AUD/USD storms higherThe Australian dollar has rebounded on Tuesday after a poor start to the week. In the European session, AUD/USD is trading at 0.6737, up 1.28%.
What goes down ... can go right back up. This has been the story early this week for the Australian dollar, which tumbled 1.5% on Monday but has recovered most of those losses today. The Australian dollar was hit hard after a weak retail sales report and widespread unrest in China over the country's zero-covid policy. The unrest in China has put a damper on risk appetite, as the result is likely to exacerbate supply chain disruptions and dampen domestic spending. Investors may have sensed an opportunity for profit-taking after the massive slide on Monday, which would help explain the rebound today.
The Fed doesn't hold a policy meeting for another two weeks, but the Fedspeak blitz, which started after the soft US inflation report sent the markets in a tizzy, continued in earnest on Monday. Fed member Bullard said on Monday the markets could be underestimating the likelihood of higher rates and that the Fed funds rate will have to reach the bottom end of the 5%-7% range in order to curb inflation, which has been more persistent than anticipated. Fed member Williams added that the Fed needed to do more work to tame inflation, which is "far too high". Fed member Brainard, a dove, expressed concern about inflation expectations rising above the Fed's 2% target. The Fed has been aggressive in telegraphing the markets that its rate cycle is far from over, a message we're likely to continue to hear in the coming weeks.
AUD/USD is testing resistance at 0.6707. The next resistance line is 0.6829
There is support at 0.6633 and 0.6511
Bullard
USD/JPY calm as inflation rises higherThe Japanese yen has edged higher on Friday and is trading at 139.90 in the European session.
Inflation continues to creep up in Japan. Core CPI accelerated to 3.6% in October, up from 3.0% in September and edging above the consensus of 3.5%. These levels pale in comparison to what we're seeing in the US, the UK and elsewhere, but Japan hasn't seen these levels of inflation in 40 years. The country has a deflationary mindset, which leads firms to absorb higher costs for fear of losing customers. However, as inflation continues to move higher, that trend is changing and consumers are feeling the pain of higher prices.
Despite rising inflation and a weak yen, the Bank of Japan is resolute in maintaining its ultra-loose policy in order to support the weak economy. The BoJ has been an outlier as it has capped interest rates while the global trend has been to raise rates, arguing that cost-push inflation is only temporary. BoJ Governor Kuroda has said that inflation should peak after hitting 3%. Kuroda might want to consult with Jerome Powell or Christine Lagarde about making assumptions about inflation peaks, as they found out to their chagrin that inflation was much stickier than they had anticipated.
Ever since the last US inflation report sent the equity markets soaring and the US dollar sliding, the Fed has circled the wagons and telegraphed a hawkish message to the markets. The latest salvo came from Fed member Bullard, who urged the Fed to raise rates to 5%-5.25% at a minimum. Bullard also presented a hawkish scenario in which the funds rate would climb all the way to 7%, a message investors clearly didn't want to hear. Retail sales and unemployment claims were better than expected, another indication that the US economy remains resilient handle further rate hikes. The Fed's coordinated message and the solid data have quelled the stock market rally and boosted the US dollar.
USD/JPY is testing support at 139.95. Below, there is support at 138.09
There is resistance at 141.01 and 142.87
Canadian dollar jumps as CPI surgesThe Canadian dollar is up sharply on Wednesday, as Canada's inflation report was hotter than expected. In the North American session, USD/CAD is trading at 1.2519, down 0.74% on the day.
Canada's CPI for March jumped 6.7% YoY, a full percentage point higher than the 5.7% gain in February. On a monthly basis, inflation rose 1.4%, up from 1.0% prior. Both the annual and monthly figures were the highest since January 1991. Inflationary pressures are not just increasing, but are widespread across economic sectors. Fuel, food, durable goods, restaurants, air travel - you name it and prices have moved in one direction - up.
