Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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US dollar swings both ways
Michael O’Neill
FX Trader, Loonieviews.net
Summary: The US dollar is directionally challenged when it comes to the big three major currencies, while the euro has been chilled by a new blast of ECB dovishness.
USDJPY has bounced between 109.60 and 112.00 since the middle of February on the back of continually shifting risk sentiment. EURUSD has been in a 1.1200-1.1500 during the same period. The single currency was unable to sustain upward momentum after the dovish Federal Open Market Committee meeting, and European Central Bank President Mario Draghi reclaimed the dovish mantle this morning. Previously, the ECB suggested that Eurozone interest rates would rise around the end of the summer. Today, Draghi warned that expected rate hikes could be delayed. EURUSD has traded with a negative bias since then.
That isn’t the case for the commodity currency bloc. The Australian, New Zealand and Canadian dollars are on a one-way street lower. The Reserve Bank of New Zealand telegraphed a potential rate cut, in part because of a strong currency, trashing NZDUSD, and knocking CAD and AUD for a loop.
Further weakness in US Treasury yields, renewed recession chatter and a lack of progress with the China/US trade talks will continue to underpin the US dollar as a safe-haven currency and undermine the commodity bloc currencies. NZDUSD will target 0.6550 on a decisive break below 0.6740, AUDUSD has 0.6980 support in its sights while USDCAD is pointing at 1.3640.
Global growth concerns and recession fears sparked by falling US Treasury yields are making Wall Street nervous. The Dow Jones Industrial Average (DJIA) and S&P 500 opened in the red but clawed their way back to unchanged within the first 45 minutes of trading. The Nasdaq is still in negative territory albeit modestly.
The US data wasn’t much of a factor. The trade data was reportedly distorted by tariff front-running.
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