FX Update: USD kneejerks higher as Powell gets second term.
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: USDJPY
USDJPY 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.
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The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
FX Trading focus: USD 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: USDJPY
USDJPY 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.
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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