Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Macro Strategist
Summary: Nine of the ten G10 central banks meet in the coming week and the next, with interesting subplots for nearly all of them.
The November US jobs report
The US jobs report was a mixed back, with the unemployment rate ticking back up to 4.2% versus a steady 4.1% reading expected, with the additionally negative angle that this was despite a 0.1% drop in the participation rate (more unemployed despite the slightly smaller labor force). In the initial reaction this has edged out the relatively positive news that the Nonfarm Payrolls Change rose +227k for the month vs. +220k expected, with a +56k revision to the two prior months' data. The US dollar was poised near key levels like 1.0600 in EURUSD as we discuss below, so the consolidation of the post-election USD strength could be set to go full circle back to Election Day levels if the post-jobs reaction holds here. New local lows in US treasury yields are supported the USD softness in the wake of the jobs numbers. USDJPY is having a justified look back below 150.00 and could test recent lows if US yields continue lower.
Central banks in focus this week and next
A cavalcade of central banks kicks off with RBA Tuesday, followed by Bank of Canada Wednesday and ECB and SNB on Thursday. Five more G10 central banks report the following week. We preview each of these in the rundown for the event risk highlights below. The most anticipation is around the size of the Bank of Canada and Swiss National Bank moves as the market weighs whether they will move 25 or 50 basis points. I lean in favour of 50 from the BoC and only 25 (low conviction) in the case of the SNB, which only has 100 total basis points of positive policy rates to work with before hitting zero. We all thought that the ZIRP era was completely behind us, but the remarkable Swiss are proving us wrong, as the one-year, one-year forward hit zero this week there. The RBA is in a tight spot PR-wise on its hawkish hold – could it soften that stance up Tuesday? AUDUSD has reached key levels near 0.6400 this week!
Chart: EURUSD
EURUSD pulled through the critical 1.0600 area after the US jobs report, which was a clearly drawn up line of resistance and near the former low of 2024 before the downdraft to sub-1.0400 levels that was quickly recovered. The next resistance level of note is up to 1.0750+, which is near the pre-US election lows. The bears would need a weak close well back south of 1.0600 today (Friday) to pounce again sooner rather than later.
Euro finds support as focus turns fiscal
The collapse of the French government saw little fallout – certainly not for EURUSD which stayed resilient after an initial dip early in the week. And French yield spreads to Germany actually tightened well back below 80 basis points by later in the week as well after ballooning to 88 basis points at the start of the week on Marine Le Pen’s threats to take down Barnier in moving against his austere fiscal plans. The sovereign debt resilience is a strong indicator that the situation will not deteriorate in the near term, so the Euro would have to weaken for other reasons outside of debt stability concerns for now. Further supporting the euro is the story run by FT and others that Europe could be looking to fund massive new defence spending with large-scale debt issuance, perhaps as much as half a trillion euro. This, together with the fate of the French government budget and the new German government after elections presumably next February are critical for the longer term picture.
Top highlights for the week ahead: (times are GMT where shown):
The calendar is dominated in the coming week by the US CPI release and four central banks, kicking off with Australia’s RBA on Tuesday.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.
The JPY strength stands out on the positive side for G10 currencies, although it has lost some momentum, possibly to be regained after the weak US jobs data. AUD clearly the weakest currency here and the only surprise side for the RBA next week is.
Table: FX Board Trend Scoreboard for individual pairs.
NOKSEK trying to establish a new downtrend and GBPUSD a new uptrend today, let’s see where things are on the close Friday and in the couple of days ahead to see if these stick. Elsewhere, AUD weakness stands out almost universally in AUD.
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