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13 July 2017 at 7:14 GMT
FX Update: Dovish Fed points to AUD going loonie? — #SaxoStrats
- Fed chair Janet Yellen leans dovish before Congress
- 'AUDUSD could look well above 0.8000'
- Canadian dollar rally exceeds expectations
Ready to rip? The Aussie was boosted by Chinese data overnight and could surge further still
if it manages to break 0.775 versus USD. Photo: Shutterstock
By John J Hardy
Fed chair Janet Yellen waxed more dovish than the market expected yesterday, failing to bolster the more hawkish impression from the June Federal Open Market Committee meeting.
In the testimony, Yellen suggested that the fed funds rate is not far from neutral, even if she did suggested that the Fed expects conditions will evolve to allow a higher neutral rate down the road. By making this conditionality, the market can feel more comfortable in second-guessing the Fed’s policy intentions as these rely on the Fed’s notorious inability to forecast the trajectory of the economy.
An indirect takeaway that enhances the dovishness of these minutes was the lack of any mention in the testimony of financial stability concerns, rejecting the notion that the Fed is concerned enough on that front to give it a high profile in one of its most important events for communicating with Washington and the markets.
Why is the Fed so cautious? Perhaps it feels that simply quietly proceeding with the anticipated policy removal is better than trying to provide specific forward guidance. Alternatively, the Fed may be fearful of the actual impact of quantitative tightening and sees that as a major policy hurdle with unknown consequences.
Strong import data from China overnight helped to boost the Aussie. The recent humdrum disappointment from the Reserve Bank of Australia aside, much of the recent data from Australia has been strong, key commodity prices and mining stocks are looking higher, and it smells like an upside break in AUDUSD is in the making on the policy convergence and dovish Fed themes.
Chart: AUDUSD (weekly)
AUDUSD could look well above 0.8000 if it manages to finally break through the 0.7750 area resistance of the wedge-like formation and interest in RBA policy normalisation picks up in the weeks ahead, with a weak USD driven by the unwinding of the last shreds of the Trump Trade and lack of hawkish risks from the Fed relative to inbuilt expectations.
The G-10 rundown
USD – the greenback is deservedly weak as Yellen has re-engaged the Goldilocks trade (Fed removing policy at a snail’s pace while accommodation globally is still so strong that risk assets can rip higher again) and the central bank policy convergence theme
EUR – the euro saw an odd surge and then reversal of fortune that was out of synch with market indicators – like US treasuries – elsewhere. Was this an algo induced hiccup? Regardless, the goldilocks trade may favor more pronounced carry trades rather than the euro, though a strong close today in EURUSD could keep the pressure on EURUSD higher for 1.1500-plus.
JPY – the bounce in US treasuries has seen the JPY pull back stronger. Key support zone for USDJPY down in 112.25-50, but have a hard time seeing the JPY being a star performer as long as the theme is one of central banks moving away from consolidation, unless we get a policy shift from the BoJ (in which case, look out below for JPY crosses).
GBP – EURGBP saw a pronounced bearish reversal on stronger than expected UK data yesterday, which had UK rates rebounding. Tough to measure the quality of the reversal – certainly rate spreads are pressuring the EURGBP back lower as the ECB is seen as moving far later than the UK. But overnight, a very weak RICS House Price Balance number suggests risk of faltering house prices. GBPUSD a more interesting candidate for expressing GBP strength.
CHF – the central bank convergence theme is no boost to the franc, as the SNB is seen as a last mover, and strong risk appetite and interest in carry trades could see the CHF continue to weaken verus the Euro as long as 1.0975-1.1000 remains intact.
AUD – as we discussed above, looking for upside risk in AUDUSD given the dovish Fed, benign and even strong Australian data and resurgence in key commodity prices again.
CAD – CAD extended to the strong side more than we thought was likely, in part because the Bank of Canada managed to clear hawkish expectations but importantly also as the Fed was seen as dovish. As the BoC said that policy will be “highly data-dependent” and not on a preset course, this will make CAD rather reactive to data releases from here.
NZD – Looking for some kiwi underperformance against a resurgent AUD, but NZDUSD is making mischief again and we have to recognize the significance of the technical situation if it can clear the 0.7350-0.7450 zone.
SEK – will key off the Swedish CPI today – risk skewed to the upside.
NOK – fairly soft performance from the NOK, given the action elsewhere.
Upcoming Economic Calendar Highlights (all times GMT)
- 0730 – Sweden Jun. CPI
- 1230 – Canada May New Housing Price Index
- 1230 – US Jun. PPI
- 1230 – US Weekly Initial Jobless Claims
- 1330 – Fed Chair Yellen to testify before Senate panel
- 1700 – US Fed’s Brainard (FOMC voter) to Speak
— Edited by Michael McKenna
John J Hardy is head of FX strategy at Saxo Bank