Video

#SaxoStrats
​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
Denmark
  • 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.

Chart: EURUSD

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.

EURUSD

Create your own charts with SaxoTraderGO click here to learn more

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

3y
Shazi Shazi
Euro usd higer down tell me

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. 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 Tradingfloor.com 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 Tradingfloor.com 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 Tradingfloor.com or as a result of the use of the Tradingfloor.com. 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. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com 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 ourtrading 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. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail