Article / 19 September 2017 at 7:54 GMT

FX Update: Geopolitics take centre stage ahead of FOMC – #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Euro lifted by S&P upgrade of Portuguese bonds 
  • US–North Korean showdown comes at a very tricky time
  • Fed unlikely to match BoE's pace of policy normalisation
North Korean troops
 Trump may opt to blame China for allowing North Korean provocations. Picture: Shutterstock

By John J Hardy

The euro has got a bit of a boost, perhaps partly due to S&P’s upgrade of Portuguese debt to investment grade, which dropped 10-year sovereign yields for the country some 35 basis points in one day yesterday. 

EURCHF is back over 1.1500 and EURUSD is back biting at 1.2000 this morning, despite the impending Federal Open Market Committee meeting. Still, this means little for European Central Bank prospects and EU rates are badly lagging rate rises elsewhere, so wondering how much the euro can continue to pull higher here in the short term. 

US president Donald Trump will speak at a UN general assembly today, a potentially critical speech to monitor for tone, not only on the North Korean provocations, but on the degree to which the blame is placed on China, as the danger for retaliatory measures between the two superpowers could provide a new source of generalised market worry in a very frothy market. The timing of the showdown over North Korea’s nuclear programme could not come at a worse time, as China’s leadership eyes the 19th Party Congress in mid-October.


It’s a bit tough to see the Fed upgrading the policy path tomorrow with the suddenness that the Bank of England recently achieved as the FOMC will likely be rolling out its well broadcast quantitative tightening measures later this year, and further rate hikes will depend on incoming data. After yesterday’s smart dip and bounce, we continue to like to focus higher here as long as we close the week more or less clear of 1.3500 for a follow-up move higher towards 1.38 and even 1.40 in coming weeks.

Source: Saxo Bank
The G10 rundown

USD – key for USD traders is whether the FOMC meeting is priced correctly as a relative non-event. The focus will be on forward guidance and the degree to which the Fed sticks to its guns on the dot plot (hawkish) or moves toward the market’s complacent view on rate hikes (more dovish).

EUR – the euro is seeing a “relief rally” as EURGBP bounced, and EURCHF is poking at cycle-high resistance after the Portuguese debt upgrade. Looking at EURCHF as the most interesting candidate for euro strength as we watch whether the FOMC meeting can cap EURUSD at 1.2000 or provide the excuse for new highs for the cycle.

JPY – the yen the weakest of the weak as global bond yields have risen as JGB’s are stuck in a rut, likely because the ongoing BoJ asset purchase programme is too big in a largely dysfunctional market. There's some policy adjustment risk on this theme at this Thursday’s BoJ meeting – stay tuned.

GBP – the recent rally has unwound further on BoE governor Mark Carney’s cautious words on Brexit, though GBPUSD survived a brushback below 1.3500 and EURGBP went so far so fast to the downside that a bounce to 0.8900+ still looks like a modest consolidation as we watch for more sterling strength.

CHF – Peripheral debt spreads compressing on the Portuguese upgrade sees EURCHF poking back above 1.1500 – watching whether we pull to new highs for the cycle there. GBPCHF is another candidate for expression of sterling strength.

AUD – the Reserve Bank of Australia minutes overnight did little to shift rate expectations as the bank sounds upbeat on the economy, but not worried that labour market tightness will provide much inflationary pressures via higher wages. The iron ore price development has not been AUD-supportive over last couple of weeks.

CAD – the Bank of Canada’s Timothy Lane suddenly waxing cautious on the loonie’s strength saw CAD broadly weaker. “Now as the Canadian dollar is strengthening, we’re certainly watching that closely and we’ll be taking that into account pretty strongly in making our decisions”. This is a clear warning sign that the runaway portion of CAD strength is likely finished as the BoC signals will prove increasingly cautious and push back against further strength from here.

NZD – nerves are raw as the election on Saturday approaches, and on the large two-way risk on whether Labour wins – though we still see the risks as eventually lower for the kiwi either way – with a National Party win merely providing a better entry point for AUDNZD longs in particular. Options strategies over the election are one way to keep a position through possible volatility with a fixed risk.

SEK – EURSEK remains stuck in a rut as policy-linked rate moves elsewhere are more forceful, while the Riksbank is seen as a laggard on policy and providing the chicken-and-egg problem of wanting to see clearly higher sustained CPI and/or currency weakness before waxing more hawkish (less dovish) on policy. By the way, apparently the 2.3% core inflation reading from August doesn’t seem to be enough for this market…

NOK – Norwegian rates are rebounding a bit ahead of Norges Bank’s meeting this Thursday, with little in the way of expectations – but we watch 9.40+ and 9.25 in EURNOK for developments.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0900 – German Sep. ZEW Survey 
  • 1145 – Bank of England’s Kohn to Speak 
  • 1230 – US Aug. Housing Starts and Building Permits 
  • 1230 – US Q2 Current Account Balance 
  • 1430 – US President Trump to Speak at UN 

– Edited by Clare MacCarthy

John J Hardy is head of FX strategy at Saxo Bank


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