn’t done an emergency hike at a non-scheduled regularly meeting since 1994, as far as I can tell. The combination of the CPI and Bullard’s comments took the March FOMC meeting expectation to +46 basis points, i.e., very strong consensus that the Fed will hike fifty basis points (or an emergency move of 25 bps plus another 25 bps at that meeting) and the anticipated rate through the December FOMC meeting is some 30 bps higher at above 178 bps than where it closed Wednesday. Bank of Japan set to enforce its yield-curve-control policy – before the US CPI release yesterday, the Bank of Japan announced that it would buy “unlimited” amounts of 10-year JGB’s in operations on Monday, obviously to enforce its 25 basis point yield cap on 10-year Japanese sovereign debt after the yield on that debt had reached as high as 23 basis points yesterday. The JPY was sharply weaker on the news, but USDJPY avoided new highs above the previous 116.35 mark as it came back broadly bid – especially in the crosses yesterday - on energy prices and risk sentiment cratering.  This is an interesting move from the BoJ if it maintains this policy, as any further rise in global bond yields from here, particularly longer yields, will theoretically have to absorbed by further weakening of the already very weak Japanese yen. Riksbank dovish, SEK rushes lower – the Riksbank failed to make any shift in line with the recent ECB meeting, as it expressed the view that monetary policy needed to stay loose “for inflation to be close to the target in the medium term.” As well, the Riksbank promised to continue with enough QE to keep the bank’s balance sheet unchanged through this calendar year before allowing holdings to “decrease gradually.” The rate lift-off time frame was only pulled forward to the second half of 2024 from the prior forecast of Q4 of 2024. All in all, a very dovish mix despite Governor Ingves providing the decisive vote in overruling dissenting voices on the QE decision, so the Riksbank did an effective job of throwing the SEK under the bus. Chart: EURUSDYesterday’s developments were perhaps both confusing and revealing. Initially, the hot US January CPI release failed to boost the US dollar, which actually dropped to a new low in places (new high in EURUSD) despite additional Fed tightening being priced into the forward curve in the wake of the release. Later, the USD came roaring back only after Bullard unleashed his hawkish broadside that unsettled the market, which is now forced to price in the risk of even an emergency Fed hike before the regularly scheduled March meeting. All in all, the revealing bit is that we wake up this morning with the Fed priced to hike a full 6-7 times through the December meeting this year, with risk sentiment on the defensive and the EURUSD is only about 30-40 pips below the Wednesday close. This suggests that the path to a stronger US dollar is a very difficult one (a full-on market crash?) and increases the conviction in the downside potential. The ultimate test for that notion would be if the Fed does indeed deliver an emergency hike in coming days and yet EURUSD fails to fall much further or even shows resilience and bounces back to current levels or higher.Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strength.Yesterday’s action didn’t do much to alter recent trends, though note the Swedish krona biting hard to the downside…Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Watching how USD pairs shaped up in the wake of the churning back and forth yesterday, and as we watch the nature of the consolidation after the huge EURUSD rally off the lows.Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1030 – Russia Central Bank Key Rate Announcement (expected to hike 100 bps to 9.50%) 1500 – US Feb. Preliminary University of Michigan Sentiment  
FX Update: Risk sentiment comeback with a few twists

FX Update: Risk sentiment comeback with a few twists

John Hardy John Hardy 08.12.2021 15:14
Forex 2021-12-08 14:45 4 minutes to read Summary:  Risk sentiment is well on its way to erasing the reaction to the news of the omicron variant of covid, with most reactions across FX adjusting as one would expect on an improved outlook, with commodity currencies performing best, while safe haven JPY and CHF trade weaker and the euro is unable to figure out what it wants to do. Adding to a more hopeful stance and a weaker US dollar overnight was China allowing its currency to push to new highs for the year, beyond the highs established back in May. FX Trading focus: CNY new highs for the year, strong resurgence in risk sentiment The US dollar has pushed lower this week on a resurgence in risk sentiment, led by fading omicron fears – particularly yesterday – but also on hopes that China is set to support the global growth outlook and signaling confidence by allowing the renminbi to push to new highs for the year versus the US dollar. The weaker US dollar elsewhere this week explains the timing of the large move to new lows in USDCNH, as the CNH has actually underperformed resurgent commodity FX and some EM FX this week even while it outperformed the strong US dollar this year on balance. If the USD is to weaken further from here, it would be no surprise to see CNH continuing higher versus the US dollar – perhaps even beyond the 2018 lows in USDCNH – while keeping it somewhat weaker versus other currencies against which it has appreciated so aggressively this year. China is clearly interested in defending the stability and purchasing power of the CNH versus the USD and its basket, but the extent of the revaluation is getting stretched if we look at the official CNY basket. In G10 FX, the resurgence in risk sentiment has boosted the usual suspects and weighed against the other usual suspects, although a couple of unusual situations stick out: GBP and SEK: Sterling is in danger of breaking down versus