Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Nervous conditions continue to support JPY
John J. Hardy
Chief Macro Strategist
Summary: The US session on Friday didn’t manage a convincing enough rally in equity markets to brighten the global mood and we start the week in a risk averse funk that continues to support the Japanese yen. Focus this week remains on animal spirits and Italy headlines.
Although currency market moves are very muted here relative to the volatility in equity markets, the Japanese yen remains the most volatile currency, with USDJPY posting new lows this morning and other JPY crosses suffering breaks of local support. Japanese equities have suffered a vicious reversal over the last few weeks and international reduction of exposure to the Japanese market and the related lifting of currency hedges could be a driver on top of the traditional focus on the behaviour of domestic investors. Oddly, despite the dark mood, emerging currencies have fared well, perhaps as the US dollar has gone sideways, as have US treasury yields. Emerging market yield spreads have widened very little during this rather violent correction in major equity markets.
Hopes for Brexit breakthrough over the weekend were dashed as talks broke down on Sunday, meaning we are hardly likely to see a breakthrough at the EU summit this week. The Brexit deadline is fast approaching and the mid-November summit suddenly looms a month from now. EURGBP has erased most of last week’s gains and the pair needs to stay below the 0.8825-50 pivot area to avoid a fresh squeeze.
Italy has delivered its budget specifics to the EU, which will have a chance to look through the budget proposal in detail and respond this week, meaning we have another week of headline risk.
Complicating the EU existential backdrop were the Bavarian state elections over the weekend, which saw the CDU sister party CSU losing close to a quarter of its support and netting the worst result in some 70 years, while the SPD lost more than half of its voters as the rank and file express disgust with the party’s participation in the grand coalition. It is clear that the centre is not holding anywhere in European politics. The lost votes for the two parties went to the Greens and even more so to the AfD, which was on the ballot for the first time. Some speculate that if Merkel’s CDU polls poorly and demonstrates that the current government has lost majority support, she may have to step down at the CDU party conference in December and that new elections could arrive well before 2021.
Hopes for Brexit breakthrough over the weekend were dashed as talks broke down on Sunday, meaning we are hardly likely to see a breakthrough at the EU summit this week. The Brexit deadline is fast approaching and the mid-November summit suddenly looms a month from now. EURGBP has erased most of last week’s gains and the pair needs to stay below the 0.8825-50 pivot area to avoid a fresh squeeze.
Italy has delivered its budget specifics to the EU, which will have a chance to look through the budget proposal in detail and respond this week, meaning we have another week of headline risk.
Complicating the EU existential backdrop were the Bavarian state elections over the weekend, which saw the CDU sister party CSU losing close to a quarter of its support and netting the worst result in some 70 years, while the SPD lost more than half of its voters as the rank and file express disgust with the party’s participation in the grand coalition. It is clear that the centre is not holding anywhere in European politics. The lost votes for the two parties went to the Greens and even more so to the AfD, which was on the ballot for the first time. Some speculate that if Merkel’s CDU polls poorly and demonstrates that the current government has lost majority support, she may have to step down at the CDU party conference in December and that new elections could arrive well before 2021.
Chart: USDJPY
The strong JPY is one of the few consistent themes here and the pivotal 113.00 area of the prior highs from the summer gave way last week – but the bigger sign of a breakdown here doesn’t arrive until we see the pair swinging down through the 61.8% Fibo near 111.60 and perhaps the Ichimoku cloud area around 111.00.
The strong JPY is one of the few consistent themes here and the pivotal 113.00 area of the prior highs from the summer gave way last week – but the bigger sign of a breakdown here doesn’t arrive until we see the pair swinging down through the 61.8% Fibo near 111.60 and perhaps the Ichimoku cloud area around 111.00.
The G-10 rundown
USD – no one seems to know what to do with the US dollar, perhaps as market conditions are pulling the currency in two directions simultaneously. Risk off is traditionally USD supportive as markets prefer the liquidity of the US dollar, but the fear is perhaps that US treasuries are inferior safe havens this time around as it was the rise in US yields that has driven at least some of the markets’ instability.
EUR – the euro will be held back by Italian budget concerns until that 2019 budget has passed muster. A Brexit fiasco could also weigh in the euro crosses. Technically, EURUSD is in limbo between 1.1800 and 1.1500.
