FX Update: Digesting the FOMC reaction.
Summary: The market has made a significant adjustment in the wake of the FOMC meeting last week, but the action at the start of this week suggests that any follow-on move from here could be fitful, as we have a long few months to watch data develop and as the Fed could push back against over-interpretation of what happened last week. Elsewhere, the Swedish krona is calm even as the government has fallen and HUF traders are gearing up for the first rate hike in Europe since the pandemic at the Hungarian central bank meeting tomorrow.
FX Trading focus: A big adjustment post-FOMC. Now what?
The Asian session overnight saw an extension of the sharp moves that were established in the wake of the FOMC meeting: the USD continued higher and the JPY continued higher still as US long yields were crushed to new cycle lows. But the move exhausted itself before the European session got underway and by lunchtime in Europe, the moves in the Asian session in all of the markets mentioned above had reversed, suggesting that we could be spending the balance of this week digesting the most significant move across markets in many months, equities excepted (the chunky sell-off there may have been partially mixed up in futures and options contract expiries on Friday, although St. Louis Fed ). The two key event risks this week that could test market developments since last Wednesday are Fed Chair Powell’s appearance tomorrow in testimony before a House committee and the Friday May PCE inflation data.
Chart: EURUSD
EURUSD pushed down through the 61.8% Fibo retracement at 1.1920, arguably a minor resistance point now, with the bigger level is clearly the round 1.2000 level, which now also coincides with the 200-day moving average. If we see another wave or two of concern that the Fed is set to taper asset purchases soon and we have further repricing of the Fed rates higher (Friday a key event risk with the US May PCE inflation data), we could see the neckline of the head-and-shoulder like formation tested below 1.1800, which could lead to some follow through toward 1.1500 or even lower (classic head-and-shoulders target would be an incredible 1.1050-ish). I am reluctant to get aggressive on the bearish potential even from current levels as USD strength driven by surprises from the Fed when the fiscal picture is getting cloudier by the week. And USD strength together with any fear of lower USD liquidity quickly becomes so destructive and toxic that these moves can’t endure for long unless a dramatic policy mistake is being made. So for now, I’ll watch that neck-line area and the 1.1704 pivot low from late March (when it was the long end of the US yield curve maxing out as well as Fed expectations, it should be noted) for whether the move can be corralled.
Interesting test tomorrow for HUF on rate hike. The Hungarian central bank has thoroughly flagged a rate hike at tomorrow’s meeting as Hungary will be the first country in Europe to hike rates, with a fairly dispersed set of forecasts from analysts. The rate is at an odd 0.60%, with some looking for moves in multiples of 0.15%, with consensus centered on a hike of 30 bps to 0.90%. There will be considerable focus on the guidance as well, and considerable hawkishness seems in order to lift HUF, given what the Fed has just done to the US dollar. Interestingly, the move lower in EURHUF, for example, that unfolded when the Hungarian central bank made it clear in mid-May that a hike was coming, has been completely unwound.
Sweden – drama in politics, if not in SEK. The SEK is sharply weaker versus the USD and even versus the Euro on the repricing of the leading central banks’ potential to hike rates sooner than previously expected. It is far too soon to decide if we have a compelling re-entry point for SEK longs versus the euro or elsewhere as another wave of weak risk sentiment could see another squeeze on SEK longs. I lean more toward fading EURNOK upside from here with caution and via options structures. The current Swedish Social Democrat leader, Löfven, lost a confidence vote today and will have to decide whether to resign or call snap elections. The current government is a very weak Social Democrat-Green coalition and the far-left Left party abandoned its support for the coalition in the confidence vote. The development that precipitated the crisis for the sitting government was the talk of new measures to ease rent controls on new housing developments as the existing rules have prevented new supply from coming on the market as developers don’t see sufficiently high returns on new units for lower income households. A huge wave of immigration that added several percent to Sweden’s population in recent years has turned the housing situation into a pressure cooker. Implications for SEK have been modest to non-existent as there is little prospect for new political developments even if Löfven resigns, with the blocs deadlocked in the polls, and as a caretaker government could result, one that would sit until elections in September of next year.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
FX Trading focus: A big adjustment post-FOMC. Now what?
