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: GBP is spiralling lower on delay dread
John J. Hardy
Chief Macro Strategist
Summary: Even if the UK avoids a No Deal Brexit and heads longer-term towards the softest of Brexits or even a second referendum, the lack of certainty or sense that any pent-up capital is ready to fill the UK’s current account gap could drive sterling significantly lower.
Note: the recording of yesterday’s FX Update webinar is available if you missed it – provides a bit more perspective on longer term themes and scenarios than our daily update.
The pound is in a funk as it appears impossible for Prime Minister Theresa May to deliver Brexit, which will inevitably mean – strongly assuming that all parties are interested in avoiding No Deal brinkmanship – a long delay and a scrambling around to figure out the process from here. Next week will prove pivotal but if the choices are a chaotic or managed No Deal exit, or more likely, an agreement for a long delay, sterling is more strongly at risk as investors steer clear of investing in the UK economy and leaves the country short of the funding needed to offset its large external deficit.
Fed speakers Bullard and Williams, both Federal Open Market Committee voters, were out late yesterday talking up the US economic outlook. Uber-dove Bullard even specifically stated that it is too early to cut rates. This is an interesting counterpoint to the avalanche of dovish development of the last few months. A patient Fed apparently doesn’t mean one that is set to panic further by slashing rates (unless…inflation misses or the market lurches into a fresh meltdown).
In China, the equity market had one of its best session for the cycle and closed at a new high, which Is helping to drive positive sentiment on the renminbi and regional economies and currencies. Interesting to see how the Reserve Bank of Australia early next week comments on regional developments as Australia on the one hand is strongly supported on the mining side of the equation even as its housing market is suffering a steep correction. Few believe that the RBA is ready to hike already early next Tuesday.
Trading interest
Dropping the JPY trades for now after whipsaws in recent session – today is year end. We could be looking at switching directions again and going long JPY crosses if the risk melt-up scenario engages.
Liking our EURAUD short from the FX Breakout Monitor that we highlighted a couple of days ago at around current levels.
Reduced interest in long USDCAD as we weigh the risk of a melt-up scenario that could support CAD.
Focus on sterling next week on a break and hold below 1.3000 for further downside risk.
Staying long AUDNZD for 1.0700+, stops sub 1.0325.
Chart: GBPUSD
Sterling is struggling as the market has a hard time finding the outcome that looks positive for the UK as long as we don’t see an immediate clearing of uncertainty. In the meantime, UK growth is weak, the credit impulse that sets the tone for growth in the coming few quarters is even weaker, and the country has a still very low interest rate and runs a very large external deficit (albeit at just under 4% of GDP, smaller than its worst levels of near 5% in 2016. A close below 1.3000 in a firm USD environment could set the path towards 1.2500 again if Brexit uncertainty is dragging out over the horizon.
The pound is in a funk as it appears impossible for Prime Minister Theresa May to deliver Brexit, which will inevitably mean – strongly assuming that all parties are interested in avoiding No Deal brinkmanship – a long delay and a scrambling around to figure out the process from here. Next week will prove pivotal but if the choices are a chaotic or managed No Deal exit, or more likely, an agreement for a long delay, sterling is more strongly at risk as investors steer clear of investing in the UK economy and leaves the country short of the funding needed to offset its large external deficit.
Fed speakers Bullard and Williams, both Federal Open Market Committee voters, were out late yesterday talking up the US economic outlook. Uber-dove Bullard even specifically stated that it is too early to cut rates. This is an interesting counterpoint to the avalanche of dovish development of the last few months. A patient Fed apparently doesn’t mean one that is set to panic further by slashing rates (unless…inflation misses or the market lurches into a fresh meltdown).
In China, the equity market had one of its best session for the cycle and closed at a new high, which Is helping to drive positive sentiment on the renminbi and regional economies and currencies. Interesting to see how the Reserve Bank of Australia early next week comments on regional developments as Australia on the one hand is strongly supported on the mining side of the equation even as its housing market is suffering a steep correction. Few believe that the RBA is ready to hike already early next Tuesday.
Trading interest
Dropping the JPY trades for now after whipsaws in recent session – today is year end. We could be looking at switching directions again and going long JPY crosses if the risk melt-up scenario engages.
Liking our EURAUD short from the FX Breakout Monitor that we highlighted a couple of days ago at around current levels.