JPY – as noted above, the JPY thrives in these conditions and an extension of global deleveraging would likely drive further strength. Still, the trading ranges look muted relative to the big expansion in volatility in equity markets last week.
GBP – another headline-driven sell-off after the market got ahead of itself in pricing in progress in Brexit negotiations. Traders are warned that “it ain’t over ‘til it’s over”.
CHF – the EURCHF nipped in the bud, likely on Brexit disappointment via a GBPCHF correction as much as anything else. Disappointing for CHF bears if EURCHF can’t maintain above 1.1400-ish.
AUD – AUDUSD channel has been mesmerising in its regularity and any squeeze here needs to fully challenge the top of the channel and close above – currently around 0.7200 – to begin to signal that the downtrend is under siege.
CAD – the ugly correction in oil prices and risk off keeping the pair clear of 1.3000, with the rate spread suggesting no reason to look for CAD outperformance. The recent rally is bullish is the pair maintains altitude here.
NZD – CPI data up late today – a rare glimpse of fundamental NZ data. AUDNZD is mired in limbo and we await a pulse before expressing a view, though we are looking ways to short the kiwi.
SEK – last week’s strong CPI print inspired a rally and now we look for follow through – which would be a more straightforward affair were it not for the backdrop of nervous asset markets and EU existential risks.
NOK – EURNOK getting into interesting territory as 9.40 approaches as the pair hasn’t closed below this level in a year. With oil under pressure and less interest in coming Norges Bank activism relative to the Riksbank after last week’s Swedish CPI release, would expect more NOK to underperform SEK.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – US Oct. Empire Manufacturing
1230 – US Sep. Retail Sales
1430 – Canada Bank of Canada Survey
1600 – Eurozone ECB’s Nouy to Speak
2145 – New Zealand Q3 CPI
USD – no one seems to know what to do with the US dollar, perhaps as market conditions are pulling the currency in two directions simultaneously. Risk off is traditionally USD supportive as markets prefer the liquidity of the US dollar, but the fear is perhaps that US treasuries are inferior safe havens this time around as it was the rise in US yields that has driven at least some of the markets’ instability.
EUR – the euro will be held back by Italian budget concerns until that 2019 budget has passed muster. A Brexit fiasco could also weigh in the euro crosses. Technically, EURUSD is in limbo between 1.1800 and 1.1500.
JPY – as noted above, the JPY thrives in these conditions and an extension of global deleveraging would likely drive further strength. Still, the trading ranges look muted relative to the big expansion in volatility in equity markets last week.
GBP – another headline-driven sell-off after the market got ahead of itself in pricing in progress in Brexit negotiations. Traders are warned that “it ain’t over ‘til it’s over”.
CHF – the EURCHF nipped in the bud, likely on Brexit disappointment via a GBPCHF correction as much as anything else. Disappointing for CHF bears if EURCHF can’t maintain above 1.1400-ish.
AUD – AUDUSD channel has been mesmerising in its regularity and any squeeze here needs to fully challenge the top of the channel and close above – currently around 0.7200 – to begin to signal that the downtrend is under siege.
CAD – the ugly correction in oil prices and risk off keeping the pair clear of 1.3000, with the rate spread suggesting no reason to look for CAD outperformance. The recent rally is bullish is the pair maintains altitude here.
NZD – CPI data up late today – a rare glimpse of fundamental NZ data. AUDNZD is mired in limbo and we await a pulse before expressing a view, though we are looking ways to short the kiwi.
SEK – last week’s strong CPI print inspired a rally and now we look for follow through – which would be a more straightforward affair were it not for the backdrop of nervous asset markets and EU existential risks.
NOK – EURNOK getting into interesting territory as 9.40 approaches as the pair hasn’t closed below this level in a year. With oil under pressure and less interest in coming Norges Bank activism relative to the Riksbank after last week’s Swedish CPI release, would expect more NOK to underperform SEK.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – US Oct. Empire Manufacturing
1230 – US Sep. Retail Sales
1430 – Canada Bank of Canada Survey
1600 – Eurozone ECB’s Nouy to Speak
2145 – New Zealand Q3 CPI
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