the euro here after testing new lows for the year this morning in GBPUSD despite sterling’s former correlation with risk appetite, perhaps as a lot of air has been taken out of Bank of England expectations as the market has shifted the expected lift-off meeting to February of next year after pricing as early as November a couple of months ago. Late last week, the BoE’s normally hawkish Saunders sounded cautious on lifting off next week, while the day before yesterday Deputy Governor Broadbent advised looking “a couple of years ahead” in predicting that “these pressures on traded goods prices are more likely to subside than intensify”, although he did say wages could be an inflation driver. Chart: EURGBPEURGBP is poking at the 200-day moving average from the downside for the third time in recent months, and the less hawkish BoE may help trigger a further squeeze higher, especially if the 0.8600 prior pivot high falls. Next focus higher still comes in at the range highs from April-May near 0.8720. Source: Saxo Group SEK has traded sideways today rather than rallying, as one would expect, on the strong comeback in risk sentiment. The krona is historically one of the most highly risk sensitive currencies. Sure, the euro is largely stuck in the water here and the EU growth outlook has plenty of clouds over it with covid shut-downs etc, but EURSEK looks “wrong” relative to other reaction to the improved mood across markets, and should be lower. A statement today by Riksbank dove Jansson that it is hard to justify rate hikes and that a more active fiscal policy is the way forward likely held back SEK, as perhaps NOKSEK buying, judging from the last couple of session in that cross. In other developments, AUDNZD has cleared the important 1.0500 level, EURCHF is trying to pull higher but is still some way from challenging the important 1.0500 level. The CHF has not behaved anything like the JPY in recent months, failing to show sensitive in EURCHF, at least, to large shifts in safe haven years. Likely, to get EURCHF off the mat, we’ll need to see a broader EUR rally that includes EURUSD on a brightening outlook for EU growth. Hard to see how it gets much worse, on a relative basis, at present (covid shutdowns, energy crunch, etc…) The Bank of Canada is out just after pixel time for this article. The market is leaning for hawkish guidance for a sure rate hike at the January meeting, which is very likely what it will get. The degree to which CAD can continue to rally will also depend on whether the now suddenly very CAD-supportive backdrop extends. USDCAD needs to bash back below 1.2500 to suggest a full reversal of the rally move off the sub-1.2300 lows in October is in the cards. Looking ahead, the next critical event risks are the Friday US November CPI print, and then the exercise next week in seeing how the market reacts to the crystallization of the now hawkish Fed’s adjustments to its new monetary policy statement and to the “dot plot” of its policy forecasts. Table: FX Board of G10 and CNH trend evolution and strengthStill mean reverting from the prior trends in most currencies, but far more upside needed from commodity currencies to fully reverse the prior trends. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.A strong move higher in EU yields taking EURJPY back well above the important 128.00 level of contention lately – watching whether the trend can flip positive in the week ahead. Elsewhere, note again that AUDNZD has pulled above the important 1.0500, that USDCHF flipped positive (even if it is mid-range after surviving another test of the 200-day moving average), and that NOKSEK is trying flipping positive after a very sharp rebound from recent lows. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1500 – Canada Bank of Canada Rate Decision 1500 – US JOLTS Job Openings survey 2130 – Brazil Selic Rate Announcement 2205 – Australia RBA Governor Lowe to speak 0001 – UK Nov. RICS House Price Balance 0130 – China Nov. CPI / PPI
FX Update: EURCHF lower has been the Teflon trade

FX Update: EURCHF lower has been the Teflon trade

John Hardy John Hardy 03.12.2021 13:50
Forex 2021-12-03 13:28 4 minutes to read Summary:  A look across FX shows many of the usual suspects weakening with the recent bout of risk aversion, with commodity currencies near important levels versus the US dollar. While the JPY has traded erratically of late on conflicting themes and has not shown its safe haven status of yore, the Swiss franc has, managing to thrive when the focus is on inflation and when it is on weak risk sentiment as the SNB seems to have quietly stepped away from reining in franc strength. FX Trading focus: EURCHF lower has been the Teflon trade The most consistent trending pair in G10 FX of late has been the slide in EURCHF, which has even slipped below the prior six-plus-year low near 1.0500 over the last week. Remarkably, the pair has maintained its consistent ride lower through some remarkable jolts in the background, including the more hawkish shift from the Fed and the omicron news. This may suggest that the move is not being driven by strong speculative flows – which might have shown significant volatility in line with other currency pairs recently, but rather by consistent flows as the Swiss National Bank has apparently stepped away from the assumed stout defense of the 1.0500 level. The last two weeks of sight deposit data have shown no growth, i.e., no signs that the SNB is leaning against this move after doing so the prior four weeks. Also, when inflation fears dominate as they have at times recently, CHF strength is an easy way to avoid importing inflation without rocking the boat with monetary policy signals, while CHF strength is also a natural safe haven play when volatility spikes as it has in recent weeks. The consistent trend may be set to extend here, with parity in EURCHF a natural