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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Chart Highlights: AUDUSD decision time. EURJPY hitting resistance
John J. Hardy
Chief Macro Strategist
Summary: AUDUSD has reached an important resistance area ahead of the FOMC meeting next week and the steep EURJPY rally of late has stalled out as the bond sell-off has also stalled. The fate of both pairs could be correlated with the direction in bond yields. Elsewhere, EURNOK recently pulled to all time highs and mulls whether there is more to come to the upside.
A few highlighted charts where important technical events are unfolding. Do note that we are composing this piece during an ECB press conference, President Draghi’s last, though we don’t expect major surprises to emerge as Draghi may instead choose to use the presser as a figurative handing of the baton to the EU and the need for fiscal policy to counter weak economic growth as the ECB toolbox is effectively exhausted.
EURNOK – more to come?
This is a follow up from last week’s chart highlights as EURNOK quickly jumped to new highs recently above 10.06 and only found resistance just below 10.25. Support for the move extending would come from a sell-off in oil (quite the opposite over the last couple of sessions), a weakening of the global growth outlook and/or weakening risk appetite. Seasonally, NOK is often weak into year end. Technically, a break rejection only arrives with a close back down through 10.06, and arguable below 10.00. The first major Fibo retracement level comes in around 10.075. Today’s Norges Bank meeting produced little volatility as the short statement brought no new forward guidance.
AUDUSD – pivot zone resistance dead ahead
The AUDUSD rally looks correlated with the recent rise in bond yields and to a degree with the general comeback in risk appetite, though to really set the upside loose, we’ll need to see further catalysts specifically supportive of AUD, like a strong US-China trade deal outcome, rise in key commodity prices, and sense that Australia will avoid a credit crunch. Technically, the pair has pulled to an important flat-line resistance level just ahead of 0.6900 (the previous pivot high), with other resistance higher still in the important zone into the upper reaches of the well-established descending channel that goes back into 2018 and the 200-day moving average ahead of 0.7000. AUDUSD really needs to swiftly take out these kinds of levels to suggest a more profound bottom in place for the chart. On the downside, If the rally continues to stumble here tactically, downside interest could pick up further on weak risk sentiment and a move below the 0.6750 area 61.8% Fibo retracement of the recent rally wave.
EURJPY
As with AUDUSD, the recent rally in EURJPY and many JPY crosses looks very much associated with the bear steepening move in bond yields – as the move higher has stalled out just as long bond yields in Europe have also stopped rising this week. An Elliott Wave analyst might bet tempted to see this recent wave as a completed C-wave in a three wave consolidation within an overall, very extensive bear market if the price action dips back below 120.00. Elsewhere, the EURJPY has tested the descending trend-line, but the major 200-day moving average remains untested. Important tests in coming days from the bond market and over next week’s FOMC and BoJ meetings.
USDRUB
USDRUB has traded within a broad 62.50-67.50 range since stabilizing from late 2018 weakness, and stable financial conditions globally may prevent the pair from showing much technical behavior in the near term. The Russian Central Bank likely has more interest in supporting the Russian economy than seeing a stronger ruble, so it may take the opportunity to cut rates as aggressively as it can get away with provided the USDRUB rate remains below 65.00, which could mean better risk/reward for long positions on further dips within the range as carry is eroded by the Russian central bank. The bank will likely announce a fourth 25-bps rate cut since this spring at its meeting tomorrow, taking the policy rate to 6.75%.
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