FX Update: USD teases break higher yet again

Yesterday, Fed Chair Jay Powell dismissed that the Fed was even considering a negative rates policy as a likely tool, saying “the committee’s view on negative rates has not changed. This is not something we’re looking at.” Powell highlighted instead the need for fiscal tools to deal with the crisis. Of course, believing that the Fed knows where it is going with policy is shaky, given that circumstances have consistently made a mockery of the Fed’s own predictions, from Bernanke’s assessment of the risks of the subprime housing bubble to the 2019 Powell Fed’s about face when It moved to expand its balance sheet and cut rates. Powell’s speech and the negative market action after the speech and later in the day saw the USD and even more so the JPY pulling higher on the day.

The market action has taken the price action back to the precipice of a wider USD breakout to the upside, though several recent teases higher in the USD that never ended up leading anywhere keep our confidence low that “this is the one”. One factor suggesting we should take the risk a bit more seriously, however, is the wobbly risk sentiment in equity markets and the sell-off in corporate bond ETF’s over the last couple of days, which coincide with the start of the Fed’s actual purchases of that debt.

The USD direction here occupies most of our attention at the moment, though there are some interesting subplots developing here and there. We have talked about the massive fiscal surge in Norway and how that could drive NOK strength and the RBNZ clearly . Today, we will watch the Bank of Canada’s Financial System Review release and the ensuing Poloz press conference for signs of whether the Bank of Canada is considering new policy options as well – USDCAD has been caught in a winding, coiling consolidation like a number of USD pairs. In EM, we note the HUF looking wobbly and how USDMXN deals with today’s Bank of Mexico rate (cut) announcement.

Chart: EURUSD
Is waiting for a EURUSD downside break like waiting for Godot? This 1.0800 area has been sticky since even before the Covid19 crisis and the pair needs to find sustained separation in either direction to indicate it is going somewhere. A EURUSD break lower is the major piece needed to argue that a larger USD breakout is afoot and could further aggravate wobbly market sentiment elsewhere in a self-reinforcing loop – also as a USD break higher could set in motion concerns about the critical USDCNY exchange rate as the big 7.20 area would likely come under fire in a broader USD surge.