target. Elsewhere in FX, most of the smaller currencies are lining up on the usual risk-on, risk-off fault-lines, with commodities currencies and Scandies all weak as sentiment has softened again today, although it will be interesting to see if oil prices can make a stand after the reversal of the sharp sell-off yesterday despite nominally bearish news. Big next levels coming into view include 1.3000 in USDCAD and 0.7000 in AUDUSD. On the strong side, the EUR, USD and JPY are jockeying for the upper hand in addition to the strong CHF noted. The reaction function around today’s US jobs report (can a strong average hourly earnings add further energy to Fed upside expectations on top of an already momentous shift, and how much will residual omicron uncertainty hold back that pricing for now?). Chart: EURCHFEURCHF has weakened steadily since mid September in line with the weakening in EURUSD, but far more steadily than the latter, as this trend has managed to sustain through recent volatility elsewhere and shifting focus. The technical situation is without remarkable variation and there are no signs that the SNB is leaning against the move of late. Could the move extend all the way to within reach of parity? Source: Saxo Group Elsewhere, notable BoE hawk Michael Saunders was cautious sounding in comments today on the omicron variant uncertainty, prompting the sharp slide in sterling today. He said that the omicron development is a key consideration for whether to hike in December and sees some advantages in the BoE waiting for omicron data, which may sideline any hike potential at the December 16 meeting, with the market currently putting low odds on a move (difficult to measure – the idea has developed that the BoE will hike 15 bps to 0.25%, with about a 5-7 bps of hiking priced). Saunders still favors policy tightening soon and said today that the rate rise would be limited if the BoE gets going soon. Table: FX Board of G10 and CNH trend evolution and strengthThe impressive CHF rising nearly all the way to the top of the table here, as the left/right split of the G10 currencies is nearly perfect, with all of the five “smalls” in the red, most of them deeply so. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Plenty of bright orange readings in the daily ATR shadings – these indicate very significant volatility relative to the last 1000 trading days (top 10% ranking), , while it is interesting to note something like the EURUSD supermajor still trading with still quite low intraday volatility. AUDNZD is trying to flip back to negative, while USDCHF and USDJPY have yet to follow through lower after their recent flips to the negative in the “trend” reading. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1300 – ECB Chief Economist Philip Lane to speak 1330 – US Nov. Change in Nonfarm Payrolls 1330 – US Nov. Average Hourly Earnings 1330 – US Nov. Unemployment Rate 1330 – Canada Nov. Net Change in Employment 1330 – Canada Nov. Unemployment Rate 1415 – US Fed’s Bullard (voter in 2022) to speak 1500 – US Nov. ISM Services  1500 – US Nov. Factory Orders
FX Update: Powell is now an inflation fighter, not a punchbowl spiker

FX Update: Powell is now an inflation fighter, not a punchbowl spiker

John Hardy John Hardy 01.12.2021 16:30
Forex 2021-12-01 15:25 4 minutes to read Summary:  Fed Chair Powell cemented recent evidence that the Fed has changed its stripes from a punch bowl refiller for the economy and the labor market to an inflation fighter at large. The market is finding it tough to absorb this message, given the recent market choppiness and virus distractions, but interesting that the US dollar has not found more strength on this momentous pivot. FX Trading focus: Hawkish broadside from Powell Fed Chair Powell cemented the impression that the Fed has shifted firmly into inflation fighting mode with an appearance yesterday before a Fed panel. The rhetoric was direct and of a make-no-mistake variety. Powell said that the end of balance sheet expansion would likely wind down a few  months sooner than originally foreseen, even with the current omicron variant of covid concerns. He also spelled out that it is probably time to retire the word “transitory” when discussing inflation, ad said that the risk of higher inflation has increased. Perhaps most interesting was a comment that persistent higher inflation brought a risk to getting the labor market back to where it was pre-covid. It is crystal clear at this point that the Fed has pivoted to inflation-fighting and tightening and will move in that direction as quickly as it can until the inflation numbers improve markedly. Of course, the market was already adjusting to clear signs that the Fed is moving into a far more hawkish stance early last week, only to be sidelined viciously by the omicron variant worries in recent days. Were it not for that interlude, Fed expectations would likely be at new cycle highs as yesterday’s signals from Powell make the Fed shift as clear as day. As it is, we have only clawed back a majority of the 2022 hikes priced in pricing of Fed rate hikes, still some 8 basis points to go for end of year Fed pricing (the “omicron discount” being perhaps 15 basis points or more?). The two curious things are that the US yield curve continues to viciously flatten and the market continues to price the terminal Fed rate for the coming hiking cycle at 2.00%. The inability for the longer yields to lift higher recently may be reining in the USD upside for. The other indicator besides yield-curve shifts that is making waves here on my radar screen of financial conditions is the measure of corporate credit, where spreads have blown wider, as discussed over the last couple of episodes of the Saxo Market Call podcast. The bluntness from the Fed yesterday may have driven the particularly bad day for junk bonds as the new style from the Fed could lead