​The Trump administration has not yet formally deployed the long-awaited latest $200 billion in tariffs against China, but a new Wall Street Journal report indicates that Japan might be next on the agenda.
Article / 15 December 2015 at 8:36 GMT

FX Update: Market pricing in a toothless FOMC

Head of FX Strategy / Saxo Bank
  • Risk-off sentiment weighs on USD
  • Markets pricing in careful FOMC
  • RBA minutes confirm cautious optimism

Federal Reserve
The Fed may be preparing to hike rates, but markets are expecting the central bank's 
forward guidance to be distinctly dovish. Photo: iStock
By John J Hardy

The risk-off tone abated late yesterday after peaking in the early New York trading hours but then picked up again overnight in Asia, keeping the USD on its back foot and keeping EURUSD pushing on resistance around 1.1030/40 while USDJPY remains heavy below 121.00. 

There are at least two ways to read this move: the first sees the market as having been burned badly by the European Central Bank the week before last and closing its books on the year, having lost the will to put on risk after the “macro trade of the year” – short EURUSD and long European stocks – has gone belly-up. 

The other interpretation is that the fresh fear and loathing about the impending Fed rate hike and the risk-off evident in junk bonds, equities and emerging markets – not to mention the deflationary risks from a devaluing China and a fresh implosion in oil prices – will mean that the Fed tiptoes into this rate hike cycle with extremely cautious guidance.

The Reserve Bank of Australia minutes confirm the central bank’s cautiously optimistic outlook on the Australian economy, but Australia’s rates settled lower overnight – most likely due to the risk-off tone in Asian markets  as Australia stocks plunged to close at a fresh low for the cycle and lowest close since mid-2013. 

The Aussie has stayed within the recent trading range versus the USD between the key 0.7150 and 0.7375 levels, while NZDUSD has slipped higher again overnight and is pushing above the first key resistance just ahead of 0.6800. As we have discussed recently, it is difficult to interpret technical breaks that unfold ahead of major event risks like the FOMC tomorrow – so let’s see if this move sticks today. We also have another key resistance line coming in at the previous highs around 0.6900 and the 200-day moving average is actually now slightly below that level.


EURUSD has squeezed to minor new local highs this morning as we eye the next resistance levels around 1.1100 (the old range) and then arguably the last retracement that keeps the risk of this consolidation transforming into an outright bull move is the 1.1250 area – the 61.8% Fibonacci retracement of the latest downward wave.


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Source: Saxo Bank 

The G-10 rundown

USD: Suffering as a swarm of factors have the market pricing in a very cautious Federal Open Market Committee meeting tomorrow (contributing factores include China's recent announcement that its exchange rate policy focus will be switching to a basket, low oil prices, and weak risk appetite).

EUR: Only thriving if the market mood continues to sour. 1.1100 is the next resistance level, though the bigger one is the 61.8% Fibonacci of the entire wave from the 1.17-plus spike to the recent sub-1.06 lows coming in around 1.1250.

JPY: A fellow traveler with the euro at the moment, as the yen only benefits on risk off – though we did see comments overnight quoting unnamed central bank sources) that Bank of Japan officials are gaining confidence in the Japanese economy ahead of this Friday’s meeting (markets are not pricing anything from the BoJ anyway).

GBP: Market may try to look through the CPI today, as the bigger data is up tomorrow with the latest earnings and employment numbers. EURGBP is trading around 0.7300 today, the last arguable resistance area ahead of the 0.7500 levels.

CHF: EURCHF bounces back into the range between 1.0800-1.0900, while USDCHF is down on the last arguable local support levels around 0.9800 – it’s stand or fall time for this pair around the FOMC meeting tomorrow.

AUD: RBA minutes showed the cautious optimism we have become accustomed to overnight, but these failed to drive interest rate expectations higher as the risk-off overnight pushed interest rates lower. AUDUSD remains in the 0.7150-0.7375 no-man’s land.

CAD: USDCAD finally consolidating a bit on the modest bounce in oil prices – CAD looks unfairly beat down in some of the crosses with NZDCAD on a ludicrous parabolic trajectory that has our contrarian hackles raised.

NZD: What is the quality of a break unfolding in NZDUSD through a resistance level when we don’t yet have the FOMC announcement tomorrow in the bag? Color us sceptical on NZDUSD’s upside prospects from here, though we’ve no bearish technical argument until/unless we see a bearish reversal.

SEK: Market split on whether we see rate cut or quantitative easing expansion from the Riksbank here, so plenty of room for a two-way reaction. EURSEK getting a bit richly priced, so even fresh easing may bring little sustainable upside beyond a kneejerk rally unless risk appetite goes into full meltdown mode (not our base case.)

NOK: At the moment, it's looking like a one-dimensional bet on the oil price to trade NOK, but market nervously eyeing the Norges Bank on Thursday for developments as the fresh downdraft in oil over the last few weeks must have Olsen and company preparing fresh easing measures.

Upcoming Economic Calendar Highlights (all times GMT)

  • Sweden Riksbank Rate Announcement 
  • UK Nov. CPI (0930) 
  • Germany Dec. ZEW Survey (1000) 
  • Sweden Riksbank Press Conference (1000) 
  • Canada Oct. Manufacturing Sales (1330) 
  • US Dec. Empire Manufacturing (1330) 
  • US Nov. CPI (1330) 
  • US Dec. NAHB Housing Market Index (1500) 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank

Shazi Shazi
Euro usd higer down tell me


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