Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: NZD dumps on dovish RBNZ. NOK pumps on big stimulus
John J. Hardy
Chief Macro Strategist
Summary: The kiwi dropped sharply overnight as the RBNZ surprised with expanding QE and talk of preparation for negative rates. NOK headed in the opposite direction on a huge government stimulus announcement. Sterling is struggling as a huge March trade deficit reminds of its weak external position in this crisis. US Fed Chair Powell to speak later.
First off, want to highlight a particularly rich discussion on this morning’s Saxo Market Call podcastj, in which we talk liquidity versus solvency, the beginning of the Fed’s corporate bond ETF purchases, the many FX stories on the menu today and much more. Also, late yesterday, I penned a short update on the prospects for potential NOK strength on the announcement of a massive stimulus programme from the Norwegian government that will see the . NOK has responded, but interesting to see if the currency can continue higher if oil prices and risk sentiment suffer a major setback at some point.
The mood changed late yesterday with a rather chunky sell-off in the US equity market, especially the big cap names that have so dominated recent market action. The VIX posted its largest advance since mid-March, and in FX, the yen is finding itself on top of the pile this morning with a strong US 10-year auction yesterday offering further support there.
The kiwi suffered a very steep sell-off overnight as the aggressive RBNZ moved ahead with a surprise doubling of its intended QE purchase amounts and by bringing the prospects of negative rates into the discussion. From the summary of the meeting overnight: “The Committee noted that a negative Official Cash Rate (OCR) will become an option in future, although at present financial institutions are not yet operationally ready…. It was noted that discussions with financial institutions about preparing for a negative OCR are ongoing.”
Sterling is trading on the weak side again, and as we look at below, is having a look at key support on the GBPUSD chart. The March trade balance data this morning reminds us that the UK is very poorly place in this crisis with an aggressive response needed to a severe outbreak, but on a macro level, constrained by a huge current account deficit, where the improvement that was hoped for in the UK economy and inflows of capital have been cut off by this crisis.
Today we watch for any follow through in the negative mood established last night in equities, and not that the strong safe haven bid in US treasuries on the strong auction and the rally in the yen point to a defensive tone today. US Fed Chair Powell speech could be critical – watching for any suggestion that the Fed feels it is maxing out its potential for now and/or a firm view on the viability or not of negative rate policy – not expecting Powell to speak in favour, and yesterday, uber-dove Kashkari of the Minneapolis Fed even spoke against NIRP, preferring other tools.
Chart: GBPUSD
The action in GBPUSD has been largely flat since the pair came flying off the lows as the Fed flooded the system with all manner of measures back in March. But today we see the pair pushing on the local pivot around 1.2250, a break of which could open up for a run to the psychologically important 1.2000 level or even lower.
The G-10 rundown
USD – the dollar firming again after stumbling yesterday for no obvious reason against the euro – but still need a bigger impulse from the greenback either way as it has merely coiled and coiled in a range. Powell a possible catalyst in addition to risk sentiment today.
EUR – the euro looking lower again after yesterday’s oddball rally – some of that EURGBP driven? Simply don’t understand the recent back-up in EURJPY and curious if the bears there get things back on track if risk sentiment stumbles further.
JPY – a strong support for the yen from both equity softness and strength in US treasuries yesterday with another test on the latter in today’s T-bond auction – would expect strength there. Yen upside in the crosses preferred if safe haven seeking in evidence as both USD and JPY likely to strengthen with that backdrop.
GBP – sterling on the defensive and don’t see major catalysts for upside potential until or unless we see some hard evidence that the post-Covid19 recovery is on track and is exceeding expectations. That looks a long way from here – for now focusing on the technical catalyst noted above on the GBPUSD chart.
CHF – no pulse in EURCHF as 1.0500 is the apparent floor for the SNB at the moment.
AUD – employment data dead ahead, with interpretation of the numbers made difficult by the government’s “JobKeeper” scheme, which keeps millions in Australia nominally on employers’ payrolls even as they are not working and the government is paying them a salary. Still interesting to see the spin around the official numbers and how the market reacts.
CAD – CAD has been escaping much notice, but longer term crude oil prices still remain in the dumps, not pricing a strong recovery and tomorrow sees a major Bank of Canada financial review – room for dovish surprises there – but want to see a technical move in USDCAD higher to provide a trading hook.
NZD – this latest RBNZ meeting seals the deal for NZD bears as the central bank clearly wants to go to negative rates and keeps us looking lower for NZD versus AUD and the USD and even JPY for variety.
SEK the Swedish krona headed nowhere in a hurry after the EURSEK has done the heavy lifting in providing what appears a major market top until proven otherwise. That still leaves plenty of room for a throwback SEK sell-off of some magnitude if concerns about the shape of the recovery develop in the near term.
NOK – the most interesting test from here for NOK is whether the weight of this stimulus announcement is of sufficient magnitude to offset headwinds from any new sell-off in risk appetite and/or crude oil. Regardless, the big stimulus announced yesterday does help provide a backstop for the currency.
Upcoming Economic Calendar Highlights (all times GMT)
- 1100 – ECB’s Lane to Speak
- 1200 – Hungary Central Bank Meeting Minutes
- 1230 – US Apr. PPI
- 1300 – US Fed Chair Jay Powell to Speak
- 1700 – US Treasury 30-year T-Bond auction
- 2010 – New Zealand RBNZ Governor Orr before parliament committee
- 2301 – UK Apr. RICS House Price Balance
- 0130 – Australia Apr. Employment Change / Unemployment Rate
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