investors in the riskiest debt to conclude that they may be allowed to twist in the breeze down the road if inflation levels stay high, rather than receiving endless bailouts that keep zombie companies in business and able to forever roll forward their debts. We are set up for an interesting 2022 that will likely look very different from 2021. The shift in Fed rhetoric will make the market extra-sensitive to US data and developments that impact inflation, from energy prices, to the CPI/PCE data itself and the average hourly earnings data perhaps even more than the usual nonfarm payrolls change focus. Today’s Beige Book could be interesting for anecdotal evidence from interviews with companies on their impression of supply constraints, wage adjustments and issues finding qualified workers, etc. Today’s November ADP Payrolls was another strong 500k+ as expected. Chart: USDJPYUSDJPY was handcuffed by developments yesterday – on the one hand with the USD supported by a rise in Fed expectations, but on the other hand, JPY traders finding no fresh reason to bid up the JPY as the long end of the US yield curve remains pinned at quite low yields and there has been no shift in the Fed’s “terminal rate” – where the market sees the Fed rate hike cycle peeking out. So the price action bobbed well back above the 112.73 range pivot level that was broken yesterday, but has a steep wall to climb to threaten the 115.00+ cycle highs again, something that would likely require the entire Fed yield curve to lift, and more aggressively than expectations for policy normalization elsewhere. Source: Saxo Group Table: FX Board of G10 and CNH trend evolution and strengthAgain, the market is finding the reaction function increasingly difficult to the recent jolts in inputs. Note the huge momentum shift in SEK, where the market overdid the recent squeeze, but the strength there will likely only improve once the euro bottoms and the outlook for EU yields and fiscal improves. Table: FX Board Trend Scoreboard for individual pairs.Well entrenched trends are few and far between, but the EURCNH and EURCHF downtrends stand out, with the latter’s lack of volatility after recent direction changes remarkable. The Swiss franc does well as a safe haven and does well because the SNB can’t be seen weakening the currency when inflation pressures are rising. Upcoming Economic Calendar Highlights (all times GMT) 1500 – US Fed Chair Powell, Treasury Secretary Yellen to testify before House panel 1500 – US Nov. ISM Manufacturing 1530 – DOE’s Weekly Crude Oil and Fuel Inventories 1900 - Fed Beige Book 0030 – Australia Oct. Trade Balance
FX Update: Omicron whiplash for USDJPY

FX Update: Omicron whiplash for USDJPY

John Hardy John Hardy 29.11.2021 13:42
Forex 2021-11-29 13:00 4 minutes to read Summary:  The Friday meltdown in USDJPY and JPY crosses was all about position squaring as we had just come from a place of anticipating a more hawkish shift from central banks, particularly the US Fed. The sense of whiplash was most acute in USDJPY, which had just been up testing multi-year highs before the deleveraging across markets on the new omicron covid variant clouding the outlook. FX Trading focus: Narrative whiplash for JPY traders on omicron variant concerns The news of the new omicron variant of covid could not have come at a more difficult time for the market to absorb for at least two reasons. First, of course, was the poor liquidity when US markets were closed Thursday and only open part of Friday due to the Thanksgiving holiday. Second was that we had just earlier the same week seen Fed Chair Powell and Brainard elevating the relative focus and position of grappling with inflation in their acceptance speeches, which had sent Fed rate hike expectations to new highs for the cycle early last week before the news hit. That ratcheting up of Fed rate anticipation had helped take USDJPY to new highs since early 2017 above 115.00 and EURUSD to new lows below 1.1200. But the positioning build-up in USDJPY has been far more extreme and the reaction in JPY crosses on Friday was fully in fitting with the JPY’s old status as a safe haven. Note that AUDJPY had its worst single-day drop since the heart of the pandemic outbreak panic in March of last year, while EURJPY has poked below the important 128.00 area that would suggest a break-down if the move holds. EURUSD rose sharply, as the sudden repricing of the Fed saw the EU-US yield spread tightening sharply, but the move would have to extend as far as 1.1500 to start having more profound technical implications. Has the market taken the news too far? That is not for me to judge, as it will take some time to assess the status of the reach of the current outbreak transmissibility, virulence and vaccine-evading characteristics of this new variant, all while real damage is being done as some countries are limiting travel, some merely from the areas where the new variant was discovered in southern Africa, while Japan has announced a full ban on inbound travel starting tomorrow. US President Biden will speak on the new variant later today. What does the best outcome look like? The omicron variant proves very transmissible, but is considerably milder and/or not particularly good at getting around the existing vaccines. Worst case involves some combination of significant vaccine evading characteristics and virulence that is anywhere similar to prior variants. I suspect that without immediate good news (real news surely requires at least a week from here?), the uncertainty could see risk-correlated trades dragged lower before things can improve, but a significant further deterioration in risk assets would likely require actual bad news emerging rather than merely an extension of the uncertainty. Regarding a timeline for learning more about the risks from the omicron variant, it’s best perhaps to admit that I have no