FX Update: Market sentiment sours, weighs on riskier currencies

The US dollar – December FOMC shaping up as critical
I have written at length on the murky outlook for the US dollar in the nearest term, given the ongoing lack of political clarity and the wait for the two Georgia run-off elections on January 5. Meanwhile, the weak USD narrative is generally one of: political gridlock will more than be made up for by a hyper-accommodative Fed providing the necessary USD liquidity to keep the USD under pressure. On that note, the December 16 FOMC will prove a key milestone with many touting the potential for the Fed to already look into a maturity extension of its purchases or announcing an expansion of its rate of purchases after the recent episode of rates climbing toward post-pandemic outbreak highs. The great and balanced Tim Duy penned an excellent post yesterday questioning whether the Fed is at all ready to wax dovish as its pleas for fiscal are also a kind of expression of the belief that expanding QE would be ineffective, something it has more or less also stated. And with financial conditions about as good as they get, there is no compelling argument for QE from that angle. Worth considering the risk that the market is over-reliant on the dovish Fed narrative in the near term through that December FOMC meeting.

Talking Turkey
The powerful recent TRY rally reversed all of the prior sell-off from late October and then some once Turkish President Erdogan made it clear that he was willing to allow a more traditional approach to reversing the risk of a chaotic currency devaluation. That leads to today’s Turkish central bank meeting, at which a rate hike of 475 basis points is now the consensus, which would take the key rate to 15.00%, a far more fitting policy rate for Turkey’s situation. The near-term question is whether this move is already priced in tactically after a more than 10% appreciation in the lira versus the US dollar from the top.

The G-10 rundown

USD – The US dollar climbing on the decline of risk sentiment after New York City announced a closure of its schools in what seems a moment of reckoning with what will be a very tough slog for the economy in the US over at least the next couple of months and possibly longer on the need to deal with th. Thoughts on December FOMC above.

EUR – a smooth path to fiscal stimulus is needed and soon, otherwise the euro at risk of bogging down here – watching for the potential of wider fall-out on the existential front, where there is no evidence at present on the ECB’s purchases

JPY – the yen firmed broadly on the bout of weak risk sentiment into this morning, but with the USD likewise firming and USDJPY back testing above 104.00 as of this writing, the move lacks urgency – probably need a more notable bid into US treasuries (US 10-year benchmark below 75 bps again versus current 85?) for the yen to draw more focus.

GBP - sterling poised for a deal announcement that could usher in a rally that may prove surprisingly modest, unless the UK position looks particularly submissive. The key level lower in EURGBP 0.8867 for potential opening toward 0.8600.

CHF – interesting that the bout of risk off here still sees EURCHF in the tight area of consolidation around 1.0800 area.  Watching 0.9200 in USDCHF for flow potential as well if USD upside follows through here.

AUD – great jobs data out of Australia last night as the October data captured some of the improvement from the lifting of the Victoria lockdown. In less positive news, China delivered a list of 14 grievances to Australian media that had Prime Minister Morrison out on TV defending his administration’s position. The situation is more than a bit fraught, with Chinese companies directed to not import seven goods categories this month, including copper ore and wine. AUDUSD has room to consolidate here, with bulls only starting to suffer if it works below 0.7225/00.

CAD – the pivot high in USDCAD at 1.3173 is the trigger risk for a squeeze to 1.3300 or higher if the focus on the near-term gloom drives another sell-off in crude oil.

NZD – the NZDUSD move higher looks overdone in light of where other USD pairs trade – room to consolidate there to at least 0.6800 without rocking the boat for the bulls.

SEK – with focus seeming to revert back to near term Covid-19 doom and gloom this winter and risk sentiment, you guessed it, EURSEK has risen sharply off yesterday’s lows. If the 10.30 area is triggered on a more extended bout of concern about the outlook, EURSEK could be in for a more notable consolidation, if one we would like to eventually fade.

NOK – EURNOK needs to hold below the recent highs/200-day moving average or we risk another squeeze up to the top of prior range well above 11.00.

Upcoming Economic Calendar Highlights (all times GMT)

• 1100 – Turkey Central Bank Rate Announcement
• 1330 – US Fed’s Mester to open Financial Stability Conference
• 1330 – US Weekly Initial Jobless Claims and Continuing Claims
• South Africa SARB Interest Rate Announcement (no time given)
• 1500 – US Oct. Existing Home Sales
• 2330 – Japan Oct. National CPI