Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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FX Update: Market set to put next BoJ Governor Ueda’s feet to the fire?
John J. Hardy
Global Head of Macro Strategy
Summary: The US dollar remains firm, held back slightly yesterday by a modest brightening in sentiment and yields easing a bit lower. Overnight, nomination hearings for Kazuo Ueda, the likely successor to Kuroda at the helm of the Bank of Japan, gave the impression that Ueda will be in no rush to tighten BoJ policy. If yields continue to run higher, the outgoing Kuroda and incoming Ueda are going to have their feet put to the fire by a weakening JPY.
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Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: USD remains firm after wobble on yields consolidating yesterday. USDJPY could rip higher as likely incoming BoJ Governor Ueda signaled little urgency to normalize BoJ policy in hearings overnight.
The government nominee to replace Kuroda at the helm of the Bank of Japan, Kazuo Ueda, signaled a very cautious approach to the daunting task of a transition away from the Bank of Japan’s aggressive easing policy of the last 10 years in his three-hour nomination hearings before the Lower House overnight. “If I’m appointed BoJ governor, my mission isn’t to come up with some kind of magical, special monetary policy…As I’ve mentioned before, if you look at the trend in prices, there are improvements we’re seeing, but the situation remains that it’ll take some time until we’ve securely achieved 2% inflation.” This looks quite dovish given the significant backup in yields nearly everywhere else around the world, and also looks like a setup for Mr. Ueda to have his feet held to the fire by a powerful new round of JPY weakening if global yields continue to rise from here. USDJPY is vulnerable to testing the next layers of resistance as discussed below in the USDJPY chart.
Chart: USDJPY
USDJPY is pushing on local resistance here and could be set for a significant advance higher if global yields continue to advance after likely incoming BoJ Governor Ueda failed to signal any urgency on tightening BoJ policy. The first level coming into view is the 200-day moving average just above 137.00 if local highs are taken out, but another solid advance in US treasury yields could quickly set the focus higher on major retracement levels for the sell-off from the 151.95 top to the bottom of the correction at 127.23, like the 61.8% retracement near 142.50.
Elsewhere, as discussed in this morning’s Saxo Market Call podcast, we note the general failing of the China recovery narrative, as commodity prices have faltered over the last month, the CNH continues to weaken broadly (not just versus the USD) and the Aussie is serving as a solid proxy on that front. It has rolled over aggressively versus the NZD, sparked this week by the combination of softer than expected AU wage data and a more hawkish than expected NZD, but the critical AUD pair in focus is AUDUSD, which is testing below the 200-day moving average again today. Besides general correlation with risk sentiment for that pair, also watching copper as a coincident indicator, with further broad AUD weakness a risk if the price punches well below $4/lb.
Broadly speaking, the USD is an expression of risk sentiment and the backdrop remains testy, with an overriding concern of escalating tensions between the US and China as Ukraine risks becoming a Cold War-style proxy war, as well as the technical situation in US equity markets, where the recent action has been poised on critical support levels (rising trend-line and 200-day moving average in the case of the S&P 500. The January PCE inflation data is up later today – watch the core month-on-month for directional surprises. Note that next week’s US data does NOT include the jobs data on Friday, which won’t be reported until the following Friday, March 10 (also the day of the next BoJ meeting, Kuroda’s swan song – should prove an interesting day for USDJPY.)
Table: FX Board of G10 and CNH trend evolution and strength.
Note the CNH relative weakness despite USD strength, note the AUD relative weakness. Signals are muted elsewhere, with relative SEK strength largely an artifact of the big move off the back of the Riksbank meeting now more than two weeks ago.
Table: FX Board Trend Scoreboard for individual pairs.
The 11.00 level in EURSEK seems to be sticky here and SEK outperformance would likely be difficult if global sentiment continues to head south. More AUD pairs tilting into negative trends, including AUDNZD on a close in the low 1.0900’s today. USDCAD quietly trying to crawl higher – watching 1.3700+ next resistance there.
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