clue, but a Reuters article suggests the major vaccine makers may be able to determine efficacy of existing vaccines in about two weeks. Chart: USDJPYWhile other JPY crosses were bigger movers on Friday, the technical development in USDJPY was the most remarkable, as it came off new cycle- and multi-year highs. The damage is significant locally, but would turn more severe if the 112.73 pivot low from October is broken and then goes on to challenge the more structurally significant 111.50-111.00 area. Source: Saxo Group Looking at the week ahead, we would normally be touting the importance of the next set of US survey numbers (November Consumer Confidence and November ISM Manufacturing on Wednesday and ISM Services on Friday) and November jobs and earnings numbers on Friday, but instead, we’ll have to juggle the ongoing news flow and headlines from the new virus variant and may have to file these data away for a later “pent-up” reaction if the omicron variant impact dissipates. Besides the US dollar and the JPY, I will watch all points on the US yield curve and risk sentiment measures closely for how the market is reading the situation. Powell is out today with opening remarks at some event - more interesting is testimony tomorrow, together with Treasury Secretary Yellen, on the policy response to the pandemic, which could see interesting exchanges on inflation, etc.  Table: FX Board of G10 and CNH trend evolution and strengthThe JPY is in a very different place from where it was a week ago or even two trading sessions ago and looks to remain the high-beta currency to whether the virus news drags market sentiment. The SEK reading looks extreme, but difficult to fade in terms of picking levels – downside put spreads in EURSEK the cautious way to proceed for those interested in fading this move now rather than waiting for a reversal pattern to develop. Source: Bloomberg and Saxo Group Table: FX Board Trend Scoreboard for individual pairs.Talking trends is treacherous business when the market goes into headline reactivity mode, but note that USDJPY and CNHJPY turning negative (if they close lower today) would make it a clean sweep for the JPY across the board. Source: Bloomberg and Saxo Group Upcoming Economic Calendar Highlights (all times GMT) 1300 – Germany Nov. Flash CPI 1330 – Canada Oct. Industrial Product Prices 1530 – US Nov. Dallas Fed Manufacturing Survey 1715 – ECB President Lagarde to speak 2000 – US Fed’s Williams (voter) to speak 2005 – US Fed Chair Powell gives opening remarks at conference 2350 – Japan Oct. Industrial Production US President Biden to speak about omicron variant 0030 – Australia Oct. Building Approvals 0100 – China Nov. Manufacturing and Non-manufacturing PMI 0200 – Australia RBA’s Debelle to speak
FX Update: Position squaring in FX as new covid strain roils markets

FX Update: Position squaring in FX as new covid strain roils markets

John Hardy John Hardy 26.11.2021 14:30
Forex 2021-11-26 14:05 5 minutes to read Summary:  The contagion across asset markets triggered by new covid strain concerns has hit FX in the form of classic deleveraging, as euro and yen shorts are squeezed on a reversal of recent US yield rises and safe haven seeking, while the US dollar gets a pass elsewhere because it is still safer than smaller, less liquid currencies, particularly in EM. The timing is terrible for this wave of risk aversion as we have thin trading conditions over the US Thanksgiving holiday.   FX Trading focus: Position squaring hits heavy euro- and yen shorts Risk contagion across the board overnight on the news of a new covid strain in South Africa with significant mutations and signs of overtaking as a percentage of cases in regional outbreaks. There may a sudden “straw that broke the camel’s back” angle to this, given the covid concerns elsewhere, particularly in Europe. The timing is worse than unfortunate, as the liquidity backdrop of particular concern as the news has hit with the US out on holiday yesterday and only open for half a session today, with few likely anticipating until last night or this morning that they would even need to bother showing up for work today. The sense of whiplash has been particularly acute as we have just had a look at US President Biden nominating Powell for a second term and many highlighting the focus on inflation in his acceptance speech for the nomination, with Brainard’s acceptance speech also highlighting inflation as a major concern. This had jolted Fed expectations for next year to new highs for the cycle at the outset of this week, and now just a few days later we get covid mutation concerns that have sent a deleveraging wave across markets. In US treasuries, this has mean a sharp drop along the entire US yield curve, giving the euro and the yen a strong boost, as the euro in particular was headed south and fast on the policy divergence theme of the ECB seen likely to maintain zero rates and even some level of QE out over the horizon while the market had priced in three full Fed rate hikes by the end of next year before this sudden reversal. On the weak side, while the US dollar has fallen within the G3 and is approximately flat against sterling, the smaller currencies are sharply lower against all of the above, and EM generally doubly so. Meanwhile, a chunky new drop in oil prices on the anticipation of widening international travel restrictions and even domestic lockdowns in places is adding to the NOK woes just after that currency was trying to recover versus the single currency last week, sending EURNOK up through its 200-day moving average and above 10.20 at one point today after trading below 9.70 barely over a month ago. Chart: AUDJPYAUDJPY is doing its usual job of capturing a wave of risk aversion as the lurch lower in risk sentiment was reflected here, and the clearly important 200-day moving average gave way with a bang. This is