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US rates traders driving the capital markets

Chris Weston
Head of Research
Feb 7, 2023
It’s been an interesting session, with short-end rates driving the show across markets – interest rate traders are the boss of markets here, as they lift terminal fed funds pricing to 5.12% by July.

In turn, US 2yr Treasuries have gained a chunky 19bp to 4.48%, where we see yields breaking the series of lower highs (drawn from the Nov peak). US real rates have also gone for it, with 5yr rates +11bp and the USD has been a slave to this pricing, following empathically in its wake.

The market is doing a big re-think on Fed policy and USD shorts have no choice but to act.

A data-dependent Fed means the market is more alert and must think more dynamically about how certain data points affect the Fed’s thinking on policy. Last week's US payrolls, while many have debated the accuracy, have caused a reasonable re-think.

Fed chair Powell speaks in the session ahead (4 am AEDT) and while moderating wages are giving the Fed some pause for thought, the market is expecting a hawkish response and positioning itself accordingly. Client flow is somewhat more sceptical and after building a sizeable USD net long skew clients are net short on USDs - certainly seeing that positioning in EURUSD, with 60% of open positions held long – of course, that is an aggregation of scalper flow, swing and day traders and it’s not one universally held view – but it’s interesting that clients are countering this USD move.

I had been looking for sell-stop orders in EURUSD below Friday’s low and that has worked well – with price now eyeing a close below the Dec highs of 1.0736 – a factor which obviously increases the prospect of a deeper move into the 6 Jan pivot low of 1.0481. While there is some water to pass under a bridge the January US CPI looms large (due Wed at 00:30 AEDT) and it will be all anyone is talking about in the coming few days – At this point, the market is eyeing US core CPI at 5.5% (down from 5.7%), with headline CPI eyed at 6.2% (from 6.5%) – However, there are only a handful of estimates in the mix at this point – the Cleveland Fed core CPI nowcast model sits at 5.6%.

One to keep in mind as the market will throw the USD around hard on this, and the noise in the lead up will be deafening.

In my mind – and taking my bias from the market momentum – the USD rally has further legs here, although, as suggested yesterday, I am not expecting a full USD bull trending market and the upside should be capped. Price will guide though and it’s the only thing that matters.

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