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: Euro waxes resilient as G3 horse-race steals focus.
John J. Hardy
Chief Macro Strategist
Summary: The Friday squeeze in equity markets saw the US dollar roll over after its most recent bout of strength. As market stumbled a bit to open this week after weak Chinese data in the Asian session overnight, the more interesting relative race to watch is the relative moves between G3 currencies as the euro shows signs of putting up a bit of a fight, at least against the Swiss franc to start, but EURGBP also found support at important levels.
FX Trading focus: G3 horse race the focus as euro, JPY resilience creep into the picture
The consolidation in treasury markets last week as risk deleveraging intensified at least briefly changed the narrative in FX, as the JPY enjoyed a massive comeback on Thursday on the safe haven appeal of long bonds finally kicked in. The short squeeze in equities on Friday saw that development reversing sharply, but the potential for JPY strength remains in play if we have seen at least a cycle high in bond yields for now. Both Fed tightening expectations and the longer end of the US yield curve have peaked recently and a follow through in 10-year yields below 2.75% opens up the next layers of resistance down to 2.50%.
Today, after a brought bout of new JPY and USD strength overnight, the most interesting independent mover today is the euro, which finally found support against GBP at important levels in EURGBP (ahead of the 0.8450 area and 200-day moving average slightly lower that was a breakout zone on the way up) and against CHF, as EURCHF pulled back higher to threaten the 200-day moving average and the psychologically important 1.0500 level. The readily identifiable drivers for positive Euro outlook today are ECB governing council member Villeroy out warning that an eye must be kept on the euro, but also helping are the reversal of the most recent surge in Nat Gas prices, and for the longer term, Netherlands prime minister making a strong pro-EU comment
Chart: EURCHF
EURCHF jumped back higher today, likely in part on the ECB’s Villeroy warning on the euro, but the pair needs to punch higher through the psychologically key 1.0500 area and the 200-day moving average to suggest a further revaluation higher is afoot (the 1.0600 looks even more prominent, but we need to recall that the massive cycle low in early 2020 was also near 1.0500). Certainly, the ECB warning does point to limits in the ECB’s willingness to sit on its hands and could prompt the central bank to indicate a willingness to shift into a higher gear in its tightening regime. There has certainly been a strong regime change in CHF of late, as USDCHF smashed through the range high in late April and has been testing well above parity lately, even with US treasuries in consolidation mode.
Data focus this week is on the US housing market indicators and the Apr. Retail Sales report up tomorrow. It took only three months for the US mortgage rate to go from the unprecedented range lows (relative to pre-pandemic levels) as late as the beginning of January to a more than 10-year high by late March, and we have headed another 50 basis points higher since then. This is the largest rate shock by a mile on this very important financial condition. The first places to look for signs that the housing market is rolling over are in the volume of transactions and a slowing in new builds. The NAHB Survey of new home buying interest has rolled over but it is still at extremely high levels (higher than during housing bubble peak of 2005), while New Home Sales peaked in early 2021 and Building Permits are still at cycle highs – a mixed picture but overall, significant loss of momentum. The headline expectations for Retail Sales look strong, but we have to remember the multi-decade highs in inflation here, meaning real growth in retail sales requires very strong numbers indeed. Given very ugly sentiment numbers (see below), would expected downside risks in real retail sales lie ahead.
Friday saw a very weak US May preliminary University of Michigan sentiment reading at 63.6 for the “current economic conditions” half of the overall survey, a dramatic new cycle low and far below the 69.6 expected. Only three other readings in the 2008-09 cycle were lower still (record low in November of 2008). The overall index also made new lows for the cycle at 59.1. The longer term inflation expectations in the survey were stable at 3.0%. The last few days have seen new record high prices for gasoline in the US, which could affect the final UMich survey for the month and then inflation expectations bear watching for that survey and next month as an input for Fed policy.
Table: FX Board of G10 and CNH trend evolution and strength.
The Euro rally in broader terms has eased, but still positive, while interesting to note the divergence of JPY and CHF as the JPY retains some of the strength from the momentum introduced last week. What is gold indicating other than the cross-the-board challenge of recent USD strength?
Table: FX Board Trend Scoreboard for individual pairs.
The EURGBP and EURCHF pairs put in a rally today that keeps the positive trend for those two pairs alive – watching for follow through (or not) in coming days for the trend status there.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US May Empire Manufacturing
- 1255 – US Fed’s Williams (voter) speaking
- 1300 – Canada Apr. Existing Home Sales
- 1415 – UK Bank of England Governor Bailey and other MPC members to speak
- 0130 – Australia RBA meeting minutes
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