The upswing in inflation is a worrying trend for the BoC, and given the tight labor market and solid growth in the economy, we could be treated to a second straight 0.50% rate increase at the June meeting. At last week's meeting, the central bank raised rates from 0.50% to 1.00%. The Canadian dollar moved higher, as investors liked the oversize rate hike as well as the BoC's announcement that it would scale back its balance sheet. The BoC appears to be in sync with the Federal Reserve, as the BoC's rate-tightening cycle could see rates rise as high as 3% but the end of the year. This should help the Canadian dollar keep pace with a Fed-powered US dollar, at least with regard to monetary policy.
We saw 0.50% rate hikes from the BoC and RBNZ last week and the Fed is likely to follow suit at its May meeting, given that US inflation is galloping along at a 40-year high. FOMC member Bullard is even suggesting that a massive 0.75% hike is a possibility. This stance is not Fed policy, but with talk of a 0.75% increase, a 0.50% move is looking less dramatic, and might not shake up the markets, which have been fed a steady diet of hawkish statements from Fed members over the past few weeks.
USD/CAD has broken below resistance at 1.2533. Below, there is support at 1.2451
There is resistance at 1.2605 and 1.2687
Japanese yen extends slideIt was another rough week at the office for the Japanese yen, as USD/JPY fell 1.67%. The crumpling yen hasn't eked out a daily gain since March and has extended its losses today. In the North American session, USD/JPY is trading at 126.88, up 0.42% on the day.
The yen is essentially at the mercy of the US/Japan rate differential, and with that differential continuing to widen, the yen continues to head south. US 10-year Treasury yields rose to 2.87% earlier today, their highest level since 2019. The outlook for USD/JPY remains bearish and we could see the symbolic 130 line fall in the short term.
The US Federal Reserve is in hawkish mode, and has telegraphed its intent to increase rates by 0.50% at the May 4th meeting. CME's Fed Watch has set the likelihood of this scenario at 88%, meaning it's a done deal unless there is some drastic, unexpected development ahead of the meeting. The Fed is scrambling to fend off spiralling inflation, which hit 8.5% in March, a 40-year high. With investors looking for clues about how tight the Fed plans to go, comments from senior Fed officials will be carefully scrutinized and could be market-movers. Later today, Fed President James Bullard, one of the most hawkish FOMC members who favours aggressive action from the central bank, will deliver public remarks later in the day, and the markets will be all ears.
USD/JPY pushed above its multi-year high of 125.80 last week and the upswing shows no signs of easing. The Bank of Japan has expressed its uneasiness at the rapid fall in the yen's value, but has refrained from anything more than "jawboning" about the issue. It's unlikely that the BoJ will intervene except as a last resort in order to keep 10-year JGB yields below 0.25%, which the Bank has designated as its line in the sand.
USD/JPY continues to climb and break above resistance lines. The pair faces resistance at 1.2740 and 1.2837
There is support at 125.72 and 1.2475
Euro extends losses on Ukraine crisisThe euro has started the week in negative territory, after sharp losses on Friday. EUR/USD is struggling to remain above the 1.13 level.
The crisis on the Ukraine/Russia border has reached a fever pitch, with the US saying it expects an invasion as early as Wednesday. There are some signals that a diplomatic solution can be found, but a Russian invasion remains a very real possibility. German Chancellor Olaf Scholz is in Kyiv and will travel to Moscow for a last-ditch effort to prevent a Russian attack, which would have a massive impact on the financial markets. The euro fell close to 1% last week, mostly on jitters over fears of a Russian invasion. I expect the currency to remain under pressure as the crisis continues.
In the US, St. Louis Federal Reserve President James Bullard said on Monday that the Fed must move more rapidly in raising rates. Bullard admitted that the Fed was "surprised to the upside on inflation". Bullard, who is one of the most hawkish voting members, said last week that the Fed should raise rates by a full percentage point by July. The markets are leaning towards a 50 basis point hike in March, with a 61% likelihood, according to CME's FedWatch. Bullard added that he was especially concerned with the surge in inflation since it was broad-based and was not showing any signs of easing.
There are other voices in the Fed, of course, and investors will be looking for guidance from the Fed on the course of rate hikes this year. The Fed minutes, which will be released Wednesday, could provide some insights into the Fed's plans.