beginning to demolish the longer-term bullish hopes as it is a hold below the 200-day moving average here is a kind of confirmation of the rejection of the next cycle highs above 85.00 that were attempted last month. Theoretically, if the last gasp support of the 61.8% retracement of the local rally wave can avoid falling, there is shred of hope, but that would likely depend on a full reversal of everything we have just seen overnight. As we emphasized in this morning’s Saxo Market Call podcast, it is impossible to know how the virus situation shapes up here until further details emerge, but the market appears poorly positioned here for a more difficult global growth outlook at a time was just on how much the Fed is going to have to course correct and end QE and hike rates because US Q4 GDP is running incredibly hot. And that was in turn driving the predominant focus on relative policy divergences, with especially Europe being singled out for its particularly weak outlook, given the energy crunch and it being at the epicenter of the latest covid wave. If I am to poke around at places where moves are getting a bit overdone here in the short term, the EURSEK squeeze move looks a bit excessive, but that isn’t to say that poor liquidity and the usual market correlations can’t send it squeezing higher still. Yesterday, the Riksbank brought a rate hike into its forward guidance (late 2024) for the first time for the cycle at a time as the market is front running that and even pricing the ECB to achieve lift-off next year. Trading a market move like the one has developed overnight is tricky business as anything can happen and either direction. Concern may deepen and dramatically so that nations will scramble to limit the spread of this new variant until more is known, and we still know little about its virulence. And in the very short-term, a self-propelling position squaring can extend aggressively ahead of the weekend as risk managers force adjustments linked to the blow-up in volatility. Then the gap risk can move in the other direction over the weekend. Impossible to know, only to limit risk and exercise patience and a couple of weeks or more of headline risks before we know the lay of the land better. Table: FX Board of G10 and CNH trend evolution and strengthAs noted above, the big direction change here is in the euro and the JPY, which have pulled sharply higher in most crosses, with the Swiss franc happy to continue higher as well (suggesting that the USDCHF pair was increasingly important positioning-wise recently?). Elsewhere, SEK downside is beginning to look extreme, and CNH upside likewise if commodity prices continue to crater. Table: FX Board Trend Scoreboard for individual pairs.Far too early to talk trends when what we have here is a sudden positioning wipeout – but we will have to see how the next few days develop. Most “flips” as of this update are linked to the oil move (NOKSEK, CAD crosses etc.) although note the euro ripping higher against AUD and NZD.
FX Update: USD remains firm, RBNZ taps brakes on expectations

FX Update: USD remains firm, RBNZ taps brakes on expectations

John Hardy John Hardy 24.11.2021 13:44
Summary:  The US dollar remains firm after the news of Fed Chair Powell getting the nod for a second term on Monday, but a more aggressive extension of its recent strength is avoided as US yield rises were tempered yesterday. Elsewhere, a less hawkish than expected RBNZ saw the kiwi sharply weaker as the market removed a chunky bit of forward rate hike expectation on the latest guidance. FX Trading focus: USD follows US yields higher in the wake of Powell getting nod for 2nd term The US dollar strengthening in the wake of President Biden’s announcement that he would tap Jay Powell for a second term as Fed Chair extended modestly yesterday and into this morning, somewhat tempered by a strong US 7-year treasury auction taking the steam out rises in yields yesterday – with the 7-year benchmark actually notching new highs for the cycle before retreating in the wake of the auction. The more widely tracked 10-year US treasury yield benchmark is still rangebound below the October pivot high of 1.7% and the post-pandemic outbreak high of 1.75%  from the end of March. This has kept USDJPY from extending notably above the sticky 115.00 area of the moment. Elsewhere, the euro remains relatively weak despite ECB Vice President de Guindos out speaking and hinting some concern on inflation rises: “the ECB is continuously pointingout that the inflation rebound is of a transitory nature....However, we have also seen how in recent months these supply factors are becoming more structural, more permanent.” But just this morning we also have the ECB’s Holzmann out saying that inflation is likely to slow from next year. Later today we will get the expected German government coalition deal (SPD’s Scholz as Chancellor with Green’s Baerbock reportedly set for the foreign minister post and importantly, the liberal LDP’s Lindner set to lead the finance ministry), with a press conference set for 3 p.m. EURJPY and EURUSD are heavy this morning and note that  the 128.00 level in EURJPY is a well-defined range low, while EURUSD doesn’t have notable  support until well below 1.1200 and arguably not until psychological levels like 1.10. With covid spiking and a galloping energy crisis, I don’t envy the new German leadership. Overnight, the Reserve Bank of New Zealand waxed a bit more cautious than was expected by the market, and not only by raising the rates 25 basis points rather than the 50 basis points that a minority were expecting to see. In the central bank’s new statement, the bank strikes a more cautious tone: yes, clearly further rate hikes are set for coming meetings, but the bank is clearly in a wait and see mode, given the tightening of financial conditions already in the bag and that which the market has already priced in: “the Committee expressed uncertainty about the resilience of consumer spending and business investment....