Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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RBNZ fails to deliver, Riksbank boosts SEK
John J. Hardy
Chief Macro Strategist
Summary: The RBNZ failed to deliver the dovish shift the market was looking for, but not looking for this to encourage a large follow on move. Today’s Riksbank sets the tone for SEK at pivotal chart levels.
The risk appetite resurgence is the overarching theme here, with the latest headlines boosting hopes that a US-China trade deal is imminent and even if not, US President Trump has promised to extend the March 1 deadline if a deal is close. Additionally, Congress and Trump may even be close to a deal for border funding that would avoid a fresh government shutdown, which becomes too politically toxic for both sides if allowed to extend.
At this point, the market’s expectation for this trade deal – if that is what we are seeing – have stretched beyond what the negotiations can deliver. (We suspect a bear squeeze, benchmark chasing and CTA flows in a relatively thin market are very significant factors for the risk appetite resurgence, as the macro news is not improving.) By the time we get to an eventual deal announcement, it may soon prove a sell-the-fact setup. For now, the remarkable thing from our point of view is how well the USD has held in there over the later stages of this rally and keeps our view of the greenback positive for now until proven otherwise, particularly against the euro.
The Reserve Bank of New Zealand surprised the market’s heavy lean for a dovish statement with a far less dovish shift than expected, as the statement retained a tightening bias, even if the expectation for that next rate rise was pushed out to after 2020.
The RBNZ admitted it might have to cut rates, but retaining the tightening bias was enough to disappoint the NZD bears, who quickly flushed their shorts as short NZ rates backed up higher. We suspect this meeting is a mere delay to the eventual broad downside risk for the NZD. The first order of business will be watching whether AUDNZD can remain below 1.0500 for a sense of its relative strength.
The Riksbank is out with its latest decision and policy statement just as I am writing this report. It slightly marked down 2019 growth expectations to 1.3% from 1.9% and interestingly, has dropped its mandate for FX intervention (hardly necessary when the market has been aggressively devaluing its currency already).
On the policy outlook, the RIksbank maintains the forecast for gradual policy tightening that looks like rank fantasy if the eurozone is tilting into recession later this year, where Sweden can only follow, with its economic downside compounded by a massive housing bubble. Hard to gauge what to do here – the decision and stance is hawkish relative to a very weak currency, but we don’t like the setup for the Swedish economy. Around 10.34 on EURSEK the stress-test level for a bigger turnaround in the SEK’s fortunes. Governor Ingves press conference up later at 10:00 GMT.
At this point, the market’s expectation for this trade deal – if that is what we are seeing – have stretched beyond what the negotiations can deliver. (We suspect a bear squeeze, benchmark chasing and CTA flows in a relatively thin market are very significant factors for the risk appetite resurgence, as the macro news is not improving.) By the time we get to an eventual deal announcement, it may soon prove a sell-the-fact setup. For now, the remarkable thing from our point of view is how well the USD has held in there over the later stages of this rally and keeps our view of the greenback positive for now until proven otherwise, particularly against the euro.
The Reserve Bank of New Zealand surprised the market’s heavy lean for a dovish statement with a far less dovish shift than expected, as the statement retained a tightening bias, even if the expectation for that next rate rise was pushed out to after 2020.
The RBNZ admitted it might have to cut rates, but retaining the tightening bias was enough to disappoint the NZD bears, who quickly flushed their shorts as short NZ rates backed up higher. We suspect this meeting is a mere delay to the eventual broad downside risk for the NZD. The first order of business will be watching whether AUDNZD can remain below 1.0500 for a sense of its relative strength.
The Riksbank is out with its latest decision and policy statement just as I am writing this report. It slightly marked down 2019 growth expectations to 1.3% from 1.9% and interestingly, has dropped its mandate for FX intervention (hardly necessary when the market has been aggressively devaluing its currency already).
On the policy outlook, the RIksbank maintains the forecast for gradual policy tightening that looks like rank fantasy if the eurozone is tilting into recession later this year, where Sweden can only follow, with its economic downside compounded by a massive housing bubble. Hard to gauge what to do here – the decision and stance is hawkish relative to a very weak currency, but we don’t like the setup for the Swedish economy. Around 10.34 on EURSEK the stress-test level for a bigger turnaround in the SEK’s fortunes. Governor Ingves press conference up later at 10:00 GMT.
Chart: NZDUSD
NZDUSD backed up sharply overnight in sympathy with New Zealand rates at the front end of the curve doing likewise. It was no help to the NZD bears to have the backdrop of resurgent risk appetite and nearly parabolic gains in Chinese markets. Not expecting a significant follow through higher here for NZD.
NZDUSD backed up sharply overnight in sympathy with New Zealand rates at the front end of the curve doing likewise. It was no help to the NZD bears to have the backdrop of resurgent risk appetite and nearly parabolic gains in Chinese markets. Not expecting a significant follow through higher here for NZD.
The G10 rundown
USD – as we discuss above, the greenback has held in remarkably well despite the resurgent optimism in global markets and hopes for a US-China trade deal. Latest CPI data up today but the market is looking elewhere.
EUR – a weak backup in EURUSD despite the disappointment of the 1.1300 break not holding. We continue to focus lower on the weak EU growth outlook.
