Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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FX Update: Digesting the FOMC reaction.
John J. Hardy
Global Head of Macro Strategy
Summary: The market has made a significant adjustment in the wake of the FOMC meeting last week, but the action at the start of this week suggests that any follow-on move from here could be fitful, as we have a long few months to watch data develop and as the Fed could push back against over-interpretation of what happened last week. Elsewhere, the Swedish krona is calm even as the government has fallen and HUF traders are gearing up for the first rate hike in Europe since the pandemic at the Hungarian central bank meeting tomorrow.
FX Trading focus: A big adjustment post-FOMC. Now what?
The Asian session overnight saw an extension of the sharp moves that were established in the wake of the FOMC meeting: the USD continued higher and the JPY continued higher still as US long yields were crushed to new cycle lows. But the move exhausted itself before the European session got underway and by lunchtime in Europe, the moves in the Asian session in all of the markets mentioned above had reversed, suggesting that we could be spending the balance of this week digesting the most significant move across markets in many months, equities excepted (the chunky sell-off there may have been partially mixed up in futures and options contract expiries on Friday, although St. Louis Fed ). The two key event risks this week that could test market developments since last Wednesday are Fed Chair Powell’s appearance tomorrow in testimony before a House committee and the Friday May PCE inflation data.
Chart: EURUSD
EURUSD pushed down through the 61.8% Fibo retracement at 1.1920, arguably a minor resistance point now, with the bigger level is clearly the round 1.2000 level, which now also coincides with the 200-day moving average. If we see another wave or two of concern that the Fed is set to taper asset purchases soon and we have further repricing of the Fed rates higher (Friday a key event risk with the US May PCE inflation data), we could see the neckline of the head-and-shoulder like formation tested below 1.1800, which could lead to some follow through toward 1.1500 or even lower (classic head-and-shoulders target would be an incredible 1.1050-ish). I am reluctant to get aggressive on the bearish potential even from current levels as USD strength driven by surprises from the Fed when the fiscal picture is getting cloudier by the week. And USD strength together with any fear of lower USD liquidity quickly becomes so destructive and toxic that these moves can’t endure for long unless a dramatic policy mistake is being made. So for now, I’ll watch that neck-line area and the 1.1704 pivot low from late March (when it was the long end of the US yield curve maxing out as well as Fed expectations, it should be noted) for whether the move can be corralled.
Interesting test tomorrow for HUF on rate hike. The Hungarian central bank has thoroughly flagged a rate hike at tomorrow’s meeting as Hungary will be the first country in Europe to hike rates, with a fairly dispersed set of forecasts from analysts. The rate is at an odd 0.60%, with some looking for moves in multiples of 0.15%, with consensus centered on a hike of 30 bps to 0.90%. There will be considerable focus on the guidance as well, and considerable hawkishness seems in order to lift HUF, given what the Fed has just done to the US dollar. Interestingly, the move lower in EURHUF, for example, that unfolded when the Hungarian central bank made it clear in mid-May that a hike was coming, has been completely unwound.
Sweden – drama in politics, if not in SEK. The SEK is sharply weaker versus the USD and even versus the Euro on the repricing of the leading central banks’ potential to hike rates sooner than previously expected. It is far too soon to decide if we have a compelling re-entry point for SEK longs versus the euro or elsewhere as another wave of weak risk sentiment could see another squeeze on SEK longs. I lean more toward fading EURNOK upside from here with caution and via options structures. The current Swedish Social Democrat leader, Löfven, lost a confidence vote today and will have to decide whether to resign or call snap elections. The current government is a very weak Social Democrat-Green coalition and the far-left Left party abandoned its support for the coalition in the confidence vote. The development that precipitated the crisis for the sitting government was the talk of new measures to ease rent controls on new housing developments as the existing rules have prevented new supply from coming on the market as developers don’t see sufficiently high returns on new units for lower income households. A huge wave of immigration that added several percent to Sweden’s population in recent years has turned the housing situation into a pressure cooker. Implications for SEK have been modest to non-existent as there is little prospect for new political developments even if Löfven resigns, with the blocs deadlocked in the polls, and as a caretaker government could result, one that would sit until elections in September of next year.
Table: FX Board of G10 and CNH trend evolution and strength
No surprises here, as the USD and JPY have risen to the top of the heap, with the CNH playing its usual role as a low-beta US dollar, while interesting to see that the weakest of the G10 currencies latest have been the two Scandies. We prefer leaning against further NOK weakness before taking a view on SEK just yet.
Table: FX Board Trend Scoreboard for individual pairs
Here, note that EURCHF is looking to turn positive again on the theme of more hawkish signals from global central banks. Note as well that the readings for the likes of EURUSD and USDSEK are getting quite spicy at absolute values near 8, levels that are hard to sustain.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US May Chicago Fed National Activity Index
- 1230 – ECB President Lagarde to speak
- 1345 – US Fed’s Bullard (non-voter) and Kaplan (non-voter) to speak
- 1900 – US Fed’s Williams (voter) to speak
- 2100 – New Zealand Q2 Westpac Consumer Confidence
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