The House Republicans came up with a complete non-starter of a budget bill that Senate Democrats will never pass, much less the veto-holding Biden administration. The bill looks to raise the debt limit by $1.5 trillion and reduce some $130 billion in spending next year, including axing many of the Biden administration’s hallmark initiatives, like canceling student debt and some of the climate- related programs (although details can be hammered out later). House speaker McCarthy claimed that the bill could save the government $4.5 trillion over the next decade. The House Republicans would have to show extreme discipline to get it passed even in the house as it can’t pass if they lose more than four votes from 222 possible. Liquidity headwinds lie ahead and threaten risk sentiment headwinds and possibly USD upside. These come from the Fed continuing its QT while the US Treasury is set to drive a net liquidity drain from here. (Backgrounder: US treasury has been providing extensive liquidity as it drained hundreds of billions of USD from its account at the Fed. That account has now dwindled to about as low as it can go now, stopping that source of liquidity for now. And once the debt limit issue is cleared, the Treasury will set about rebuilding the account by hundreds of billions, driving even tighter liquidity.) But if the Biden administration and Congressional Republicans play a game of brinksmanship, it’s hard to imagine that process as a USD positive and will keep the Fed in a cautious stance. The situation could come to a head as soon as early June because of weaker than expected tax revenues, while otherwise late July has been considered the more likely pinch point at which time the US Treasury runs out of room with its special maneuvers. If sanity prevails and a handful of Republican House members cross the line, the issue can be avoided until possibly 2025.
Fed Chair Powell was surprisingly pointed in his remarks on the likelihood that the Fed funds rate would likely have to head higher than previously anticipated and by indicating a willingness to consider re-accelerating the pace of rate hikes if “the totality” of data warranted doing so. This gives a clear sense that the Fed doesn’t trust its own models of where things are headed and was unsettled by the January inflation data (particularly the PCE core) in particularly, as well as the strong jobs report and modern low record in the unemployment rate. With that in mind, it is clearly the data itself that is in the driver’s seat for cementing the ensuing jump and break higher in the US dollar and market reset to a higher Fed terminal rate yesterday. The 2-year US treasury yield benchmark rose to a new high since 2007 above 5.00% as the terminal Fed rate by September of this year was lifted as high as 5.65%. As noted in this morning’s Saxo Market Call podcast, the market still expects about 150 basis points of cutting by early 2025 from wherever the Fed peaks its tightening cycle, suggesting that the market remains convinced that either disinflation will quickly develop by late this year and/or that a recession at some point will have the Fed easing, if from a higher level. USDCAD is quite typical of USD pairs here as the USD makes new highs for the year against CAD, but the pair did post higher levels back at the height of the USD bull run last fall. CAD has been relatively firm in the crosses, likely on the beta that the loonie often shows to the USD in the crosses. But the Bank of the Canada has been an early mover among G10 currencies on the dovish side in trying to pre-announce a pause in their rate hike cycle on some softer Canadian data. Despite the latest shift higher in Fed expectations, the market is expecting the BoC to make good on the guidance from the prior meeting and has priced essentially no tightening from the BoC for the next two meetings, with only slightly more than 25 bps of tightening price through late this year. We could see the market punishing CAD further here if the BoC maintains this dovish guidance, especially if risk sentiment and crude oil prices remain under anything like the pressure we saw them under yesterday. Governor Macklem would do well to roll out some more emphatically two-way guidance. As with the other small, open economies, the BoC chief is likely preoccupied with the rolling trainwreck for tight household budgets incoming as Canadian mortgage reset higher. A strong majority still take out “fixed” rate mortgages, but these roll every five years. The five-year ago 5-year rate for Canadian government bonds was around 2.00% vs. over 3.50% currently, a significant difference that only worsens from here, with the 2019 5-year yield dropping to 1.50%, and then 1.00% in 2020 and even below 0.50% for much of 2021. And there is still a large minority of mortgage holders that are on floating rate mortgages and already feeling an impact. In any case, watching the 1.3900+ highs of the cycle in USDCAD through next Tuesday’s CPI release.
AUDUSD has been pounded back below 0.6700 even after RBA Governor Lowe was out overnight trying to position this week’s hold on further interest rate increases as not necessarily a lead-in to eventually cutting rates: “The decision to hold rates steady this month does not imply that interest rate increases are over,” and “Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe.” The opposite impressions drawn from the RBA and RBNZ meeting this week have triggered a sharp slide in AUDNZD, as the RBNZ waxed hawkish and surprised with a 50-basis point hike overnight, with no indication that it is guiding for a pause. The larger hike from the RBNZ immediately transmits into the yield spread, which for the 2-year swaps has now dipped to within 10 basis points of the lowest weekly close since the 1990’s at -162 basis points. RBA expectations for the coming few meetings are flat, while about a single further 25 basis point hike is priced in for the RBNZ despite the overnight 50 basis point move (25 basis points only was expected – also by me, and I was even leaning for a guidance shift). In the coming one or possibly two quarters, suspect one of the central banks will be seen as having committed a policy mistake, whether it is Australia in having moved too cautiously as it seemed to want to avoid too much transmission of policy into slowing the economy and household budgets, or the RBNZ having taken things too quickly and causing a more disruptive unwind in the housing market and perhaps the wider economy. The March CoreLogic NZ home price data showed home prices declining at a record -10.5% YoY clip, just “eclipsing” the -9.7% low of the 2008-09 cycle. But note that we are coming off peak home price rises of higher than 25% YoY in late 2021 and into early 2022. AUDNZD is working down into its minimum valuation region assuming the policy divergence can't stretch much wider from here.

