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: Brexit tunnel vision, AUD eyes jobs data
John J. Hardy
Chief Macro Strategist
Summary: A bit of cold water thrown on the sterling rally this morning as the Northern Irish DUP party is holding out against the terms of the attempts to put together a last-minute deal. Elsewhere, AUD and NZD remain weak after the latter reported CPI overnight and the former will have a look at important employment data tonight.
The latest extension in sterling higher on hopes for a deal last night has been partially erased this morning after news broke that a UK government official fretted the fate of the Brexit deal due to the DUP holding out on the terms of the draft deal, which apparently places customs check between Northern Ireland and the mainland. But Northern Ireland is so incredibly dependent on transfers from the mainland UK economy so it is hard to imagine that they can’t be bought off, perhaps literally, in some fashion, and some sources suggest cash offers from Johnson’s team may be on offer. By the time I am writing this, the negative reaction has already been half erased.
I had a great discussion of US-China issues from multiple angles this morning in today’s Market Call podcast with my colleague, Ole Hansen. In particular, Ole brought up that US sanctions on Chinese shipper COSCO means that many exporters are unwilling to load cargoes on their ships, which is adding an enormous premium on getting cargoes to China from everywhere in the world. This has to be quite an irritant from the Chinese side as trade deal negotiations are ongoing. As well, the US House of Representatives has passed a bill aimed at supporting Hong Kong protests and specifically, bringing an annual review of Hong Kong’s trade relationship with the US if it is not deemed sufficiently autonomous of mainland China. If this bill passes the Senate, would President Trump sign on to something that could scuttle any trade deal? Enormously important for the ongoing risks of a trade war escalation. The combination of images of Hong Kong protestors waving large American flags and US Speaker of the House Nancy Pelosi sending out a tweet with a picture of herself holding up a “Free Hong Kong” t-shirt will not go down well and China has already promised reprisals if any bill of this sort passes.
Chart: AUDUSD
The AUDUSD pair has been in no hurry to go anywhere for a couple of months now, but faces an important test tonight with the September employment data as the RBA has singled out employment as a key trigger for policy moves and is rapidly nearing the effective zero interest rate bound with a current policy rate of 0.75%. Australian labour market data has begun shifting in the wrong direction in recent months and a deepening of this shift could finally inject some volatility into AUD pairs on the outlook for further policy easing from the RBA, namely warming up for prospects of QE Down Under. For AUDUSD, we’ve not yet seen a daily close south of 0.6700.
The G-10 rundown
USD – the greenback a mixed bag here as focus elsewhere, but major data surprises either way could reinvigorate interest – up later today we have the US Retail Sales for September, a data series that was strong for the five months prior to the weak number in August.
EUR – the EUR tracking GBP with low beta on the swings in Brexit news. Need to see EURUSD clear 1.1110 and some positive catalyst on the policy or economic data side for a sense that the pair is turning the corner here.
JPY – USDJPY popped to new highs yesterday in the wake of surging global risk sentiment on the apparent Brexit breakthrough, but the key level remains 109.00+ in USDJPY, which will need to see new local highs in US long yields to clear.
GBP – there are perhaps two more surges higher possible here in sterling – first a minor one if the uncertainty around the DUP is swept away and the two sides come to terms and then the second one if the UK Parliament has the votes to approve Johnson’s deal. But the options market is already skewed to pricing more risk of upside volatility in sterling.
CHF – EURCHF hovering around the pivotal 1.1000 and reactive to Brexit outcomes as well as the next leg of long bond yield direction (higher yields CHF negative).
AUD – one of the coincident indicators for employment is consumer confidence and the October Australian Westpac consumer from last week dropped heavily to the lowest of the cycle. The Labour market data series is volatile, but often mean reverts month-to-month. August showed a strong surge of +34k in payrolls.
CAD – Canada’s CPI data up today and wondering if the market a bit complacent on the risk of loonie downside despite the recent rally – a big miss in the would likely catch this market off-guard.
NZD – the Q3 CPI was a bit hotter than expected, but the year-on-year number still dropped to +1.5% and the brief rally in NZD was quickly wiped away – keeping interest in downside NZDUSD. More interesting is the relative strength in AUD vs. NZD over tonight’s Australian jobs numbers.
SEK – the krona a bit more reactive than its Scandie counterpart to positive news on a Brexit deal (implications for EU growth, etc.) but EURSEK has yet to take out the technical outlook-altering 10.80-75 area.
NOK – the krone has reached the danger zone for a further squeeze higher as it significantly clears the 10.00 level, even without conditions that would normally be associated with maximum risk.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – Canada Sep. CPI
- 1230 – US Sep. Retail Sales
- 1300 – US Fed’s Evans (Voter) to Speak
- 1400 – US Oct. NAHB Housing Market Survey
- 1430 – EIA NatGas Storage change
- 1500 – DOE Oil and Product Stocks
- 1800 – US Fed’s Beige Book
- 0030 – Australia Sep. Employment Change
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