Risk sentiment is this week's focus following the US/British/French attack on Syria, with the USDJPY's tentative breakout beginning to falter as prices head into the Ichimoku Cloud.
Article / 22 September 2016 at 7:38 GMT

FX Update: USD falters as Fed fails to hike

Head of FX Strategy / Saxo Bank
  • Consensus proves correct and Fed fails to raise rates
  • Statement indicates 'clear intent' to hike in December
  • Signals point to further declines in USDJPY

Federal Reserve
Scared of its own shadow? The Fed refrained from hiking rates yet again yesterday leaving markets unwilling to place their faith in even a December move. Photo: iStock

By John J Hardy

The Federal Reserve saw its own shadow and was afraid once again, failing to hike rates in line with the majority consensus. For the first time in a long time, we saw three dissenters, but alas these were three of the four rotating regional Fed presidents who won’t be around to vote in 2017 (rather than anyone on the board of governors). 

The statement was actually relatively unchanged (somewhat “un-dovish” as there has been mounting evidence of a slowdown), and the dot plot now indicates a clear intent to hike in December, even as the longer-range policy forecasts were lowered in line with recent Fed rhetoric suggesting the longer-run neutral rate is lower than it has been in the past. 

The cheeky market hardly budged the odds for a December move higher, even after yesterday’s statement.  

The chief question now on the other side of this Federal Open Market Committee meeting is how much significance the market feels it can wring out of it. After all, we’ve had a bout of recent volatility that came after a long summer stupor. That volatility was supposedly sparked by the combination of the European Central Bank disappointing, the Bank of Japan crying "uncle" on the negative effects of its current programme, and the Fed waxing more or less hawkish (yes, the last of these has since been watered down by the Brainard speech and now this FOMC statement). 

Given the Fed's dovishness, we can now supposedly get back to piling into risky assets, emerging market trades and the like. But what if the volatility reflects the beginning of the idea that quantitative easing simply doesn’t move the needle anymore and that the entire arc of the narrative is about the switch to a fiscal focus, where there are neither any birds in the hand nor in the bush? 

Overly metaphorical, perhaps, but the reaction to the Fed statement yesterday may not have legs beyond a week or two, and we’ll be on the lookout for failure signs and for a quick USD recovery at some point. This comes down to the fact that we suspect volatility is here to stay and will return in fits on the uncertainty that a regime switch entails, as well as due to the upcoming US presidential election.

Again, the market only marginally upgraded its expectations for a rate hike in December to just above 60%, wisely casting doubt on the Fed’s ability to predict the trajectory of the US economy and perhaps mulling what might happen to consumer confidence and economic activity towards the end of the year should Donald Trump be elected president.

Elsewhere today, watch NOK around the Norges Bank meeting today. There is some chance of EURNOK ploughing through the key 9.15 area if Norges Bank fails to cut (with the lowest real rates of any developed economy and oil ticking up here again, we don’t see why they would cut despite the significant minority of analysts looking for just that). 

There certainly exists a two-way reaction potential if they do surprise with a cut, however.


The FOMC outcome yesterday has USDJPY trying the critical 100/99.50 area. The next major chart point below is toward 95.00 – the 61.8% retracement of the entire rally sequence from all-time lows to the highs last year. 

We’ll look for opportunities to get contrarian on bullish reversals, but the BoJ has laid the groundwork for helicopter money even as the market jumped on the short-term policy tweaks as being unable to weaken the JPY.


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Source: Saxo Bank 

The G-10 rundown

USD – on its back foot after the dovish FOMC, but as we discuss above, we wonder how long the reaction will be sustained as markets were thoroughly shaken in early September and renewed volatility may keep the USD from falling farther.

EUR – euro looking like a passive observer to developments elsewhere – theoretically we’ve chopped back above the local upside pivot area in EURUSD, but that chart is such a churning mess that technical takeaways have very low confidence level. Let’s see where we close the week.

GBP – GBPUSD back above 1.3000 on the dovish FOMC after avoiding touching the rising trendline. Bears will want the rally to fade ahead of 1.3100/25 to keep the downside momentum going.

CHF – move back lower in EURCHF possibly in sympathy with long yields falling again. Not sure where the catalyst for CHF lies at the moment.

AUD – pulling higher as we have a series of back and forth chops in AUDUSD of equal magnitude, with this latest rally now, at 0.7650, approximately equal in size to the last two rallies as the market appears clueless on what to do.

CAD – the big jump in crude prices on US inventory reports late yesterday and the dovish Fed have CAD sharply higher. Key Canadian data Friday and the 1.3000 level is where the bulls may make their last stand in USDCAD.

NZD – the Reserve Bank of New Zealand had to do something to talk down the kiwi and managed to do so overnight by tilting forward guidance to the downside, pushing two-year rates a solid six to seven basis points lower and helping to confirm the bullish divergence setup in AUDNZD. Stay tuned there, that pair is an interesting sideshow to the messy G3 action and JPY volatility.

SEK – SEK weakness is interesting, given the recovery in most of the smaller currencies yesterday – still eyeing the EURSEK level at 9.60 for a possible surprise to the market’s complacency.

NOK – Norges bank is up today with two-way reaction potential around the bank’s decision. Not sure why they should cut rates here, but a significant minority look for a rate cut to chop the rate to 0.25%

Upcoming Economic Calendar Highlights (all times GMT)

  • 0800 – Norway Deposit Rates 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1300 – Euro Zone ECB President Draghi to Speak 
  • 1400 – Euro Zone Sep. Consumer Confidence 
  • 1400 – US Aug. Existing Home Sales 
  • 1710 – UK BoE’s Carney to Speak in Berlin 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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