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Bank analyst says favours NZD, CAD, AUD after the dovish Fed

A response to the Federal Open Market Committee and Powell’s press conference from an analysts at a bank that has to remain unnamed.

  • says the FOMC was more dovish than they expected
  • which supports risk appetite, commodity FX
  • weighs on the US dollar
  • on EUR/USD says risks more balanced, major headwinds in the eurozone … on balance today’s FOIMC reduces downside risk for the EUR
Hard to argue with any of that really, and markets are way ahead of this note with their response already.

A response to the Federal Open Market Committee and Powell's press conference from an analysts at a bank that has to remain unnamed.

US dollar drops and risk trades rally as Fed dots say no hikes until 2024

Dollar falls around 40 pips across the board

Dollar falls around 40 pips across the board
The US dollar has slumped and risk assets are rallying after the FOMC statement and forecasts.
The latest dot plot shows 7 of 18 Fed members forecasting a rate hike (or more) in 2023. That means the majority still see no move higher through that year.
The immediate reaction was selling in the US dollar and buying equities. The S&P 500 went from -20 to +4 and the Nasdaq from -1.1% to flat. USD/CAD is down to 1.2440 from 1.2485. EUR/USD is up to 1.1950 from 1.1910.
It’s a uniform move across the board and is likely to be underscored by Powell in his press conference.

US dollar makes some headway against the euro and yen

Dollar Index rises above 92

Dollar Index rises above 92
The Dollar Index flirted with 92 a few times last week but was consistently rejected. It’s now made its way above it as the euro and yen come under pressure.
I’m hesitant to take any signals ahead of the FOMC but the tone of the commentary around the FOMC has shifted dramatically in just two weeks. Back then, there was non-stop talk about rising bond yields and now commentators and economists don’t seem to be worried at all, and are talking about the Fed being more upbeat.
I’m not sure that’s going to be the case. Powell and other Fed members have consistently highlighted high unemployment and remaining patient through the reopening. It’s way to soon to be declaring victory and any kind of hint at tapering would undermine the Fed’s credibility.
At the same time, you can’t ignore the inflation picture. US 10-year breakevens are at 2.30% today, the highest since 2014.
That leaves the Fed in a tough spot, they could declare victory but if you send a tightening impulse as soon as the market sees above 2% inflation, then you only hammer home that 2% is a ceiling and that all the talk of an overshoot was hollow.
So I think they stay dovish and that risks to the dollar are on the downside. But of course Powell can’t control all the dots so that might undermine the message and keep the dollar bid.

Welcome to Fed week

everything this week hinges on the upcoming FOMC meeting

There will be a couple of light distractions in the run up to Wednesday’s FOMC meeting but trading this week is going to revolve around the Fed, all things considered.
The language with regards to the bond market will be one to watch but the Fed will also be releasing its latest economic projections and dot plots are back in focus as well.
Imagine how would the market react if one rate hike was penciled in for 2023?
In case you need a reminder, here’s how the previous (latest) projection from the Fed:
FOMC
But as you can see, the market is well expecting a rate hike much earlier by the end of 2022 – with OIS pricing even indicating more than one hike by 2023.
Essentially, that’s part and parcel of the story in what is contributing to the rise in yields too (it’s not just an inflation story). So, will the Fed feel that its credibility is being undermined? Or is this all still acceptable for the time being? Or will they eventually cave?
That question is going to hold the key for Treasuries as yields are on the verge of an extended break higher as it holds at the February highs to start the week.

 

Fed

CFTC Commitments of Traders: EUR longs trimmed by 24K to the lowest level since June

Weekly 4X futures positioning data for the CFTC for the week ending Tuesday, March 9, 2021

  • EUR long 102K vs 126K long last week. Longs trimmed by 24K
  • GBP long 34K vs 36K long last week. Longs trimmed by 2K
  • JPY long 7K vs 19K long last week. Longs trimmed by 12K
  • CHF long 14K vs 12K long last week. Longs increased by 2K
  • AUD long 8K vs 6K long last week. Longs increased by 2K
  • NZD long 17K vs 16K long last week. Longs increased by 1K
  • CAD long 11K vs 15K long last week. Longs trimmed by 4K
  • Last week’s report
Highlights:
  • EUR longs decline by 19% to the lowest long level since end of June 2020.
Weekly 4X futures positioning data for the CFTC for the week ending Tuesday, March 9, 2021_
  • GBP longs dip off the highest long levels since April 2018
  • JPY long position moves to the lowest long position since early March 2020 and down from the high of 50K during the first week of January.

EURUSD lower on the day but bounces off the 100 hour MA

The run above the 200 hour moving average yesterday fails

The EURUSD moved above its 200 hour moving average yesterday for the first time since February 26, and in the process, extended above the midpoint of the move down from the March high at 1.19739 and a topside channel trendline. However, the high price yesterday stalled near the swing low going back to March 2 at 1.19907 (and also fell short of the 1.2000 level).
The run above the 200 hour moving average yesterday fails
In trading today, buyers try to lean against the 200 hour moving average, but could not sustain the bid. When the price correct below the level in the early European market, buyers turn to sellers on the failure and the price moved lower.
The lower channel trendline was ultimately broken but support held against its 100 hour moving average (blue line in the chart above).  The price has subsequently moved marginally higher off the key support target and as tested the broken 38.2% retracement at 1.19411.
What next?
With the price trading between the 100 hour moving average on the downside at 1.19096 and the 200 hour moving average above at 1.19581, the buyers and sellers are back in a battle for full control.   In between the levels sits the 38.2% retracement at 1.19411 which may tilt the bias down or up intraday.
If I were to give a nod to buyers or sellers, the sellers probably have more control. The price move to the upside this week is looking more like a corrective move of the bigger move lower. The price action failed above the 200 hour moving average, and topside trend line. The buyers had their shot.  They missed.
Having said that, if the pair is able to extend back above the 200 hour moving average, the landscape changes more in favor of the buyers once again.  The bearish tilt, turns more bearish below its 100 hour moving average at 1.19096.

US dollar climbs higher with yields

US dollar at the highs of the day

The US dollar is catching a broad bid following the ECB press conference. I’m not sure I would connect the two events because there’s nothing particularly notable happening in the euro at the moment.
Yields are moving up at the long end in the US with 10s now at a session high of 1.53%. They had fallen as low as 1.47% a few hours ago. 30s are at 2.27% from a low of 2.21%. There’s a 30-year auction today.
The rise in the dollar has done little so far to dent equities but gold is now negative on the day and oil has carved out a double top at $65.60.
In short, there’s not a great reason for this move but keep an eye on yields.
EUR/USD:
US dollar at the highs of the day

Dollar slumps amid retreat in Treasury yields

The dollar falls to the lows for the day as Treasury yields ease lower

10-year Treasury yields are now down more than 3 bps to 1.485% and the retreat in yields is putting pressure on the dollar across the board.
USD/JPY has nearly pared gains for the day, easing to 108.45 from 108.70 earlier while EUR/USD has moved up to 1.1968 and nearing its 200-hour moving average:
EUR/USD H1 11-03
 
The near-term level is seen at 1.1969 and a break above that will see buyers seize near-term control of the pair and start to look towards potentially testing 1.1990-00 next.
Elsewhere, AUD/USD is up to a high of 0.7780 while USD/CAD has also fallen to a low of 1.2588 as sellers start to eye last week’s low @ 1.2576-77 currently.