(and) also noted that increases in interest rates to householdsandbusinesses had already tightened monetary conditions. High levels of household debt, and a large share of fixed-rate mortgages re-pricing in coming months, could increase the sensitivity of consumer spending to these interest rate increases.” Later today, we have a stack of US data releases crammed into today because of the Thanksgiving holiday tomorrow (and for most, Friday as well). The most important of these is the October PCE Infation data print. Not expecting much from the FOMC minutes later as all eyes are on whether we are set for an acceleration of the QE taper at the December FOMC meeting, with some arguing that Powell and company have more room to move and administer a bit more hawkish message, if they so desire, as the nomination news is out of the way and this reduces hyper-sensitivity to bringing any message that could risk cratering market sentiment. Chart: AUDNZDThe 2-year yield spread between Australia and New Zealand has risen sharply in recent days and especially overnight, where the more cautious than expected tones from the RBNZ inspired a 14 basis point drop in 2-year NZ yields. The price action in AUDNZD was sympathetic with the rally back toward local resistance near 1.0450, though the rally needs to find legs for a move up to 1.0600 at least to indicate we may have put a structural low in with a double bottom here. A brighter relative outlook for  Australia could be in the cards if China is set to stimulate and raise steel output, the anticipation of which has already sharply lifted iron ore prices this week, a key indicator for the Aussie. No notable expectations for the Riksbank tomorrow – as the central bank is expected to wind down its balance sheet expansion next year, while the policy forecast is thought to be in play (perhaps a late 2024 lift-off built into expectations, though the market is ahead of that as 2-year Swedish swap rates have risen close to 30 basis in recent weeks. This is the area where the Riksbank can surprise in either direction relative to expectations). The EURSEK rally has now reversed the entirety of the prior sell-off leg and double underlines the very weak sentiment on Europe, which remains “non-existential” in nature, i.e., so far the market is keeping this about policy divergence and dark clouds over the economic outlook, not about the longer term viability of the EMU, etc…, which in the past 2010-12 crisis inspired SEK upside as a safe haven. Table: FX Board of G10 and CNH trend evolution and strengthA bit of a relative pick-up in petro-currencies in the wake of yesterday’s oil rally, as the market bought the fact of US President Biden announcing a release of barrels from strategic reserves. Elsewhere, the NZD is losing relative altitude and the USD and especially CNH reign supreme. Table: FX Board Trend Scoreboard for individual pairs.Here, note AUDNZD flipping back to positive - a move that would be “confirmed” by a close solidly above 1.0450. Also note NOKSEK trying to flip positive on the latest oil rally, although beware the Riksbank meeting up tomorrow there. .Upcoming Economic Calendar Highlights (all times GMT) 1330 – US Weekly Initial and Continuing Jobless Claims 1330 – US Oct. Advance Goods Trade Balance 1330 – US Q3 GDP Revision 1330 – US Oct. Durable Goods Orders 1430 – UK BoE’s Tenreyro to speak 1500 – US Oct. PCE Inflation 1500 – US Final University of Michigan Sentiment Survey 1500 – US Oct. New Home Sales 1900 – US FOMC Meeting Minutes
FX Update: USD kneejerks higher as Powell gets nod for second term

FX Update: USD kneejerks higher as Powell gets nod for second term

John Hardy John Hardy 23.11.2021 17:08
Summary:  US President Biden will tap Jay Powell for a second term as Fed Chair and will nominate Lael Brainard to be promoted to Vice Chair of the Fed, a move that sent the USD modestly higher and US yields sharply higher, though some of the reaction may have been on pent-up reaction to prior developments. Elsewhere, the descent in the Turkish lira is turning dire, while the kiwi is weaker ahead of an RBNZ meeting tonight. FX Trading focus: USD follows US yields higher in the wake of Powell getting nod for 2nd term Surprising a sizable minority and perhaps myself to a degree, US President Biden will tap Jay Powell for a second term as Fed Chair, while seeking to promote Lael Brainard from her current position to Vice Chair. The most prominent reason given for not going with Brainard is that her confirmation process may have proven contentious, something Biden wanted to avoid, and given extensive Democratic party support for Powell, the progressive wing aside, it was always the “easy option”. Brainard will still have to go through a confirmation process with the Senate. More interesting is the Brainard was not nominated to Vice Chair in the banking supervision and regulation role that the soon-gone Quarles occupied, a role that many envisioned for her. Biden has more nominees to consider for Quarles’ replacement and other empty spots, but continuity appears assured, though a Vice Chair Brainard will carry more weight when she dissents on non-monetary policy issues in the future (she never dissented on FOMC votes but has dissented more than 20 times on board votes linked to loosening regulation on US financial institutions). Other positions at the Fed will need filling as well, including the replacement of Quarles as banking supervisor. The market reaction to the news was fairly straightforward and “as expected” algorithmically, i.e., Brainard was supposed to be the more dovish pick, so Biden going with Powell saw the USD stronger as the market priced in about 10 basis points more in the way of Fed hikes through the end of next