The USD bulls have appreciated the renomination of Jay Powell as Fed chair and Lael Brainard as vice-chair. The outcome was not unexpected by any means, but the market has unwound hedges against a more ‘dovish’ personnel shift and a potential Brainard appointment, and the idea of policy continuation has seen the potential for a June 2022 rate hike priced at 96%, with 2.8 hikes priced through 2022.
US bond yields have found good sellers across the curve, with the additional rate hikes priced. I'm closely watching 2-year US Treasuries (now 58bp) and if yields trade above 60bp then I’d be looking at the SHY ETF (1-3yr Treasury) and tactical longs could be compelling below 85.50. It's hard to see more than 3 hikes from the Fed play out in 2022, especially if the USD is on a one-way tear with the USD exceptionalism story is alive and well. Expressing an overpriced US rates setting through ETFs is one vehicle to use.
US real (adjusted for inflation expectations) rates have had a material move to the upside, with US 5yr real rates +13bp, and the combination with USD strength has seen Gold and Crypto under genuine pressure. We’ve seen both $1833 and $1811 give way and $1800 now comes into play here. Our flow is skewed towards longs in XAUUSD and many feel the move lower is overdone.
As a rates play, USDJPY is always one of the most sensitive to moves in 2yr Treasuries, so any move lower in UST yield may see USDJPY attract sellers. Looking at the daily chart, we’ve seen the move struggle into 115, and this looks very interesting – to push through 115 we’re going to see higher 2-year Treasury yields and as stipulated, these are looking quite well priced now. If risk aversion picks up and we see the VIX above 20%, the JPY will outperform all currencies and I’d be looking at selling this bounce in NZDJPY and AUDJPY. The risk for NZD longs is we see the RBNZ hike by 50bp tomorrow, which I don’t see.
Looking at the tape in the S&P 500, it was an ugly last hour – granted, statistically Thanksgiving is typically a good week to be long risk, but that close fills me with concern, especially with real rates having such a move higher. The NAS100 didn’t like that one bit and again it was a close that the bears would have taken notice of. Asia is not overly worried at this stage, and we see the ASX200 +0.5%.
I continue to bang the drum that December could be a volatile time in markets. With the rates markets pricing front-loaded hikes and the USD on a one-way move, all it takes is higher real rates and that would constitute a genuine tightening of financial conditions.
The debt ceiling could be a market issue, but the US CPI print (11 December) promises to be a genuine landmine for markets – the risks of a print north of 7% - the highest since 1982 – keeps me bullish USDs, but whether risk assets can absorb these cross current is another thing.