Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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White knuckles ahead of tomorrow’s trade news
John J. Hardy
Chief Macro Strategist
Summary: Traders don’t know what to do with the risk of negative outcomes in US-China trade negotiations, as we are not seeing much activity outside of the kneejerk JPY safe-haven buying and marginal weakness in commodity currencies. That could all change quickly tomorrow.
We continue to see little volatility in FX despite the spike in volatility in equities on concerns that the US and China are headed towards an impasse or worse in whatever emerges from the Chinese trade delegation’s visit to Washington today and tomorrow. USDJPY is pushing on the last range support and AUDUSD is below 0.7000, but we have yet to see notable range expansion, and EM currencies are virtually dormant, even as equity markets in EM have seen rough sledding over the last couple of weeks.
Trump’s latest rhetoric at a political rally is vintage stuff: he bluntly states that “China broke the trade deal” but assures us that all is going to turn out well tomorrow: “It will work out. It always does.” We’ll see if his confidence is well placed… everything is set to calm quickly or explode wildly tomorrow.
Today, the Norges Bank will offer its latest guidance as it passes on any rate adjustment for now. The EURNOK chart looks pivotal here above 9.80, as we have discussed in recent days.
In EM, South Africa gets down to tallying its votes, and ZAR will key off the size of President Ramaphosa’s mandate to bring reforms.
The latest Chinese New Loan data overnight – for April – was lower than expected, but the last few months have been volatile after the incredible CNY 3.2 trillion figure for January.
Trading interest
Largely standing aside until we see what tomorrow brings. USDJPY calls (perhaps 1-week or 2-week with strikes of 110.50 or higher) perhaps provide best risk/reward if the tension suddenly thaws tomorrow.
Looking at 1-month EURCHF calls, strike 1.1450 – cost around 40 pips this morning with spot trading 1.1415
Chart: AUDUSD
The Aussie is clearly at risk of a major breakdown if the US-China trade relationship looks unsalvageable for a time after talks conclude in Washington tomorrow. The real kicker for downside risk only arrives if China lets its currency run lower – though at some point it would seem that the market would want to front-run this anticipated development in a backdrop of a trade standoff by selling Chinese currency proxies, from other Asian EM currencies to the AUD.
Trump’s latest rhetoric at a political rally is vintage stuff: he bluntly states that “China broke the trade deal” but assures us that all is going to turn out well tomorrow: “It will work out. It always does.” We’ll see if his confidence is well placed… everything is set to calm quickly or explode wildly tomorrow.
Today, the Norges Bank will offer its latest guidance as it passes on any rate adjustment for now. The EURNOK chart looks pivotal here above 9.80, as we have discussed in recent days.
In EM, South Africa gets down to tallying its votes, and ZAR will key off the size of President Ramaphosa’s mandate to bring reforms.
The latest Chinese New Loan data overnight – for April – was lower than expected, but the last few months have been volatile after the incredible CNY 3.2 trillion figure for January.
Trading interest
Largely standing aside until we see what tomorrow brings. USDJPY calls (perhaps 1-week or 2-week with strikes of 110.50 or higher) perhaps provide best risk/reward if the tension suddenly thaws tomorrow.
Looking at 1-month EURCHF calls, strike 1.1450 – cost around 40 pips this morning with spot trading 1.1415
Chart: AUDUSD
The Aussie is clearly at risk of a major breakdown if the US-China trade relationship looks unsalvageable for a time after talks conclude in Washington tomorrow. The real kicker for downside risk only arrives if China lets its currency run lower – though at some point it would seem that the market would want to front-run this anticipated development in a backdrop of a trade standoff by selling Chinese currency proxies, from other Asian EM currencies to the AUD.
The G10 rundown
USD – little safe haven flows on these latest trade talk worries, but would still expect USD to outperform smaller currencies if risk turns south after tomorrow.
EUR – positioning favours a resilient EUR through tomorrow in the crosses, but not necessarily within the G3 – EURJPY at new lows this morning.