year. It’s tough to tell whether some of the reaction was the market simply adjusting to have this important issue “out of the way” allowing traders to price in other recent developments, like hot US data and Fed Vice Chair Clarida’s comments on possibly speeding up the pace of the Fed’s taper of asset purchases at the December FOMC meeting. The next test for whether this USD move can extend will be with tomorrow’s October PCE Inflation print and the FOMC minutes. For USDJPY, as I argue below, an extension higher  likely needs more upside from longer US yields. US President Biden will speak today on the economy and “lowering prices for the American people” which many believe will include a release of crude oil from US strategic reserves. That’s a risky move if it fails. Chart: USDJPYUSDJPY spilled over the 115.00 barrier in the wake of Powell getting the nod for a second term, with  the move now trying to decide whether it can stick. Arguably, the rise in Fed policy expectations don’t mean much if the longer end of the US yield curve remains anchored as it has lately, which continues to suggest that the market sees inflation as transitory and/or that Fed potential on rates will max out around 2.0% and crush the growth and inflation outlook. While 10-year US yields were sharply higher yesterday, they’re still bogged down in the range since the pivot high of 1.70% in October and the cycle high near 1.75% all the way back at the end of March. The logjam needs to break there and send US long yields higher for better fundamental support for a significant break above the 115.00 level in USDJPY. European politics in the spotlight – with Germany dealing with a new Covid ave and the ongoing natural gas and power crunch, it is time for the government coalition to announce itself and begin ruling. An announcement of the “stoplight” coalition could be imminent and we’ll have to watch the awkward combination closely, particularly the LDP Lindner’s attitude toward spending as the traditionally liberal party’s supply side principles are at odds with its Social Democratic and Green coalition partners inclinations, although energy emergencies are not political, but must be dealt with.  Elsewhere, Italian president Mattarella announced he will be stepping down. If, as some believe, an effort is made to replace his mostly ceremonial role with Mario Draghi, elections would have to be held. And the French election season will only heat up from here, where we watch whether Macron can keep the populists Zemmour and Le Pen at bay.  The Euro is getting very cheap – bigger fiscal, an ECB reverse repo facility, and a non-Covid constrained outlook by spring could have EURUSD in a very different place by then. Antipodean action- the Aussie has risen sharply versus the kiwi (NZD) over the last couple of sessions as the news flow for the  Aussie has improved notably, with China’s central bank possibly signaling it is ready to bring stimulus, some of the news flow in the property sector improving, and especially as iron ore prices have jumped sharply, particularly overnight, on all of the above plus anticipation that China will have to increase steel output soon. The Reserve Bank of New Zealand was one of the quickest central banks to turn hawkish over the summer and abandon QE and was only delayed slightly in hiking rates by New Zealand’s first Covid outbreak in many months over the summer. The central bank chief Adrian Orr has made it clear that the bank is on the path or many more rate hikes to come and the market has priced in a policy rate of 1.50% by the April meeting of next year versus the current 0.50%. Most believe that the central bank will only hike 25 bps tonight but a significant minority believe that the bank will hike 50 bps. As important will be the market mood (if risk sentiment is weak on further US yield rises, for example, the impact of any RBNZ move may be muted) and whether guidance is able to meet lofty expectations for further tightening. The NZ 2-year yield has traded flat at elevated levels since late October, while NZDUSD has declined, arguably on the fresh momentum in Fed expectations, so moving the needle may require that the RBNZ deliver a 50 basis point hike and even more hawkish guidance. Turkish lira move getting downright disorderly – Turkish President was out yesterday complimenting the recent Turkish Central Bank chief’s decision to cut rates another 100 basis points and declaring that the Turkish government would concentrate on policies that encourage economic growth. In rather dire language, he drew parallels between the current situation and the struggle to form the modern Turkish state in 1923 in the wake of World War I. As of this writing, USDTRY traded near 12.50 after starting last week near 10.00, a breathtaking move. Much more of this kind of price action, and the risk of hyperinflation will swing into view. Table: FX Board of G10 and CNH trend evolution and strengthThe most important trend shift was yesterday’s huge dump in precious metals – look at the momentum scores for the last 2- and 5 days. Otherwise, most trends of late are extending with the exception of the badly fading NZD. Table: FX Board Trend Scoreboard for individual pairsThe precious metals in for a rough ride on the USD- and US yield move in the wake of the Fed Chair nomination move yesterday. Elsewhere, getting some hefty trend readings in USD/SEK and UDS/NOK, which remain high beta to Euro weakness. Upcoming Economic Calendar Highlights (all times GMT) 1445 – US Nov. Flash Markit Manufacturing and Services PMI 1500 – UK BoE Governor Bailey at House of Lords 1500 – US Nov. Richmond Fed Manufacturing 1730 – ECB's Makhlouf to speak 1800 – Canada Bank of Canada’s Beaudry to speak 2130 – API’s Weekly Petroleum Stock Report 0030 – Japan Nov. Flash Manufacturing and Services PMI 0100 – New Zealand RBNZ Official Cash Rate Announcement