FX Update: We are nearing peak tightness.

Two things worth watching in Asia this week if US treasury yields stick at these high levels or trader higher still: whether USDJPY becomes a bit unhinged and rips toward 150.00 if the Bank of Japan/Ministry of Finance maintain radio silence for now. This is possible if the intent of the prior round of intervention was more to check the pace of JPY weakening rather than defending any absolute level. And if the USDJPY rate does continue notably higher, the pressure may pick up on the USDCNH rate to pull to new highs after not really sticking the move above the prior high water of 7.20 (traded to nearly 7.27 on September 28, only to close the day back below 7.20.). The pressure is building on USDCNH and the volatility is coming at an awkward time for the Chinese political calendar.

As far as the title of this article: I do believe we are nearing peak Fed tightness, and that is likely to mean that we are nearing peak US dollar as well, although I don’t have a sense of whether we are already “there” or have another 25-50 basis points to go at the short end of the yield curve. As well, the USD rollover to weakness could take two-three years or even longer to develop into a new trend, if we look at how prior major regime shifts unfolded in 2001-2003 and in the incredibly protracted 2008-2014 experience. That would make sense in the context of the current cycle as the USD will still retain a liquidity premium as the world goes through recessionary dynamics that will likely prevail wherever this bear market in equities bottoms out in the perhaps year to eighteen months ahead.

Table: FX Board of G10 and CNH trend evolution and strength.
The surge in oil prices after last week’s OPEC+ production cut announcement offering CAD and NOK a helping hand in some of the crosses. AUD is getting the worst of it here as the RBA dovishness sits poorly in a rising yield environment. As noted above, watching CNY and JPY closely here.

Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD looking heavy again as 1.1250 is a kind of bull/bear line (and a close below would conveniently see our trending indicator turn negative as well). Elsewhere, NOKSEK looks close to pivoting higher on the comeback in oil prices, while the new EURGBP “uptrend” looks far from convincing tactically.

Upcoming Economic Calendar Highlights

• 1300 – US Fed’s Evans (voter 2023) to speak
• 1300 – ECB Chief Economist Lane to speak
• 1700 – US Fed Vice Chair Brainard to speak 
• 2200 – Australia Sep. CBA Household Spending
• 2330 – Australia Oct. Westpac Consumer Confidence Index
• 0030 – Australia Sep. NAB Business Conditions/Confidence