Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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GBP a slave to Brexit headlines, NZD jumps on CPI
John J. Hardy
Chief Macro Strategist
Summary: The trading ranges across FX are muted, with the JPY easing off the gas yesterday as risk appetite remains nervous but stable and global bond yields picked up. Elsewhere, sterling is back from important support versus the euro on the latest Brexit headlines and NZD jumps on a hot Q3 CPI print.
The US dollar bounced from yesterday’s local lows versus the euro and the yen, with no discernible catalyst, certainly not a very weak US retail sales report for September, which was flat for the month for the core figure. Today’s US event risks are second tier stuff and tomorrow’s Federal Open Market Committee minutes will be taken with a grain of salt. It feels like the FX market is reactive and a follower rather than a leader here and direction won’t be found until bonds or equities make a statement (or both at the same time, even) with FX volatility only really picking up if China chooses to allow the renminbi floor to fall (7.00 in USDCNY the critical focus there).
CAD jumped briefly yesterday after the Bank of Canada released a survey pointing to strong business sentiment despite all of the recent fuss over NAFTA and its replacement deal the USMCA. USDCAD has recently generated a bullish reversal that keeps the upside in focus as long as we trade above 1.2900-50 area, but if we widen the lens, the pair has been in a very sloppy descending channel since June/July, so the jury is out on direction.
New Zealand reported a strong rise in Q3 CPI overnight, with the quarter-on-quarter headline up an impressive +0.9%, which works out to strong inflation indeed on an annualised basis. But the trade-weighted NZD did suffer considerable weakness in the quarter, so extrapolation is difficult and we have a Reserve Bank of New Zealand with a dovish captain at the helm in Adrian Orr. Still, AUDNZD is finally on the move and testing an important pivot zone in the 1.0850-00 area that could open up the range toward 1.0500. We would suggest limited upside potential for the kiwi here even if it manages to extend the bounce.
Chart: EURGBP
Brexit giveth and taketh away at nearly every turn. Sterling is back on the bid today as the rhetoric waxes more friendly again between the two sides even if just yesterday the EU’s Donald Tusk suggested that a no-deal Brexit is more likely than ever before. UK Prime Minister May is headed to Brussels on Wednesday, where the headline risk grows again. The technical key was the 0.8800+ resistance area in EURGBP holding for now. That downside range low below 0.8625 will likely remain a hurdle until we get something more concrete on the Brexit front.
The G-10 rundown
USD – the greenback looks more likely to fade if risk appetite makes a comeback and yields are generally stable or even slightly higher around the world, driving a convergence theme. As well, positioning looks like a strong risk as the speculative world is very long of US dollars.
EUR – is waiting for the next round of headline risks on Italy as the government coalition there has passed its budget and now we await the EU response. Italian yields lower to start the day… 1.1600 local resistance/pivot area in EURUSD.
JPY – the yen is lower as risk appetite is stronger out of the gates in Europe. EURJPY avoided a breakdown through key areas after another probe yesterday below 129.50. A risk appetite comeback here is the scenario most likely to reverse the recent JPY strength.
GBP – sterling is bouncing strongly and we like GBPCHF to express further upside potential, particularly on strong UK data today, while still cognizant of headline risks. Longer dated options are one approach for maintaining a position through all of the volatility.
CHF – the franc avoided testing below the sloppy rising channel in EURCHF – like the potential for considerably more CHF weakness if we can put off a further Italian budget showdown until next year and get a Brexit deal done.
AUD – the Aussie is under the kiwi’s thumb but stands a chance of a short squeeze if risk appetite survives the latest onslaught.
CAD – as indicated above, the local USDCAD moves bullish but the bigger picture still points to a descending channel argument, so awaiting USD direction as an indicator for USDCAD – a break back below the 1.2900 area 200-day moving average sees the bearish potential picking up.
SEK – conditions today are looking favourable for a follow through higher for SEK, with the next hurdle the fast-rising 200-day moving average in EURSEK currently around 9.2650 and opening for 10.10-10.0 if broken.
NOK – both of the Scandies looking bid this morning – EURNOK is closer to a big range level around 9.40 that could open for 9.25-20 if broken.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Aug. Employment Change
0830 – UK Aug. ILO Unemployment Rate
0830 – UK Aug. Earnings
0830 – UK Sep. Claims Change
0900 – Germany Oct. ZEW Survey
1200 – Hungary Central Bank Decision
1315 – US Sep. Industrial Production / Capacity Utilization
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2015 – US Fed’s Daly (Voter) to speak
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