The Asian session overnight saw an extension of the sharp moves that were established in the wake of the FOMC meeting: the USD continued higher and the JPY continued higher still as US long yields were crushed to new cycle lows. But the move exhausted itself before the European session got underway and by lunchtime in Europe, the moves in the Asian session in all of the markets mentioned above had reversed, suggesting that we could be spending the balance of this week digesting the most significant move across markets in many months, equities excepted (the chunky sell-off there may have been partially mixed up in futures and options contract expiries on Friday, although St. Louis Fed ). The two key event risks this week that could test market developments since last Wednesday are Fed Chair Powell’s appearance tomorrow in testimony before a House committee and the Friday May PCE inflation data.
Chart: EURUSD
EURUSD pushed down through the 61.8% Fibo retracement at 1.1920, arguably a minor resistance point now, with the bigger level is clearly the round 1.2000 level, which now also coincides with the 200-day moving average. If we see another wave or two of concern that the Fed is set to taper asset purchases soon and we have further repricing of the Fed rates higher (Friday a key event risk with the US May PCE inflation data), we could see the neckline of the head-and-shoulder like formation tested below 1.1800, which could lead to some follow through toward 1.1500 or even lower (classic head-and-shoulders target would be an incredible 1.1050-ish). I am reluctant to get aggressive on the bearish potential even from current levels as USD strength driven by surprises from the Fed when the fiscal picture is getting cloudier by the week. And USD strength together with any fear of lower USD liquidity quickly becomes so destructive and toxic that these moves can’t endure for long unless a dramatic policy mistake is being made. So for now, I’ll watch that neck-line area and the 1.1704 pivot low from late March (when it was the long end of the US yield curve maxing out as well as Fed expectations, it should be noted) for whether the move can be corralled.
Interesting test tomorrow for HUF on rate hike. The Hungarian central bank has thoroughly flagged a rate hike at tomorrow’s meeting as Hungary will be the first country in Europe to hike rates, with a fairly dispersed set of forecasts from analysts. The rate is at an odd 0.60%, with some looking for moves in multiples of 0.15%, with consensus centered on a hike of 30 bps to 0.90%. There will be considerable focus on the guidance as well, and considerable hawkishness seems in order to lift HUF, given what the Fed has just done to the US dollar. Interestingly, the move lower in EURHUF, for example, that unfolded when the Hungarian central bank made it clear in mid-May that a hike was coming, has been completely unwound.
Sweden – drama in politics, if not in SEK. The SEK is sharply weaker versus the USD and even versus the Euro on the repricing of the leading central banks’ potential to hike rates sooner than previously expected. It is far too soon to decide if we have a compelling re-entry point for SEK longs versus the euro or elsewhere as another wave of weak risk sentiment could see another squeeze on SEK longs. I lean more toward fading EURNOK upside from here with caution and via options structures. The current Swedish Social Democrat leader, Löfven, lost a confidence vote today and will have to decide whether to resign or call snap elections. The current government is a very weak Social Democrat-Green coalition and the far-left Left party abandoned its support for the coalition in the confidence vote. The development that precipitated the crisis for the sitting government was the talk of new measures to ease rent controls on new housing developments as the existing rules have prevented new supply from coming on the market as developers don’t see sufficiently high returns on new units for lower income households. A huge wave of immigration that added several percent to Sweden’s population in recent years has turned the housing situation into a pressure cooker. Implications for SEK have been modest to non-existent as there is little prospect for new political developments even if Löfven resigns, with the blocs deadlocked in the polls, and as a caretaker government could result, one that would sit until elections in September of next year.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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