1.1437, a monthly resistance line, is under pressure. Above, there is resistance at 1.1577
There is support at 1.1233 and 1.1014
Buba, Bullard TalkTV // Another scalping opportunityHi! RSI and Bollinger just confirmed and entered the deadzone, while those Government guys should have some impact on EURUSD to drive it lower. I see a very good scalping opportunity. I will update this idea as time goes by, thank you!
DXY/ USD: FED LOCKHART, MESTER & BULLARD SPEECH HIGHLIGHTSFed Lockhart Speech Highlights:
Lockhart: Tepid Business Investment Plans Raise Questions About Growth
Lockhart: Uncertainty A Real Factor For Economy Right Now
Lockhart: Fed Rate Policy Will Be 'Cautious And Gradual'
Lockhart: 'No Gun To Our Head' To Raise Rates Quickly
Lockhart: Two Rate Rises Remain Possible, One Likely This Year
Fed's Lockhart: There's Some 'Haze' Around Economic Outlook
Lockhart: Doesn't See Major Bubble Risks Right Now
Lockhart: Brexit Related Risks Seem To 'Have Settled Down'
Lockhart: One Rate Rise This Year Likely 'Would Be Appropriate'
Fed's Lockhart: 2Q GDP Data Misleading Read On Economy
Fed Mester:
Mester: Economy Should Pick Up Over Second Half Of Year
Mester: Timing Isn't Key Issue For Rate Rises
Mester: Gradual Upward Path For Rates Remains Appropriate
Mester: Every Fed Meeting Is A Live Meeting
Fed's Mester: Economy Is 'On A Good Track'
Fed Bullard:
Bullard: Fed Has 'Quite A Bit Of Firepower' Right Now If Needed
Bullard: Negative Rates Not Likely For US
Bullard: Fed Doing 'Pretty Well' On Its Job, Inflation Mandate
Fed's Bullard: Dot Plot Not Telling Rate Story About Rate Outlook
Bullard: What Fed Up Activists Seeking Is 'Kind Of Crazy'
Bullard: Monetary Policy Has Been 'Doing Pretty Well'
Bullard: Inflation Is Not Far From Fed's Target
Bullard: Fed Hurting Credibility With Bad Guidance On Rates
Bullard: Understands Financial Risks Could Get Away From Fed
Bullard: Fed Will Need To Use Judgment On Bubble Issues
Bullard: Fed Should Not Be On Cusp Of A Bunch Of Rate Hikes
Bullard: Ideal For Fed To Raise Rates On Good News
Fed's Bullard: 'Agnostic' About When Fed Should Raise Rates
Bullard: Doesn't See Asset Bubbles Right Now
SELL DXY/ USD: NEUTRAL FOMC JULY MINUTES & FED BULLARD SPEECHFOMC minutes were neutral-dovish on the margin as expected, with members split on calls for further rate hikes - though there was a general consensus that the Fed needed to acumulate more data before moving on rates (this could be dovish given in real time data has been poor). Several wanted more confidence on inflation, since this is the casewe know inflation took a relagively big hit this past tuesday so also could be considered dovish. Though some saw a rate hike "soon" appropriate though reasons for why are scarce short of labour markets tightening.
This in general imo was dovish/ neutral as expected with hawks only having labour markets on their side - I like AUDUSD and kiwi longs here (aussie prefered) as I have said all week, despite the pull-back. Given FOMC minutes were not hawkish I think AUD and NZD can move higher now as i believe it was the FOMC risk that cause the sell-off or was responsible for most - I also like short $yen as a continued theme on pullbacks and short GBPUSD as a long USD hedge from 1.305.
