Currency Point: Tough but exciting times

This is one of the most amazing charts FX traders have ever seen. It is the US two-year bond over the past 2 years. it looks like a half-pipe from the winter Olympics.

The aggression with which it has risen in the past two months is phenomenal and is the clearest indication that the market is bracing for a rapid increase in interest rates and that ‘normalisation’ of the Federal Funds rate is going to be the only game in town.

It’s not hard to see why pricing is this strong US CPI for January rose 0.6 per cent month on month seeing the year on year figure coming in at a staggering 7.5 per cent the highest read since 1982. However, it’s the core read of 0.5 per cent month on month and 6.0 per cent year on year are what matter from a rate perspective. It shows gains are broad-based and that US inflation is now 4 per cent above what the Fed wants – hence the movements bond yields.

To highlight why a strong rate rise is going here is St. Louis Fed president Jamie Bullard after the inflation report: “I’d like to see 100 basis points in the bag by July 1…I was already more hawkish but I have pulled up dramatically what I think the committee should do…The report shows continued inflationary pressure in the US and is concerning for me and for the Fed…You have got the highest inflation in 40 years and I think we are going to have to be far more nimble and far more reactive to data.” Now clearly, he is a hawk, but more importantly for us in FX is he is a voting member this year.

This was tempered by San Francisco Fed president Mary Daly stating that a 50-basis point hike in March is “not my preference”, and stated that the rise in 10-year yields to 2% indicates that markets understand the Fed’s policy path – which is a consistent rise rather than jumps. She is a known dove and isn’t on the voting committee.

The USD rocketed higher on the inflation data but then hit really high period volatility. For example, EUR/USD initially fell from $1.1440 to $1.1375 then smashed past the pre-CPI read to $1.1495, then roll over to $1.1420 which is some round trip.

GBP/USD ranged from $1.3523 pre-release to $1.3644 to finish unchanged at $1.3550 today.

AUD/USD moved through at cent dropping from $0.7195 to $0.7148 on the release, then took off to a high of $0.7249, before easing back down to $0.7165.

So hard to trade with this level of volatility and low fundamentals.

The only pair that made some sense was USD/JPY which follow US real yields up 0.5 per cent to ¥116.00.

Tough times but exciting all the same.