The February preliminary EU inflation data added to the full sweep of hotter than expected inflation prints across Europe after Germany’s hot number yesterday. The core EU CPI number was +5.6% YoY, a full 0.3% above the 5.3% expected and the 5.3% high of the cycle in January. European short rates were already ramping so aggressively into today that even this data point failed to make an additional impact as German 2-year yields, for example, have ramped from below 2.9% at the start of this week to a high just above 3.25% today before support finally came in for bonds.

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The sterling had rallied hard recently after a stronger than expected Service PMI and then on the post-Brexit settlement deal over Northern Ireland. EURGBP teased a move back into the lower zone this week, only to have the rug torn out from under sterling by the cavalcade of hot EU inflation prints, but more importantly in yesterday’s case on Bank of England Governor Bailey’s rhetoric. Mr. Bailey is apparently not yet for returning to a more cautious stance after the last meeting’s confident forecast for inflation to return to below 2% by the end of next year. Bailey said “I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more....nothing is decided.” EURGBP is choppy here and failed to sustain the move above 0.8900 last time and European data is set to get quieter until the March 16 ECB meeting. The next UK CPI print is not up until March 22. The pair has to prove itself beyond the range extremes of 0.8725 to 0.8975 of this year for next steps.

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The USD/CAD weekly forecast is bearish as the Canadian dollar soars amid upbeat economic data and the greenback’s broad weakness. On Friday, the Canadian dollar dipped slightly against the US dollar. However, it remained close to its highest level in over five weeks, as domestic data revealed that the economy was expanding faster than anticipated. The Canadian economy grew by 0.5% in January, exceeding the 0.3% rise that economists had predicted. The US published mixed figures, with GDP, jobless claims, and inflation lower than expected, while consumer confidence and pending home sales rose. Although inflation decreased in February, it stayed high enough for the Federal Reserve to raise interest rates one more time this year, possibly. Consumer spending in the US rose slightly in February. Additional data showed consumer confidence in the United States dropped in February for the first time in four months. This was due to concerns about an impending recession, even though the impact of the recent banking crisis was comparatively mild.The likelihood of a 25bps Fed hike in May fell to about 50%. The daily chart shows USD/CAD trading well below the 2o-SMA with the RSI below 50. These indicators show the current move is bearish. Bears took control of bulls when the price broke below the 22-SMA and the 1.3650 support level. The move lower was explosive and impulsive, showing strong momentum. The price is approaching strong support at the 1.3500 key psychological level. This might result in a short pause or pullback before the price breaks below. However, given the strength of the bearish move, we might see the price break right through the support in the coming week. A break below 1.3500 would allow bears to set their sights on the next support at 1.3300.

EUR/USD Weekly Analysis: US Inflation Rises by Most in 6 Months. 

The EUR/USD weekly forecast is bearish as the Fed will likely raise and keep rates high for longer due to the US economy’s resilience. According to Eurostat’s Thursday report, Eurozone inflation was only slightly higher than initially anticipated in January. This confirms that price growth has long since passed its peak. 

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Data from the Commerce Department revealed that consumer spending, which makes up two-thirds of US economic activity, increased by 1.8% in January, beating analyst expectations and representing the highest growth in nearly two years.

The Fed’s favored inflation indicator, the personal consumption expenditures (PCE) price index, also increased by 0.6% last month, the most in the previous six months. These reports followed the hawkish FOMC minutes and the jobless claims report that surprisingly fell. They all point to a resilient economy despite rising rates.
The daily chart shows the EUR/USD declining after breaking below the 20-SMA and the RSI below 50. This comes after the price found resistance at the 1.1004 key level. Bears took over and pushed the price lower to the 1.0526 support level.
At this point, bears might pause before the price breaks below the support and the downtrend continues. However, the pause might allow bulls to come in and retest the 20-SMA as resistance. 

