Foreign Currency

FX Daily: Fed cancels the free lunch | Article

FX markets continue in their slightly risk-averse mode, where some of the investors’ favourite high-yield currencies – such as the Mexican peso and the Hungarian forint – remain under some pressure. This is despite global equity markets doing reasonably well. In short, we continue to see a very mixed investment environment and one in which conviction views can be dangerous.

Looking ahead today, there are two US themes to focus on. The first is the Federal Reserve’s announcement last night that its Bank Term Funding Program (BTFP) would end as scheduled on 11 March. And effective immediately, banks will be charged the rate paid on Fed reserve balances (around 5.40%) rather than the prior one-year USD OIS +10 bp (around 4.88%) to borrow money from the facility. This cancels the free lunch of banks borrowing at the BTFP and parking it at the Fed. The question is how US regional bank equity prices react to this news today. We presume that the Fed has a good handle on this such that these regional banks do not come under stress again. But let’s see how this group trades today and whether it ushers in a new, potentially risk-off tone in US markets.

The second focus is the 4Q23 US GDP data. We are looking at an above-consensus 2.5% quarter-on-quarter annualised figure. Consensus is now 2.0%. In theory that should be dollar-positive, but not necessarily risk-negative because the price data is far more important to the Fed right now. On that topic, Friday sees the December core PCE deflator (expected at a subdued 02.% month-on-month), while 13 February remains a major day for calendars in the release of the January CPI figure and the 2023 annual CPI revisions.

Given also the event risk of the US quarterly refunding on Monday as well as the CPI release on 11 February, we doubt investors will want to commit much capital just yet. Instead, then, we think rangebound trading is the order of the day, with little follow-through should the dollar look particularly bid or offered. 102.75-103.75 looks the near-term DXY range.

Chris Turner

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