JPY – the yenis running away to the downside in broad terms against other currencies on the ongoing meltup in risk appetite – would suspect that when this ends, the JPY is the highest beta trade on a shift back to more cautious sentiment. Interesting resistance approaching in USDJPY above 111.00 in the form of the 200-day moving average.
GBP – UK CPI up today, but not the chief focus here, as we await Brexit developments that many sources suggest may come painfully close to the March 29 deadline as Theresa May could use the time factor to achieve maximum leverage for a parliamentary vote on whatever she can agree with EU counterparts.
CHF – the franc is responding to the resurgence in risk appetite and weakening sharply yesterday – suddenly back near resistance and the 200-day moving average in EURCHF. USDCHF is also eyeing the last shreds of resistance into the 1.0100+ high of the cycle, the highest level since early 2017.
AUD – the Aussie is backing up a little in sympathy with the kiwi resurgence overnight, but we still prefer to look lower If the price action remains south of 0.7200. Next week’s Reserve Bank of Australia minutes could prove interesting if we are looking for a solid break below 0.7000.
CAD – USDCAD is retracing, but has a further work to do to reject the latest bullish reversal. Still, the resurgence in risk appetite and oil prices are making life uncomfortable for USDCAD bulls. A January home price index up later today out of Canada.
NZD – this RBNZ meeting was one-off supportive and Governor Orr already has a chance tonight to spin the central bank’s decision in an appearance before a parliamentary committee. Our benchmark for the NZD relative strength is AUDNZD, where the outlook is lower if the move overnight sticks – still some range to work with towards parity.
SEK – Riksbank just out now – an interesting exercising in clapping its hands over its eyes and ears and insisting on a cautious normalisation schedule on the ongoing strength of the Swedish economy (despite massive red lights) while dropping the mandate for FX intervention. This is clearly kneejerk SEK supportive, but doesn’t tell us what Riksbank policy looks like if the eurozone tilts into recession and Sweden likewise, with a housing bubble already in full unwind.
NOK – EURNOK looks to be a sell again given the risk backdrop and resurgent oil prices as long as we remain below the spike highs from Monday.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Jan. CPI
1000 – Sweden Riksbank’s Ingves Presser
1330 – Canada Jan. Home Price Index
1330 – US Jan. CPI
1530 – US Weekly Crude Oil / Product Inventories
1910 – New Zealand RBNZ’s Orr before parliament
2000 – New Zealand Jan. House Sales
2350 – Japan Q4 GDP
0001 – UK Jan. RICS House Price Balance
USD – as we discuss above, the greenback has held in remarkably well despite the resurgent optimism in global markets and hopes for a US-China trade deal. Latest CPI data up today but the market is looking elewhere.
EUR – a weak backup in EURUSD despite the disappointment of the 1.1300 break not holding. We continue to focus lower on the weak EU growth outlook.
JPY – the yenis running away to the downside in broad terms against other currencies on the ongoing meltup in risk appetite – would suspect that when this ends, the JPY is the highest beta trade on a shift back to more cautious sentiment. Interesting resistance approaching in USDJPY above 111.00 in the form of the 200-day moving average.
GBP – UK CPI up today, but not the chief focus here, as we await Brexit developments that many sources suggest may come painfully close to the March 29 deadline as Theresa May could use the time factor to achieve maximum leverage for a parliamentary vote on whatever she can agree with EU counterparts.
CHF – the franc is responding to the resurgence in risk appetite and weakening sharply yesterday – suddenly back near resistance and the 200-day moving average in EURCHF. USDCHF is also eyeing the last shreds of resistance into the 1.0100+ high of the cycle, the highest level since early 2017.
AUD – the Aussie is backing up a little in sympathy with the kiwi resurgence overnight, but we still prefer to look lower If the price action remains south of 0.7200. Next week’s Reserve Bank of Australia minutes could prove interesting if we are looking for a solid break below 0.7000.
CAD – USDCAD is retracing, but has a further work to do to reject the latest bullish reversal. Still, the resurgence in risk appetite and oil prices are making life uncomfortable for USDCAD bulls. A January home price index up later today out of Canada.
NZD – this RBNZ meeting was one-off supportive and Governor Orr already has a chance tonight to spin the central bank’s decision in an appearance before a parliamentary committee. Our benchmark for the NZD relative strength is AUDNZD, where the outlook is lower if the move overnight sticks – still some range to work with towards parity.
SEK – Riksbank just out now – an interesting exercising in clapping its hands over its eyes and ears and insisting on a cautious normalisation schedule on the ongoing strength of the Swedish economy (despite massive red lights) while dropping the mandate for FX intervention. This is clearly kneejerk SEK supportive, but doesn’t tell us what Riksbank policy looks like if the eurozone tilts into recession and Sweden likewise, with a housing bubble already in full unwind.
NOK – EURNOK looks to be a sell again given the risk backdrop and resurgent oil prices as long as we remain below the spike highs from Monday.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Jan. CPI
1000 – Sweden Riksbank’s Ingves Presser
1330 – Canada Jan. Home Price Index
1330 – US Jan. CPI
1530 – US Weekly Crude Oil / Product Inventories
1910 – New Zealand RBNZ’s Orr before parliament
2000 – New Zealand Jan. House Sales
2350 – Japan Q4 GDP
0001 – UK Jan. RICS House Price Balance
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