- Probability of a March rate hike still relatively low
- Danger of market anticipating more hikes than are actually coming
- Important Riksbank meeting today, QE and rate adjustments likely to be discussed
- Risk appetite and higher rates could feed USDJPY rally for test of the top
Federal Reserve chair Janet Yellen indicated on Tuesday that she's not averse to rate
hikes if the data support them; much of those data land today. Photo: the Fed.
By John J Hardy
US Federal Reserve chair Janet Yellen’s testimony yesterday was seen as hawkish, at least relative to virtually non-existent expectations for anything new, which was largely what she delivered.
Still, the reasonably strong focus on the risks of waiting too long to raise rates was relatively hawkish for this extremely dovish Fed chair. She refused to address the timing of the next hike or the number of hikes the Fed might carry out this year, but the odds for March still look very modest from where we sit, given the white-knuckle risk willingness across global markets of late. Risks of waiting too long? Why not hike in March, then? Bloomberg’s monitor currently shows the market only pricing a 32% probability of a hike.
Of course, if the Fed does hike in March, there is a “frequency problem”, as the market may begin to project a hike for every meeting with a press conference for the rest of this year – meaning four hikes, more than the Fed would like to see predicted at this point.
They could overcome this problem by using the March meeting as a clear pre-commit to a May hike – the odds of which are still a modest 50%. In general, however, after more than two years of correctly predicting that the Fed will generally default to the dovish side, could we risk the opposite?
There was great commentary from Bloomberg yesterday on whether the market faces a “gambler’s fallacy”
on the risk of more rate hikes than currently expected. On the less hawkish side, Yellen is clearly not a fan of winding down the Fed balance sheet until interest rates are well on their way higher. And the bigger context in any case is that the Fed will be mostly reactive to data, and most importantly, the Trump administration’s coming policy mix.
Elsewhere, we have an important Riksbank meeting today, after the December meeting clearly showed a change in trajectory for the central bank as it seeks to climb down from its hyper-accommodative monetary policy stance. At that December meeting, the six-member board was split down the middle on whether to increase the very modest QE programme.
Further signaling on an end of QE or adjustment of the timing of the first rate hike to unwind the negative interest rate policy today could accelerate the SEK rally, particularly as it looks very cheap against the euro given the backdrop of more encouraging growth and risk appetite.
On the other hand, if the Riksbank proves afraid of its own shadow and indicates that it is a bit concerned that the market is taking things too quickly and sharp SEK appreciation risk is impacting inflation negatively, we could get a significant delay in the SEK rally, though not necessarily a trend change.
Some big overhead resistance levels here for USDJPY, where the shorter trendline has been challenged today and with the 200-day moving average not much higher, while the Ichimoku cloud resistance comes in around 116.00. Continued strength in risk appetite and higher rates – especially longer US rates – would likely feed this rally for an eventual test of the top.
Source: Saxo Bank
The G-10 rundown
USD – the greenback got a boost yesterday, and Yellen is out speaking today, but it is today’s raft of data that are the next hurdle for whether the market can confirm its upgrade of Fed rate-hike risks.
EUR – a stronger US dollar sees EURUSD lower, but do note that EURJPY is attempting a notable comeback as reflationary hopes see the market pricing an eventual European Central Bank taper. 1.0500 looks like a pivot zone for whether we test the lows of the cycle in EURUSD. Note the overhanging issue of Greece and the bailout deal terms, with next Monday as the established deadline for an agreement.
JPY – as usual, the yen is proving the most sensitive to changes in yield, a condition that will persist until or unless the Bank of Japan's commitment to its yield-curve-control policy weakens. In the meantime, interesting to track the longest Japanese government bond yields relative to global counterparts.
GBP – unsupportive CPI data yesterday from the UK, but GBP managed to bounce back versus the euro. Today we have important earnings, jobless claims and employment data and EURGBP is perched in a very interesting area around its 200-day moving average, a “nested” head-and-shoulders formation with a neckline around 0.8470 and a bigger head and shoulders (created post-Brexit) with a neckline in the 0.8300-50 zone.
CHF – nothing new here as the Swiss National Bank sight deposit data suggest the bank has its hands full containing further CHF strength. One would think that current themes would offer more significant headwinds for the franc.
AUD – the Aussie is able to match the US dollar’s strength as the global reflation theme is AUD supportive, but the AUDUSD chart has entirely run dry of momentum as the area between 0.7600 and 0.7700 has held remarkably well. There are layers of resistance above, while the 0.7600 level looks a bit soft if triggered for a run into lower support.
CAD – so far, USDCAD holding above the 1.3000 level as reflation themes support CAD as much as the Fed has supported the US dollar. Hard to see a significant breakdown here without some notable developments in either energy markets or on weak US data.
NZD – the NZDUSD consolidation reached the important 0.7100-50 zone as we watch whether the global reflation trade supports NZD more than the Fed and Trump support the US dollar, as the Royal Bank of New Zealand has attempted to take itself out of the mix until 2019 at its most recent meeting.
SEK – as noted above, Riksbank is the key focus today with near-term risks two-way, though medium term we see further SEK appreciation versus the euro.
NOK – oil prices are languishing, but NOK picks up a bid versus the euro on all of the general interest in anything vaguely linked with the reflation trade lately. Note the potential for a bigger capitulation lower in NOKSEK if the Riksbank waxes a bit more hawkish today.
– Edited by Jack Davies
John J Hardy is head of FX strategy at Saxo Bank