Article / 03 March 2017 at 8:49 GMT

FX Update: What we need to see to price in a March hike — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Spectacularly good US job data increased rate hike likelihood even further
  • Not coming with a rate hike on March 15 would be a big surprise
  • EUR might react to political headlines as key politicians are set to meet on Monday
  • AUDCAD increasingly interesting as a possible bearish reversal candidate
By John Hardy

The March rate hike odds notched higher still Thursday, as the US posted its lowest weekly initial jobless claims figure for the cycle – at a spectacularly low 223k. Today we have the Fed’s Vice Chair Stanley Fischer and Chair Janet Yellen herself as the final two key Fed officials to make friendly noises on the prospects for a March 15 rate hike to more or less seal the deal. The market now strongly favors a move, even if it is not fully priced in, but sufficiently – it will be far more surprising if the Fed doesn’t hike. Supposedly, next week’s jobs report will also be important, but would probably have to be an outright disaster to influence the Fed’s decision making. 

I mentioned yesterday that one interesting aspect of all the recent fuss about upgrading the risk of a March rate hike is that we have merely seen a parallel shift higher in the forward curve rather than the rising anticipation that the Fed will eventually hike to a higher “terminal rate”, which is currently now seen at a mere 2.00% or so. It will require a bigger move higher in the eventual terminal rate for the rate hike cycle to deserve more of our attention. Stay tuned on that front.

Spread between Dec 2017 and Dec 2018 Eurodollar 3-month US interest rates

The chart below roughly shows the anticipated shift in 3-month US interest rates between December of this year and December of 2018 (therefore the approximate number of Fed rate hikes in that period). The interesting thing here is that nearly all of the focus lately has been a myopic one on the odds of the next rate hike and its timing. Further out, for example for 2018, the market expectations around further Fed policy removal has been stable within 10 basis points or so (the market figuring the Fed maybe or likely to hike twice - as a reading of 0.49 here equates to approximately 50 basis points). In other words, the market still figures there is a very low ceiling on the Fed's terminal rate.

Source: Bloomberg 

AUDUSD finally consolidated lower as the Aussie was one of the big movers yesterday on the switch in sentiment on everything “reflation trade” related yesterday, this is quickly bringing the very pivotal 0.7500 area into view – which is absolutely critical for the outlook, containing the 100- and 200-day simple moving averages, the first major Fibo (38.2%) of the rally wave, and also site of the previous major highs in December. While we have an RBA meeting next Tuesday, we’ve seen an awful lot of noise out of the RBA recently, so the surprise potential looks very limited.

Source: Saxo Bank
The G-10 rundown

USD – The USD strength is broadening out considerably and it will be interesting to watch whether this week closes with an exclamation point or a fizzle as Fischer and Yellen are out speaking later today.

EUR – There is an ECB meeting up next Thursday. The question is, whether Draghi could be forced to address the recent higher inflation readings more directly and if so, could this have more impact on the likes of EURAUD, EUR/EM as opposed to EURUSD? Note political headlines as key European national government heads are set to meet on Monday.

JPY – The inflation data out is in line with expectations, with headline year-on-year CPI at +0.4%. Still a tough slog for the Bank of Japan in getting traction on inflation despite the recent weakening of the JPY. More interesting is the recent JPY resilience and it’s strength against some of the commodities here – could this deepen if we finally get a correction in risk appetite? NZDJPY at a new low for the year…

GBP – There is little new here. GBPUSD support is trying to hang in there and EURGBP needs to find resistance in 0.8600-50 zone for bears to maintain any hope. Could be reactive to UK services PMI today.

CHF – Next key test for CHF will take place possibly around next Thursday’s ECB meeting and whether we hear any hint of a shift on the outlook for an eventual taper of asset purchases.

AUD – The Aussie only firm against a struggling kiwi – although AUDCAD increasingly interesting as a possible bearish reversal candidate as well. The currency is very poorly placed for a change in sentiment on the reflation trade.

CAD – USDCAD reaching the last resistance zone in 1.3400-50 as the oil priced faded a bit yesterday – still, the latter looks almost “managed”, so it may be up to the US rate outlook and general sentiment on the prospects for the reflation trade to drive the action here.

NZD – The kiwi exceptionally is weak on the sentiment shift and as the RBNZ clearly is leaning against the exchange rate. Important for any further weakness is likely whether AUDNZD upside develops as a theme above the 1.0750 area.

SEK – SEK preferred to commodity-linked currencies and EURSEK downside preferred if we stay south of 9.60-65.

NOK – the rally in EURNOK has tactically neutralized the recent downtrend, with a structural reversal threatening if EURNOK can’t hold below 8.90-95. NOK likely to correlate with moves in other commodity-linked currencies here.

Upcoming Economic Highlights (all times GMT)
  • 0815-0900 – Euro Zone Feb. Services PMI 
  • 0830 – Sweden Jan. Industrial Orders/Production 
  • 0900 – Norway Feb. Unemployment Rate 
  • 0930 – UK Feb. Markit-CIPS Services PMI 
  • 1000 – Euro Zone Jan. Retail Salesa 
  • 1500 – US ISM Non-manufacturing  
  • 1730 – US Fed Vice Chair Fischer to Speak 
  • 1800 – US Fed Chair Yellen to Speak 

— Edited by Clemens Bomsdorf

John J Hardy is head of FX strategy at Saxo Bank


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