Currency Point: Bringing Vol, but Fed still winning



The ranges in USD pairs are breaking to upsides as Fed speak appears to be ‘winning’ the debate about long-term policy. I’ll come back to that point later.

But it would be remiss of no to highlight the volatility going on in cryptocurrencies – the news from Elon Musk and more importantly the People’s Bank of China (PBoC) show that volatility can return at any time in this world. Which is why we remind ourselves that trading can and will catch us unaware sometimes. Although not something I cover it is a remind that vigilance is always needed.

The volatility in crypto has well outstripped anything in FX but that doesn’t mean FX has been seeing some strong movements as trader once again seem to be grappling with the USD’s direction – is it governed by data or by speak? As I stated above it appears by speak.

Here is the data to highlight from last week that mattered:

US weekly initial jobless claims fell to 444,000 versus estimates 450,000 and the prior weeks prior 478,000 although continuing claims rose to 3.75m.

The Philadelphia Fed survey for May fell (likely due to weather issues) but remained above the pre-Covid range.

US Leading Index for April rose by 1.6% to a record high led by gains in jobless claims, though the workweek was a negative contributor.

One piece that was a bit of an outlier was US housing for April which disappointed, plummeting -9.5% the expectation was for a 2% decline. This saw the annualised level at 1.569 million compared to 1.700 million led by a -13.4% fall in single home starts.

There is a big caveat to the data in that the February polar vortex and subsequent surge has distorted the figures and will smooth out over the coming period. There is also the risk around the sector’s supply chains which may be struggling to meet the surge in demand with COIVD hitting core supply markets.

Then we come back to Fed Speak – with the Minutes from the FOMC the biggest driver

Here are the main points that sent the USD sliding were:
– the economy was still far from the Committee longer-run goals. Furthermore, it also highlighted that the path ahead continued to depend on the course of the virus, and risks to the economic outlook remained.

– Participants judged that the current stance of policy and guidance remained appropriate. The main reasoning: “its needed to foster and further enhance the economic recovery as well as to achieve inflation that averages 2% over time and longer-term inflation expectations that continue to be well anchored at 2%.

– Minutes did highlight the improvement in the economy and the expectation that annual inflation would rise near term due to base effects.

– The revelation was a number of participants indicating that if the economy continued to make rapid progress toward the Committee goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchase. This contrasts with Powell’s recent comments that they were “not even thinking about thinking about tapering”.

Like the data there was an outlier in Fed speak and that came from Dallas Fed president Robert Kaplan stating that some discussion of scaling back Fed tapering is need to “[take] the foot gently off the accelerator” would be wise. He also stated that other Fed members were open to debating tapering in coming meetings which is noted in the Minutes. He has tightened is hawkish talk since his last public comments stating that the April jobs report exposed labour supply issues and suggested that unemployment benefits are making workers hesitant to return to work. It should be noted that Kaplan is a Republican.

This has led to some pretty volatile FX trading.

EUR/USD fell from four month high of $1.2245 to be back below 1.2175 through the week but ended it strongly to be back above $1.22. This is a real interesting inflection point as a break above $1.2275 is a signal for another leg higher. Very interesting pair and one that has caught most out.

USD/JPY was the standout in volatility – fluctuating between 108.07 and 109.54 and with constant bouts of 30pip moves in short period of time. The pair has clearly found a limit and is holding to it but with very fast movements make it a tricky one. Have moved away from from this pair for now.

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