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Markets are betting, however, that the RBA’s 10-month tightening campaign is largely done due to the stresses in the global banking industry. This contributed to the pair’s bearish close to the week. The Federal Reserve raised rates on Wednesday for the ninth time in a row, this time by a quarter of a percentage point. As they gathered this week to debate policy, Federal Reserve officials said on Friday that there was little evidence that financial stress was worsening. This enabled them to keep trying to lower inflation by raising interest rates. The daily chart shows AUD/USD in a downtrend, with the price trading below the 22-SMA and the RSI below 50. The bearish move found support at the 0.6606 level, where bulls returned for a retracement. The price pulled back to retest the 22-SMA and found strong resistance. This is yet another sign that the bearish trend is strong. The price is bouncing lower from the SMA and will likely take out the 0.6606 support in the coming week. A break below this support would see the price fall to the next support at 0.6402. However, if the price breaks above the 22-SMA in the coming week, we could see a shift in sentiment that would likely lead to a break above the 0.6775 resistance.

The USD/CAD weekly forecast is bullish as investors bet on a more aggressive Fed amid positive data from the US.
The pair had a bullish week as American economic data sparked bets on how aggressively the Federal Reserve will increase interest rates.
A US report released on Friday showed an annual increase in export prices of 0.8% as opposed to expectations for a 0.2% decline. According to figures released on Thursday, weekly unemployment benefit claims were lower than expected, while producer prices rose monthly in January. Retail sales figures released on Wednesday showed a considerable increase, while CPI data from Tuesday indicated persistently rising inflation.

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There were also hawkish comments from two Fed officials on Thursday and forecasts for three additional Fed rate increases this year from Goldman Sachs and Bank of America.
The daily chart shows USD/CAD in a bullish move as the price trades above the 22-SMA and the RSI above 50. This follows a bounce from 1.3300, a strong support level. The previous move was bearish as the price respected the 22-SMA as resistance, and the RSI stayed below 50. recent USD/CAD price movements have been quite choppy. The price has stayed close to the SMA and the RSI close to the 50-mark. Neither bears nor bulls have committed to pushing the price to extreme levels of overbought or oversold. This is a sign that the price is consolidating on a larger timeframe. Currently, bulls are in control but face the 1.3450-1.3500 resistance zone. A break above this level will likely increase the price to 1.3701. Otherwise, it will retest the 1.3300 support. 

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JPY blasts out of gates on yield drop, but the currency remains choppy as market struggles to draw conclusions. The market initially tried to put a brave face on the weekend’s SNB-arranged takeover of Credit Suisse by UBS, with sentiment strong and the USD and JPY weak. But this quickly yielded to risk off and sharp JPY rally and another big drop in global bond yields. Unease remains and the specifically unsettling story was the wipeout of Credit Suisse’s Tier1 debt, which saw further negative focus on banks overnight and into early European trading today on the unprecedented move. But by the lunch hour today, yields in Europe are rebounding and the JPY strength had eased somewhat. More on the relative euro- and JPY moves in the chart below EURJPY was marked sharply lower as the crumpling yields supported the JPY overnight once again, while the SNB-arranged wipeout of Credit Suisse’s Tier1 debt in its sale to UBS unsettled the huge market for similar bonds from European banks. As yields recovered today from new lows and EU regulators are out trying to reassure that Tier1 debt ranks above common equity in the capital structure, the euro is recovering today and the JPY strength if fading. As well, the JPY has traditionally proven more sensitive to longer yields, which have retreated far less as yield curves steepen. The interpretation of the latter could be that central bank may have to ease soon because of the damage from this tightening cycle to financial conditions, but that will also mean that they are more likely to fail in their fight against inflation – this is far less JPY-positive than would be the case had we seen a stronger move lower in long yields, which would suggest a higher risk of a more traditional deflationary economic slowdown. From here, we’ll be watching global longer bond yields as the key coincident indicator and the 200-day moving average near 141.80 to the upside an the range lows near 137.50 to the downside if we are set for a more significant capitulation.

USD/CAD was volatile last week following the FOMC meeting, jobs, and PMI data from the US. There was also a GDP report from Canada.
Data released on Tuesday suggested that Canada’s economy likely slowed in December after expanding modestly in November, in line with forecasts.

The US central bank decreased its Wednesday rate hike to a quarter percentage point after a year of bigger rate increases. It disregarded the extensive list of variables driving up prices, such as the pandemic and the Ukraine war.  The number of new jobs in the US increased significantly in January, jumping by 517,000, well above the expected 185,000 increase in nonfarm payrolls. The unemployment rate of 3.4% was a more than 53-and-a-half-year low. 

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The daily chart shows USD/CAD trading at the 22-SMA, a pivotal level. The RSI trades at the 50-level, showing bulls and bears have almost equal momentum. With a strong bullish candle, the price has pushed off the 1.3303 support level. It has, however, paused at the 20-SMA resistance. A break above the SMA in the coming week could mean a bullish takeover.   This comes after a bearish move characterized by many pullbacks, with the price sticking close to the 20-SMA. This shows that the bears were not fully committed to the move. If bulls take control, they will have to face the 1.3501 resistance. A break above this level would then lead to 1.3701 resistance. On the other hand, if bulls cannot trade above the 20-SMA, the bearish trend will likely continue.

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