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: Crisis coming if rise in US yields persists.
John J. Hardy
Chief Macro Strategist
Summary: The rise in US yields continues apace after a brief stumble yesterday and has taken USDJPY to perilous new heights in today’s session, well above 151.00. Elsewhere, the US dollar is firm, but oddly not really in focus. If US yields continue rising at anything resembling their recent pace for much longer, we are likely to head into some sort of liquidity crisis that triggers a policy response. Will the Fed move to send a warning signal on this rise in yields or is our concern premature? Alternatively, we have to wonder what level in USDJPY will trigger a BoJ/MoF finance surrender on its yield curve control policy, with a BoJ meeting up next Friday.
FX Trading focus: The Japanese yen is twisting in the breeze and something systemic awaits if US treasury yields don’t moderate their rise very soon.
I cheekily tried to put together an argument for why the US dollar may stop rising here, much of it predicated on the rise in US yields perhaps taking a breather now that we have fully priced the Fed to take the policy rate to at least 5.00% by early next year. The short end rise in yields has slowed in recent days, but longer yields have continued higher again after a brief stumble yesterday and are the real spectacle. The chief impact is on USDJPY, where the 150.00 level gave way with little fight late yesterday and the price action following through all the way to above 151.50 as of this writing. Elsewhere, in partial support of my point on the US dollar yesterday, we can’t call the US dollar much more than “firm” in a broad sense. After all, USDJPY and USDCHF aside, it is uninspiring for USD bulls that AUDUSD, for example, is trading at the same level as if was more than a week ago when the 10-year treasury benchmark was still below 4.00%. The same goes for EURUSD. Still, if treasury yields don’t ease off here, it’s futile to expect any significant retrenchment in the greenback’s secular strength.
It's only “safe” to say that the aggravated rise in US treasury yields risks creating accidents somewhere and possibly nearly everywhere if it doesn’t moderate or reverse soon.
Chart: USDCHF
Interesting to note the CHF weakening here versus both the Euro and US dollar as yields march higher. USDCHF is one of the few USD pairs outside of USDJPY to post a new cycle high. Swiss yields have not tracked higher with Europe and the US and important EURCHF resistance is falling above 0.9800, just as USDCHF has traded above 1.0100 for the first time since 2019. The high since all the way back in 2010 is 1.0344.
Sterling is adrift against more than just the strong US dollar, falling so new seven-trading day lows versus the Euro toady, but really needing to retake the pivot highs above 0.8860 to suggest that isolated sterling weakness has returned to the agenda. Again, the fiscal tightness into a vicious cost-of-living crisis will mean that the Bank of England can only take rates so high, and the currency could continue to suffer for the foreseeable future, regardless of the identity of the next hapless leader that will replace Liz Truss.
The week ahead
Next week sees a Bank of Canada meeting on Wednesday. After the hot CPI print for September, the Bank of Canada will have to match the Fed rate hike pace of 75 basis points, which is mostly priced in now (they have been more dynamic, willing to hike 100 bps in July to play some catchup with reality. The Bank of Canada is seen as losing its tightening momentum relative to the Fed after the meeting next week, but that may be unlikely as long as CAD weakness continues adding to inflation risks. Still, private debt leverage is far higher in Canada and more quickly sensitive to rising rates (mortgages generally based on 5-year rates), so economic weakness may set in earlier in Canada. Any more profound support for CAD will likely require either a change in direction from the Fed/US yields and/or new narrative around energy prices will be needed for CAD to find new support.
Also up next week: flash Eurozone PMIs for October on Monday, with the ECB meeting on Thursday set to deliver 75 basis points, but perhaps hoping to get away with not guiding too strongly for future meetings (market divided on whether December delivers a 50- or 75-bp move). The QT talk will only pick up in earnest in December, with the ECB doubtless hoping that the cycle will end before it ever has to do QT. Other bits and pieces include Australia’s Q3 CPI on Wednesday, the first estimate of US Q3 GDP on Thursday and US September PCE inflation data and final Oct. University of Michigan inflation expectations on Friday as the last few major data points ahead of next Wednesday’s FOMC meeting.
The Bank of Japan on Friday, just after a likely very hot October Tokyo CPI report, will be an interesting test of the Bank of Japan’s will on holding the line if USDJPY trades here or higher going into the meeting.
Table: FX Board of G10 and CNH trend evolution and strength.
Momentum is slipping lower for GBP – watching for an outright negative performance soon as the country struggles with an incoming recession. The runaway JPY downside may be checked at some point by intervention, but can’t be checked more profoundly until we see a policy capitulation from the Bank of Japan. Aussie’s negative momentum in the crosses is fading.
Table: FX Board Trend Scoreboard for individual pairs.
The EURCHF and USDCHF surge here happening through key levels – new breakouts to confirm trend or red herrings? EURGBP is trying to turn higher here – as note above, needs 0.8860+ for a stronger signal. And GBPUSD has flipped back to negative – similarly needing a break though pivot lows to suggest new momentum – 1.1000 and then 1.0925 the focus there.
Upcoming Economic Calendar Highlights
- 1230 – Canada Aug. Retail Sales
- 1340 – US Fed’s Evans to speak
- 1400 – Euro Zone Oct. Consumer Confidence
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