Reduced interest in long USDCAD as we weigh the risk of a melt-up scenario that could support CAD.
Focus on sterling next week on a break and hold below 1.3000 for further downside risk.
Staying long AUDNZD for 1.0700+, stops sub 1.0325.
Chart: GBPUSD
Sterling is struggling as the market has a hard time finding the outcome that looks positive for the UK as long as we don’t see an immediate clearing of uncertainty. In the meantime, UK growth is weak, the credit impulse that sets the tone for growth in the coming few quarters is even weaker, and the country has a still very low interest rate and runs a very large external deficit (albeit at just under 4% of GDP, smaller than its worst levels of near 5% in 2016. A close below 1.3000 in a firm USD environment could set the path towards 1.2500 again if Brexit uncertainty is dragging out over the horizon.
The G10 rundown
USD – the US dollar is firm, though more against the low yielders as risk sentiment is likewise firm – so if we engage the risk melt-up scenario (weak long U treasuries, strong risk appetite), this pattern could persist, with a weaker JPY, CHF, GBP and EUR while smaller G10 and EM are more stable to firm.
EUR – the Euro looks heavy – surely another close below 1.1200 will lead to a leg lower – especially with a backdrop of strong risk sentiment.
JPY – at most risk if the world decides to continue to celebrate the policy stimulus and long-end treasuries weaken materially.
GBP – it is crunch time for sterling and it doesn’t appear May can deliver Brexit – our concerns are rapidly rising that the sterling could suffer if we end up with a long delay.
CHF – sterling pain perhaps being felt in CHF upside, but have a hard time seeing significant further CHF upside without the SNB putting up a significant fight.
AUD – hard to be too bearish on AUD when the CNY runs higher and Chinese equities have a session like today’s. We’re selectively bullish against NZD and EUR, even.
CAD – USDAD rally looks intact, but has no momentum. A big leg up in oil and risk likely needed get bullish the currency in places – like CADJPY or EURCAD.
NZD – a strong equity market – New Zealand equities at all time highs – is supportive, but a shift in sentiment in the region might favour the AUD more – hence our interest in AUDNZD upside potential.
AUD more firmly as we look for mean reversion in AUDNZD higher after the latest dovish turn from the RBNZ.
SEK – a solid risk-on backdrop could finally punch EURSEK through 10.40-10.35 pivot zone and on toward 10.20.
NOK – EURNOK squeezed higher yesterday but the solid reversal gives bears last gasp hope that a sell-off can re-engage, which will require stable to higher oil prices and especially helpful: a full bore risk on move across markets.
USD – the US dollar is firm, though more against the low yielders as risk sentiment is likewise firm – so if we engage the risk melt-up scenario (weak long U treasuries, strong risk appetite), this pattern could persist, with a weaker JPY, CHF, GBP and EUR while smaller G10 and EM are more stable to firm.
EUR – the Euro looks heavy – surely another close below 1.1200 will lead to a leg lower – especially with a backdrop of strong risk sentiment.
JPY – at most risk if the world decides to continue to celebrate the policy stimulus and long-end treasuries weaken materially.
GBP – it is crunch time for sterling and it doesn’t appear May can deliver Brexit – our concerns are rapidly rising that the sterling could suffer if we end up with a long delay.
CHF – sterling pain perhaps being felt in CHF upside, but have a hard time seeing significant further CHF upside without the SNB putting up a significant fight.
AUD – hard to be too bearish on AUD when the CNY runs higher and Chinese equities have a session like today’s. We’re selectively bullish against NZD and EUR, even.
CAD – USDAD rally looks intact, but has no momentum. A big leg up in oil and risk likely needed get bullish the currency in places – like CADJPY or EURCAD.
NZD – a strong equity market – New Zealand equities at all time highs – is supportive, but a shift in sentiment in the region might favour the AUD more – hence our interest in AUDNZD upside potential.
AUD more firmly as we look for mean reversion in AUDNZD higher after the latest dovish turn from the RBNZ.
SEK – a solid risk-on backdrop could finally punch EURSEK through 10.40-10.35 pivot zone and on toward 10.20.
NOK – EURNOK squeezed higher yesterday but the solid reversal gives bears last gasp hope that a sell-off can re-engage, which will require stable to higher oil prices and especially helpful: a full bore risk on move across markets.
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