Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of FX Strategy
Trump is giving his decision on the Iran nuclear deal the usual “reality show unveil” treatment, supposedly set to make his decision today around 14:00 Washington time (18:00 GMT). Apparently, judging from the squeeze higher in equities, markets are somewhat hopeful that this decision won’t result in any geopolitical firestorm, but we’ll reserve judgment for now. The most hostile option that would likely lead to a very ugly showdown would be a US attempt to roll back to the prior set of sanctions that isolated Iran before the Obama deal was struck. Other options include unilateral US sanctions that don’t impose sanctions on others doing business with Iran, or some delaying tactic that aims to get other US allies on board with a more limited set of sanctions or conditions.
The euro continues to suffer at the hands of the USD and JPY, although this is more of a question of “lack of consolidation” rather than marking notable new lows. Yesterday, Germany’s April factory orders data showed further contraction and helped drag the Citi economic surprise index for the EU down to the -100 level, which it hasn’t seen since the teeth of one of the worst phases of the EU sovereign debt crisis back in 2011.
In Italy, attempts to build a government have failed and the establishment is hoping to form a caretaker government and avoid new elections, while the two populist parties that fared best in the polls are against this move and would like another poll as soon as July. Italian-German spreads have barely noticed, but the situation speaks to the slow burning eventual return of an EU existential crisis.
Elsewhere, the next two sessions look pivotal for the Swedish krona as the Riksbank may finally be getting a bit unsettled by the recent pace of SEK weakening. Tomorrow, Sweden reports its latest CPI data and today sees the release of the Riksbank minutes from the most recent meeting, which should remind us of the significant divide in sentiment among the voting members, some of whom (including Jansson out speaking today) are more convinced that inflation will return.
Chart: EURUSD
EURUSD has paused in the low 1.1900s for now, more notable for the lack of consolidation or “bounce” than anything else. Effectively, the pair has broken down technically, but is making things difficult for the bears by not following through lower after working down through key pivot levels. As long as the 1.2000 area continues to provide resistance, we continue to focus lower, at least until 1.1750-1.1800, but possibly all the way to the 1.1500-1.1600 structural area.
Source: Saxo Bank
The G-10 rundown
USD – the USD rally is largely intact, with general market sentiment just ahead today over Trump’s Iran decision. Watching the US treasury market with the most interest as a coincident indicator as things have gone eerily quiet in recent sessions.
EUR – The euro is struggling to find buyers as economic data has been a disaster and on the discovery that the EU fundamentals could be the most challenged under any worsening of global trade tensions.
JPY – the JPY is doing well as bond yields have gone sideways and after USDJPY upside was turned just ahead of the pivotal 110.00 area. The loudest signal for JPY direction may come from the bond market in the wake of the Iran decision today.
GBP – signs that the sterling sell-off is easing under the weight of weak euro sentiment. The next critical test is Thursday’s Bank of England meeting, but EURGBP looks heavy for now.
CHF – EURCHF has flatlined between 1.1950-1.2000 and may need an improvement in the EU economic outlook to resume the rally.
AUD – similar to other USD pairs, the AUDUSD sell-off has paused in the pivotal 0.7500 area after having broken down through an important trendline up above 0.7600. Interest rate spread developments are not favorable, but for some reason these have garnered scant attention in recent months.
CAD – CAD has been unable to post any notable resistance to the strong USD rally and looks ready to crumble further if Trump’s decision today puts the oil rally in reverse, which could see USDCAD challenging the key 1.30-1.31 zone.
NZD – the kiwi is bogged down in the pivotal 0.7000 area versus the USD and AUDNZD bulls can’t get any fresh momentum, so we’re at a loss for catalysts at the moment, though suspect the USD and US rates will provide the next lead.
SEK – the situation for the krona is heating up as we get the sense of some pushback (or at least surprise) on the recent pace of SEK weakness from at least one Riksbank governor. A “hawkish” deputy governor Jansson out speaking today and CPI up tomorrow.
NOK – Norway’s latest CPI data is also up tomorrow and EURNOK bearsh in better shape as the range held last week and the sell-off has the 9.55-50 downside areas back in the crosshairs. Oil prices in focus today over Trump’s Iran decision.
Upcoming Economic Calendar Highlights (all times GMT)
07:30 – Sweden Riksbank Minutes
08:30 – Sweden Riksbank Dep. Governor Jansson
12:15 – Canada Apr. Housing Starts
18:00 – Trump Decision on Iran Nuclear deal