Trader Insights – the week the banks turned dovish

Last week was a significant week, where at the epicentre the Fed showed a willingness to start reducing the pace of QT, and to get going on rate cuts, with June firmed as the starting point.

One can argue that the Fed will now be more sensitive to downside risks in the economic data flow than upside outcomes in the data – this skew or lack of symmetry, has big implications for the market’s reaction to the data – i.e. we should see a larger move in the USD, gold, and equity if the marquee US economic data points miss expectations than if it beats.

Despite the Fed’s actions the USD trades strong and has underlying momentum going into the new week. The fundamentals aren’t fully supportive of a runaway rally in the USD but there is upside momentum in play and a move into 105 (in the USDX – USD index) can’t be ruled out.

The BoE and ECB have galvanised expectations they will also go in June, with the BoE meeting in May even showing signs it could be a live meeting. The SNB cut rates when it was only 25% priced into swaps, and Banxico started its easing cycle, with expectations they may go another five 25bp cuts in the coming 12 months. The RBA aren’t in a position to ease but deal in nuance and has tweaked the statement that most saw in a dovish light.

The BoJ were the outlier with its 10bp hike, and a move away from YCC, and ETF/J-REITs buying – the market saw continued JGB buying as the offset, but what’s also important is the BoJ will bring JPY weakness as a stronger consideration for policy setting.

USDJPY bangs on the 151.90 ceiling, and it feels like the market is happy to test the BoJ and MoF (Ministry of Finance) here – an upside break will no doubt bring in a barrage of JPY-related rhetoric from both entities, so being short JPY above the highs does become tactical, although I don’t see the MoF really acting until we get into the 154-155 range.

Trading a bullish JPY view looks more compelling against the CHF and SEK, with the SEK in focus this week given the Riksbank meeting and the potential for an easing cycle to start in the May meeting. NOKSEK longs look compelling from a purely tactical perspective, but switching to a momentum focus, I’d like to see the pair push through 0.9850/70 to really get me excited that the pair is ready to trend.

The PBoC has been easing monetary policy in recent times, but on Friday allowed USDCNY to break convincingly above the 7.2000 ceiling that has contained price action all year. Closing at 7.2292, this was 1.8% higher than Friday's CNY fixing rate, and therefore pushing the boundaries of the 2% limit that USDCNY can trade above the fixing rate on any given day.

The timing of this move is certainly of interest, as it comes right on the point when we’ve seen a concerted dovish turn from G10 central banks (ex-Japan) and a tolerance for a weaker CNY could have big implications for G10 FX and volatility – typically if USDCNY (and USDCNH) are trending (grinding) higher than it negatively impacts China proxies such as the AUD, NZD, and CLP. It also suggests we could see a modest increase in the daily trading ranges in EURUSD, AUDUSD etc, which is so important for day traders.

Today’s CNY ‘fixing’ at 12:15 AEDT is therefore well worth watching – there will be a consensus as to how high the collective sees the PBoC lifting the USDCNY mid-point, but the PBoC could send a clear signal to the market about its tolerance for a weaker yuan here and that could have far reached implications for broad markets.

S&P500 futures and G10 FX have opened on a quiet note, and so working off Friday’s levels our opening calls for Asia currently sit as follows:

• ASX200 7786 +16p (0.2%)
• HK50 16,507 +8 (0.1%)
• NKY225 40,728 -159 (-0.4%)

A look at the marquee event risks for the week ahead:

• US core PCE inflation (29/3 at 23:30 AEDT) – the Fed’s preferred read that they set policy by. The market expects 2.5% yoy on headline PCE, and 2.8% (unchanged) on core inflation.
• Fed gov Chris Waller speaks on the US economy (28/3 09:0 AEDT) – Waller has defined changes in the market thought process and is the markets guide on policy – a must-watch.
• Fed chair Jay Powell speaks (30/3 02:30 AEDT) – the Fed chair steps up and will probably hold a similar line to the FOMC statement, and his own presser – Powell could easily move markets but it is unlikely he deviates from the tone set at the FOMC meeting.
• Swedish Riksbank meeting (27/3 19:30 AEDT) – no chance of a hike here, but a 25bp cut in the May meeting seems highly likely. 

We also get Canada and UK GDP, US consumer confidence, Tokyo CPI, Aussie monthly CPI.

Next week is a big one for H-share earnings – keep an eye on the price action in the CHINAH and HK50.