JPY – the market’s current go-to for safe haven seeking – have to imagine that short-terrm potential is considerable if markets go haywire, but there is nothing to like about the currency in a durable sense as the Bank of Japan and finance ministry will be quick to respond to volatility.
GBP – sterling still on the defensive despite some signs of support for May’s position from her party, but waiting for Godot – I mean, for firm Brexit developments – has been futile.
CHF – we have noted that CHF not functioning as a safe haven currency, even as Italian spreads have blown back a bit wider again. CHF could be set for sharp weakening if risk appetite improves.
AUD – the G10 currency most at risk over the US-China trade talk outcomes.
CAD – USDCAD looks like it wants to head higher on risk sentiment deterioration, but tomorrow’s trade talks are the decider.
NZD – AUD perhaps seen as higher beta than NZD to China outlook, so the kiwi may get an undeserved partial free pass if general market volatility picks up.
SEK – New SEK lows since the global financial crisis versus EUR and versus the USD since 2002. A brighter outlook needed to throw the SEK a lifeline – and/or fiscal stimulus. Politicians will respond soon to this…
NOK – the action to key off Norges Bank – downside risks prevail regardless, however, on a risk-unfriendly outcome to the US-China trade talks. Big issues afoot in oil markets here as well.
Upcoming Economic Calendar Highlights (all times GMT)
0800 - Norway Deposit Rates
1230 - US Fed Chair Powell to speak
1230 - Canada Mar. Intl. Merchandise Trade
1230 - US Mar. Trade Balance
1230 - US Apr. PPI
1230 - US Weekly Initial Jobless Claims
1430 - US Weekly Natural Gas Storage
1715 - US Fed's Evans (Voter) to speak
0130 - Australia RBA Statement on Monetary Policy
Key US-China bilateral talks begin
USD – little safe haven flows on these latest trade talk worries, but would still expect USD to outperform smaller currencies if risk turns south after tomorrow.
EUR – positioning favours a resilient EUR through tomorrow in the crosses, but not necessarily within the G3 – EURJPY at new lows this morning.
JPY – the market’s current go-to for safe haven seeking – have to imagine that short-terrm potential is considerable if markets go haywire, but there is nothing to like about the currency in a durable sense as the Bank of Japan and finance ministry will be quick to respond to volatility.
GBP – sterling still on the defensive despite some signs of support for May’s position from her party, but waiting for Godot – I mean, for firm Brexit developments – has been futile.
CHF – we have noted that CHF not functioning as a safe haven currency, even as Italian spreads have blown back a bit wider again. CHF could be set for sharp weakening if risk appetite improves.
AUD – the G10 currency most at risk over the US-China trade talk outcomes.
CAD – USDCAD looks like it wants to head higher on risk sentiment deterioration, but tomorrow’s trade talks are the decider.
NZD – AUD perhaps seen as higher beta than NZD to China outlook, so the kiwi may get an undeserved partial free pass if general market volatility picks up.
SEK – New SEK lows since the global financial crisis versus EUR and versus the USD since 2002. A brighter outlook needed to throw the SEK a lifeline – and/or fiscal stimulus. Politicians will respond soon to this…
NOK – the action to key off Norges Bank – downside risks prevail regardless, however, on a risk-unfriendly outcome to the US-China trade talks. Big issues afoot in oil markets here as well.
Upcoming Economic Calendar Highlights (all times GMT)
0800 - Norway Deposit Rates
1230 - US Fed Chair Powell to speak
1230 - Canada Mar. Intl. Merchandise Trade
1230 - US Mar. Trade Balance
1230 - US Apr. PPI
1230 - US Weekly Initial Jobless Claims
1430 - US Weekly Natural Gas Storage
1715 - US Fed's Evans (Voter) to speak
0130 - Australia RBA Statement on Monetary Policy
Key US-China bilateral talks begin
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