It comes back to the Fed
The biggest move in the FX market today is the Australian dollar, which is up 69 pips to 0.7776. Normally that’s a good move but in comparison to the 300 pip nosedive from Thursday’s high above 0.8000, it’s a blip.
Meanwhile, the euro, yen, pound and US dollar are virtually flat against one another..
Why aren’t we seeing the kind of emotion that’s driving equities much higher?
A big reason is the Fed. If you want to chase the risk trade higher right now via FX, there’s a risk the Fed wrongfoots you.
At the moment, we can see the RBA and ECB leaning against higher yields but we haven’t seen that from the Fed yet. If the Fed endorses higher yields (loudly or by saying nothing). The dollar will rally. If they lean against it, then expect a dollar-weakening risk trade with commodities and commodity currencies jumping.
In that sense, the FX market is trading in step with bonds today. The front end is flat and there’s some moderate selling in 10s and more in 30s in a steepener. So far the market has taken that in stride but if the Fed doesn’t lean against it, we could be back to the Thurs/Fri highs (in yield) in a hurry.