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: USD rebound needs far more to call it a reversal.
John J. Hardy
Chief Macro Strategist
Summary: The US dollar is rebounding as we kick off the week as China’s zero tolerance policy on Covid strikes again to dash sentiment on the first official deaths there in months. The rebound will need to continue take wing, likely amidst a more profound negative sentiment shift, to call a bullish reversal. One might think that the US Thanksgiving holiday this week should mean little volatility in the FX market, but recent years have seen no reduced volatility on Thanksgiving week.
FX Trading focus: US Thanksgiving weeks can be like any other, history shows. A lot more USD upside needed to call reversal. Big test for stretched kiwi over RBNZ.
We have opened the week on a sour note as China registered the first official Covid deaths there in months and moved to shut down activity in areas that were in the process of normalizing. Hard to believe that this China reopening story will every really arrive until we get a clear signal that the country’s leadership is willing to risk the impact of huge spike in the virus count. USDCNH is the USD pair of note that is perhaps closest to posting a bullish reversal – only needing another percent or so (up through 7.20-25 after trading 7.17 today) – to suggest the late setback for USD bulls is easing more profoundly.
It’s tempting to think that, with US markets closed on Thursday for the Thanksgiving holiday and most of the country out on holiday on Friday as well, that we shouldn’t expect much in the way of volatility or directional moves in the greenback. The most recent historical evidence suggests this is a misguided assumption. In 2020, the weak US dollar of the time continued to set new broad cycle lows, while it saw a powerful resistance-breaking rise on the week of Thanksgiving last year. The context this year is less straightforward: the recent US dollar sell-off was on the heels of an enormous strengthening move and was triggered by that weak CPI data print on the November 10. But since the greenback troughed a short couple of sessions later, we have been largely backfilling, with considerable further room for that to continue without triggering a bullish reversal. That would require that EURUSD work down through 1.0100, GBPUSD through at least 1.1650, and AUDUSD through perhaps 0.6500. This week’s US data is mostly second-tier and is all piled on Wednesday because of the Thanksgiving holiday. (Wednesday sees the final University of Michigan confidence for November, Oct. Durable Goods Orders, Oct. New Home Sales, weekly initial jobless claims, and the FOMC minutes). The more important data, as we have emphasized, only rolls in from November 30 (October PCE) to the November CPI (December 13) with the November jobs report next Friday.
Chart: NZDUSD
A remarkable run for NZDUSD of late faces an interesting test here with somewhat downbeat risk sentiment and the market’s indecision on whether the RBNZ will hike by 50 basis points once again or will accelerate to a 75-basis point pace after hot inflation data for Q3. Even just a 38.2% retracement of the rally off the lows would see sub-0.6000 levels in play, with the specific level at 0.5941, also near a sticky resistance area on the way up.
Central bank highlights this week include the RBNZ, which is up Wednesday (Tuesday night European time) and where expectations shifted in favour of a 75 basis point move after the mid-October Q3 CPI release proved far hotter than expected, but have settled a bit, such that currently, the market is about 50-50 on whether it will be 50 or 75 basis points. I‘m not sure the RBNZ will want to accelerate its hikes when it was one of the first to move and has been consistent with the 50 basis point moves, with no need to play catch-up as it is among the rate leaders in the G10. As well, we have seen a strong dose of kiwi strength since that CPI release last month, as the NZD is some 5% higher against the AUD from the peak in late September and 10% stronger versus the US dollar (more in the chart below). Shortly put – certainly possible that the RBNZ goes 75 but I would find it surprising. As a side note, if risk sentiment returns, the kiwi may get very little from a larger move. In short, I am getting a bit contrarian on NZD strength after a run of the kiwi proving the strongest among G10 currencies for the last couple of weeks, I question the need for the RBNZ to accelerate this far into the cycle.
The other central bank meeting among G10 currencies is the Riksbank up on Thursday, with a 75 basis point move expected that will take the rate to 2.50% after the super-sized 100 basis point move in September. There is considerable trepidation in Sweden on the impact of the rate tightening on housing, where prices are tumbling already. One survey just out reported house prices down -3% in October and down -14% from peak With the majority of the tightening set to have unfolded over just two meetings over two months, the Swedish financial system could eventually face a challenge that will require some form of bailout if prices fall too rapidly, though there are no real signs of stress on the banking front, even if at least one property developer is seeking a debt restructuring. Regardless, quite a large discount in the krona has developed recently relative to its normal correlation with risk sentiment, which has been a strong tear on Europe over the last several weeks. Watching the 11.00+ highs of the cycle in EURSEK for next steps.
Table: FX Board of G10 and CNH trend evolution and strength.
Momentum has built up on positive side for the US dollar, if only sufficient to cut the negative USD trend reading in half – so a lot more needed to reverse weak USD picture. Elsewhere, noting the outsized NZD strength ahead of RBNZ on Wednesday and SEK weakness ahead of Riksbank on Thursday and despite strong risk sentiment in Europe.
Table: FX Board Trend Scoreboard for individual pairs.
As noted, the USD pair closest to a reversal is USDCNH, while it is interesting to note JPY weakness today as EURJPY bids for an upside reversal and a pair like AUDJPY is not far from an upside reversal as well. Sterling continues its resilience after the bleak budget statement last Thursday, if not against the greenback today.
Upcoming Economic Calendar Highlights
- 1330 – US Oct. Chicago Fed National Activity Index
- 1800 – US Fed’s Daly (Voter 2024) to speak
- 2145 – New Zealand Oct. Trade Balance
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