FX Update: What happens to risk rebound if US yields break higher?

Riksbank a real party pooper. Sweden’s Riksbank announcement this morning saw the central bank remaining Camp Cautious, with pointless tweaks to growth and employment forecasts and with zero recognition of the recent inflation spike as the furthest-out Q3 2024 headline inflation forecast actually lowered while the core inflation forecast was left unchanged for that time frame at 2.1%. The bank left its policy rate forecast through Q3 ’24 unchanged at 0% as  it expects “it will take a couple years more before CPIF inflation is assessed to be more permanently close to 2 per cent.” The SEK has managed to keep an even keel and is impressively back close to the 200-day moving average as a function of the comeback in risk sentiment, certainly not down to this as-dovish-as-possible Riksbank meeting.

CAD clears away minor election distraction. Canadian Prime Minister Trudeau has plenty of egg on his face, but has survived the ill-advised snap election yesterday and will return as Prime Minister with the status quo minority government that was in place before this unnecessary distraction that provides no real new policy mandate. CAD is higher more on oil prices failing to lose altitude as viciously as did risk assets during this recent sell-off and the snapback in both oil and risk since yesterday. Canadian two-year yields remain near the high of the range while the US two-year yields are buried in the doldrums, suggesting that USDCAD is more than a bit mispriced if the FOMC fails to wax hawkish and/or risk sentiment continues to surge higher together with oil prices. Technically, a close back well south of 1.2700 in USDCAD after the FOMC would suggest the squeeze to 1.3000+ scenario has been averted for now.

Table: FX Board of G10 and CNH trend evolution and strength
The JPY showing the most strength here as NOK outperformance eases (Norges Bank Thursday!), but the critical question through tomorrow night is whether the USD firming of late blasts into outright rally mode post-FOMC meeting. If the driver there is higher US yields, JPY could take a back seat or worse.

Table: FX Board Trend Scoreboard for individual pairs
Note that the NZDUSD rally has now rolled over badly enough to turn negative, although just barely so as the next session or two looks pivotal (basically, the FOMC outcome). Elsewhere, the EURGBP trend turning positive looks like a function of risk sentiment direction at the moment, but the BoE will likely weigh heavily on Thursday. The big rally in USDCNH is noteworthy, but only gets more technically relevant on a follow through higher – note the 200-day moving average near 6.48 there.

Upcoming Economic Calendar Highlights (all times GMT)

• 0730 – Sweden Aug. Unemployment Rate
• 0830 – Sweden Riksbank meeting
• 1200 – Hungary Central Bank Rate Decision
• 1230 – US Aug. Housing Starts and Building Permits
• 1230 – US Q2 Current Account Balance
• 0015 – Australia RBA’s Debelle, Berkelmans before Parliament committee
• 0130 – China PBOC rate decision
• 0200 – Australia RBA’s Bullock