Currency Point: Oxymorons

‘A hawkish cut’, ‘dovish upgrades’ and ‘potential non-movement’ – the oxymorons are strong in policy speak currently. 

Over the past week four G10 currency central banks have moved rates, three cut, one hiked.Which leads us to review the outlooks for certain currencies and assess our overall playbook.

In the world of FX all reviews should start with a view around the Federal Reserve and then work outwards from there.

The ‘hawkish cut’ oxymoron does point to Chairperson Powell and co.’s baseline view of the FOMC’s policy setting of being inside a ‘midcycle adjustment’ period.

As the FX and interbank markets predicted the Fed delivered a 25-basis point cut to the Federal Funds rate on Thursday. However, the 7-3 spilt from the Board vote and then a fairly large range in the Dot Plots for 2019 and 2020 that only shows 7 sitting members are forecasting further cuts completes the picture of a mildly dovish, if not neutral FOMC committee. The markets needed a fully feathered FOMC with the implied pricing leading into the meeting. Thus, a mildly dovish FOMC saw the USD receiving a nice boost from the unwind in dovish sentiment.

We should highlight a subtext of Powell’ press conference from a playbook standpoint, that is avoid giving the market clear policy signposts, instead place conditionality on the incoming data to ‘guide the Fed’s decisions making.’

Now the outlook on the whole is more to the downside than upside as the effects of the growing global slowdown, US 2020 Presidential Elections, Brexit endgames and Europe’s impending recession will likely trigger the ‘conditionality’ clauses and thus see further cuts, which suggest an easing view in the USD.

But for now, the USD is likely to outperform most G10 peers particularly risk peers such as the EUR, AUD, NZD, and SEK. As the near-term events are risk negative and risk off FX events. GBPUSD will likely move to Brexit events rather than monetary policy/macroeconomic events.

The technical playbook for the remainer of 2019 is for DXY to follow Bollinger bands. DXY has continually reverting to the mid-line on touching the top band since mid-year. When using the 15-month curve fitting model the curve suggests a flatting, which suggests the topping pattern is developing considering the rise in DXY over the past 15 months. Not surprising considering the building hype around the Fed’s rate cuts.

Inside this pattern DXY is holding between 96-99 couple this with the Bollinger band set ups and one can use simple momentum to find short term opportunities as the markets assess what the ‘mid-cycle’ set up means for policy longer term.