FX Update: USD at a crossroads, awaiting treasury auctions, FOMC
Summary: US yields stopped rising and the US dollar has largely stopped rising as well. US treasury auctions today and tomorrow are crucial for the next moves in the greenback. Elsewhere, the ECB meeting tomorrow is receiving plenty of attention, which it only should receive if yields elsewhere continue higher, because the ECB is operating without the fiscal dominance that is prominent elsewhere.
FX Trading focus: USD at a cross-roads ahead of auctions, FOMC
The USD rise has paused on balance over the last twenty-four hours as the US treasury market finally found a decent bid yesterday, although the strong bid-to-cover level at the 3-year US treasury auction yesterday that produced some extra pep in the equity market’s step was not the whole story, with indirect bidders (foreigners) not showing up strongly at that auction. To be fair as well, the 3-year yield has hardly lifted off in nominal yield terms relative to the longer end of the curve, so it is tonight’s 10-year auction and the 30-year T-bond auction tomorrow that are the key arbiters for the status of US yields at this point. A punch lower in US yields on strong demand could indicate that treasuries have lurched into a consolidation period of some duration that actually just may put an end to the USD bull run here, while signs of weak or very weak demand keep the drama high and risk another rally leg for the US dollar.
As we have stated extensively recently, the Fed is not about to do yield curve control just yet. We have argued that with the fiscal tsunami incoming, the Fed will tolerate much higher yields at the longer end of the yield curve before sounding the alarm (though it may need to move on the technical side to improve liquidity and issues linked with that such as the rules around banks’ leverage ratios. It was these issues perhaps more than anything else that aggravated treasury market volatility the week before last. Such a Fed move could be forthcoming already at next week’s FOMC meeting in some supplemental note or similar.)
ECB is in an unenviable position – can’t do much.
The reason for the title above is that the ECB is operating in a very unfortunate environment, made only somewhat more fortunate for their inflation mandate by the recent weakening of the euro, as the strong rise in US yields has helped to boost the US dollar. The problem for the ECB is that its policy tools are lacking for addressing a rising yields environment and for doing anything to boost the economy. The EU needs more fiscal to get with the transition to this new era of “fiscal dominance” and the unwieldy EU has not only botched the vaccine roll-out, but has all of the usual difficulty of acting forcefully when the time has long passed to do so.
The recovery fund of EUR 750 billion spread over the seven years of the 2021-2027 budget is a pittance compared to the $1.9 trillion in US stimulus that will be hitting a US economy in full in coming quarters – and that for a US economy that is already more open and more vaccinated and ready to open more quickly than Europe. Italy is actually shutting down some areas again on a recent rise in cases. The chief argument here for an extension lower in the Euro is that the ECB simply can’t afford to allow long yields in the EU to rise if there isn’t a sufficiently large fiscal impulse to make that yield rise less problematic. Pulling forward purchases or other monetary shenanigans are futile for addressing the economy, even if they can push the euro around a bit. A dovish ECB doesn’t have to weaken the euro much if US yields are also beating a retreat, but imagine we get all of: dovish ECB, higher inflation globally and a higher US long yields. The EU needs fiscal, not ECB fiddling.
Interesting chart development: NOKSEK
NOKSEK upside is worth considering on the pair breaking above parity for the first time since the Covid wipeout last year – trade could extend to at least 1.05 assuming crude oil doesn’t suffer a major setback, with some further fundamental support from a weak EU fiscal impulse keeping SEK somewhat subdued relative to NOK, which is directly plugged into the rise in crude oil prices.
Chart: USDJPY weekly
USDJPY is at a critical cross-roads soon if it continues to rise. For USDJPY to avoid a further major rise, we will likely either need to see the rise in global yields to slow and even reverse for a time, and/or we would likely need to see the Bank of Japan eventually stepping away from any commitment to tame the longer end of the curve, which recent comments from . The wide, descending channel in USDJPY that has formed since 2017 is the chief chart structure providing the levels of note – and 110.00 looks awfully important in that regard for whether we are set to remain in the channel or see a rise to 115.00 or even higher.
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: USD at a cross-roads ahead of auctions, FOMC
The USD rise has paused on balance over the last twenty-four hours as the US treasury market finally found a decent bid yesterday, although the strong bid-to-cover level at the 3-year US treasury auction yesterday that produced some extra pep in the equity market’s step was not the whole story, with indirect bidders (foreigners) not showing up strongly at that auction. To be fair as well, the 3-year yield has hardly lifted off in nominal yield terms relative to the longer end of the curve, so it is tonight’s 10-year auction and the 30-year T-bond auction tomorrow that are the key arbiters for the status of US yields at this point. A punch lower in US yields on strong demand could indicate that treasuries have lurched into a consolidation period of some duration that actually just may put an end to the USD bull run here, while signs of weak or very weak demand keep the drama high and risk another rally leg for the US dollar.
As we have stated extensively recently, the Fed is not about to do yield curve control just yet. We have argued that with the fiscal tsunami incoming, the Fed will tolerate much higher yields at the longer end of the yield curve before sounding the alarm (though it may need to move on the technical side to improve liquidity and issues linked with that such as the rules around banks’ leverage ratios. It was these issues perhaps more than anything else that aggravated treasury market volatility the week before last. Such a Fed move could be forthcoming already at next week’s FOMC meeting in some supplemental note or similar.)
ECB is in an unenviable position – can’t do much.
The reason for the title above is that the ECB is operating in a very unfortunate environment, made only somewhat more fortunate for their inflation mandate by the recent weakening of the euro, as the strong rise in US yields has helped to boost the US dollar. The problem for the ECB is that its policy tools are lacking for addressing a rising yields environment and for doing anything to boost the economy. The EU needs more fiscal to get with the transition to this new era of “fiscal dominance” and the unwieldy EU has not only botched the vaccine roll-out, but has all of the usual difficulty of acting forcefully when the time has long passed to do so.
The recovery fund of EUR 750 billion spread over the seven years of the 2021-2027 budget is a pittance compared to the $1.9 trillion in US stimulus that will be hitting a US economy in full in coming quarters – and that for a US economy that is already more open and more vaccinated and ready to open more quickly than Europe. Italy is actually shutting down some areas again on a recent rise in cases. The chief argument here for an extension lower in the Euro is that the ECB simply can’t afford to allow long yields in the EU to rise if there isn’t a sufficiently large fiscal impulse to make that yield rise less problematic. Pulling forward purchases or other monetary shenanigans are futile for addressing the economy, even if they can push the euro around a bit. A dovish ECB doesn’t have to weaken the euro much if US yields are also beating a retreat, but imagine we get all of: dovish ECB, higher inflation globally and a higher US long yields. The EU needs fiscal, not ECB fiddling.
Interesting chart development: NOKSEK
NOKSEK upside is worth considering on the pair breaking above parity for the first time since the Covid wipeout last year – trade could extend to at least 1.05 assuming crude oil doesn’t suffer a major setback, with some further fundamental support from a weak EU fiscal impulse keeping SEK somewhat subdued relative to NOK, which is directly plugged into the rise in crude oil prices.
Chart: USDJPY weekly
USDJPY is at a critical cross-roads soon if it continues to rise. For USDJPY to avoid a further major rise, we will likely either need to see the rise in global yields to slow and even reverse for a time, and/or we would likely need to see the Bank of Japan eventually stepping away from any commitment to tame the longer end of the curve, which recent comments from . The wide, descending channel in USDJPY that has formed since 2017 is the chief chart structure providing the levels of note – and 110.00 looks awfully important in that regard for whether we are set to remain in the channel or see a rise to 115.00 or even higher.
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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