Forex news for North American trading on September 22, 2021:
- Gold down $6 to $1768
- US 10-year yields down 0.2 bps to 1.304%
- WTI crude oil up $1.62 to $72.10
- S&P 500 up 42 points to 4396
- CAD leads, JPY lags
As a result, risk trades were strong throughout the day. I suspect that was restrained somewhat by Fed uncertainty in the run-up to the meeting.
In turn, Powell was surprisingly hawkish in essentially precommiting to a Nov taper announcement along with a mid-year timeline of when it would wrap up. Combine that with a hawkish shift in the dots and there was plenty of scope for USD strength and yet it never really materialized.
USD/JPY made some headway and EUR/USD is down 30 pips but stocks were strong and commodity currencies hung with the dollar. I tend to think that’s China/Evergrande trades coming in off the sidelines after the risk event.
Tellingly, Fed funds futures did move up to price in a +80% chance of a December 2022 hike so there’s a clear shift in pricing that wasn’t a tailwind for the dollar.
The bond market offers some hints that could be ominous though. There was a decent-sized flattening as long end yields fell 3.5 bps. We’ve seen this script before where bonds pricing taper and rate hike talk like a policy mistake, or like it means the Fed won’t really tolerate an inflation overshoot. I’ll be watching closely to see how that develops, though I’m not sure there’s a clear trade on it outside of fixed income.
As for the overall trade, keep in mind that real money likes to digest the early moves before going to work later in the week. We’ve seen so many instances this year where the first moves and first analysis in markets was wrong.