FOMC July Minutes Highlights:
FOMC Minutes: Split Fed in July Sought to Keep Options Open On Rate Hike
FOMC Minutes: Uncertainty From Brexit, May Hiring Slowdown Receded
FOMC Minutes: General Agreement to Accumulate More Data Before Rate Move
FOMC Minutes: Some Saw Another Rate Hike Appropriate Soon
FOMC Minutes: Several Wanted to Wait For More Confidence On Inflation
FOMC Minutes: Most Saw U.S. At or Approaching Full Employment
FOMC Minutes: Uncertainty From Brexit, May Hiring Slowdown Receded
FOMC Minutes: Several Saw Wage Increases as Evidence of Tightening Labor Markets
FOMC Minutes: Others Uncertain About Trajectory of Inflation
FOMC Minutes: General Agreement to Accumulate More Data Before Rate Move
FOMC Minutes: European Banks Under Pressure, Paticularly Italian Banks
FOMC Minutes: Staff Saw U.S. Financial System Resilient to Brexit Vote
FOMC Minutes: Long-Term Policy Framework Discussed, Decisions Not Needed For Some Time
Fed Bullard Speech highlights:
Bullard Reiterates Fed Rate Target Close to Appropriate Level
Bullard: Fed Rate Target Close to Appropriate Level
Fed's Bullard: Fed Needs to Explain Why Predicted Rate Rises Haven't Happened
Bullard Sees Limited Policy Coordination Between Central Banks
Bullard: Would Like to See Higher Rate of Productivity
Bullard: Sticks with call for single rate hike in 2016 & 2017, reiterates data dependency
LONG USD VS JPY, EUR, GBP: HAWISK FED BULLARD - FED FUNDS RALLYBullard is the lone Fed official forecasting just one additional rate increase, and expects modest growth over the next two and a half years. But he reiterated Tuesday he's not expecting the economy to head south. However, did go out of his way to mention a relatively dovish point "We Have Some Ammunition if We Need it During Next Recession". Nonetheless he remained hawkish net on the margin, reiterating FED Georges hawkish comments regarding the labour market "About as Good as It's Ever Been", whilst using the June NFP print to flatten any questions regarding the low May print saying "Strong June Jobs Gains Showed May Report Was 'An Anomaly'". Similarly Bullard continued with Georges sentiment of the US's post-brexit robustness stating that the "Market Reaction to Brexit Shock Was 'Satisfactory,' 'Orderly'" - and infact surprisingly pushed this hawkish brexit sentiment on to new levels of "Ultimately the Brexit Impact on U.S. Economy Will be 'Close to Zero'". This is perhaps the most hawkish/ upbeat statement i have heard form a key Fed member since the decision which is positive given Bullard's naturally dovish stance.
Bullard also stressed the need for a solid US Fiscal package to boost demand, where i have to say fiscal stimulus has almost gone forgotten about in the last 7-years post crash, given the dominance of the central banks, quoting "U.S. Badly Needs Fiscal Agenda for Boosting Economic Growth".
Once again todays "FED speaker tracker" continues to add to my long $ view in the medium term. Today already we have seen front end rates continue their aggressive recovery this week, with the fed funds rate implied 25bps hike probability now trading for Sept/ Nov at a whopping 18% vs 11.7%Mon, with Dec trading at 36.3% vs 29.2%Mon .
10y UST (TNX) rates trade up another 4% today after a 5% gain yesterday, whilst 30yrs trade 3% up on the day (TNY) - as global risk rallies. Whilst USD is trading a little weaker in the immediate term as it readjusts lower for risk-on USD selling, long USD/ DXY is my medium term view as we continue to see the US FOMC Rate curve aggressively steepen, which is likely to continue for the next week at least - steeper implied curve means hike is more likely - more likely or realised hikes = increased (in the medium-term) dollar strength. Further, we expect dovish/ easing BOJ BOE ECB over the same period, this monetary policy divergence compounds the long $ view against its 3 biggest crosses (hence the long DXY expression)
Medium term trading strategy:
1. The best expression of this medium term USD view is long DXY - as above I hold 8/10 conviction views for a number of the heavily weighted USD basket crosses based largely on likely monetary policy divergence in the medium term (FOMC Hiking whilst BOE, BOJ & ECB ease/ cut) e.g. LONG USDJPY @104 - 106.3TP1 109.5TP2; SHORT EURUSD @1.11 - 109.3TP1 107.5TP2; GBPUSD @1.34 - 131.2TP1 128.5TP2
