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: Safe havens on the defensive ahead of US jobs data.
John J. Hardy
Chief Macro Strategist
Summary: The USD could be set to pivot back lower here, ironically in particular if the US data proves in-line or stronger than expected. Indeed, yesterday’s strong ISM non-manufacturing suggested that the market is poorly positioned for positive data and could drive notable consolidation across all safe havens.
Trading interest
- Maintaining AUDNZD longs with stops below 1.0570 for 1.0950
- Long EURCHF around 1.0900 for 1.1000+ with stops below 1.0850
- Short EURSEK around 10.69 with stops above 10.75 for low 10.50’s target
Please have a listen to today’s Market Call podcast, in which we discuss important themes driving the shift in risk sentiment, the outlook for Fed expectations, bond market volatility and much more. A slide deck is also available.
The strong US August ISM Non-manufacturing survey yesterday further helped shift the narrative as the market was not only ill-prepared for a sudden thawing in the US-China trade tensions (however long it may last), but also not ready for a strong US data point: in yesterday’s case a 56.0 reading in the ISM Manufacturing. This was better than the 54.0 expected and 53.7 expected and a strong counterpoint to the weak ISM Manufacturing survey earlier in the week and helped drive a more notable consolidation in US treasuries, also taking down safe havens a couple of notches – most spectacularly in precious metals, but also seeing USD, JPY and CHF weaker.
Likewise, a strong US jobs report today could continue to drive discomfort with the market’s current positioning, seeing further consolidation in safe havens and driving a deeper recovery in riskier currencies. Remember over today’s payrolls change that increasingly over the coming year or so, census hiring will be a large factor in payrolls change figures, so have one eye on the private payrolls release as well. We believe the US recovery is very long in the tooth, but employment and earnings data badly lag the economy, so we’re not necessarily expecting anything negative to show up in today’s report.
The Russian Central Bank meets today and may be able to pull off the rate cut and see the RUB higher, given the risk sentiment improvement of the last couple of days.
Chart: EURCHF
EURCHF has traded heavily through thick and thin and a possibly dovish ECB may have some fretting the risk of further downside, but safe haven factors may be a more important driver in the near term. Further consolidation there – for example, bond yields backing up a bit, could finally drive a chunkier consolidation here than we have seen in a while. The first major resistance is the psychological 1.1000 area, but a mere 38.2% retracement of the entire last down-wave doesn’t come in until 1.1065.
The G-10 rundown
USD – the USD under pressure here almost across the board (notably exception the JPY, which is even weaker) and good US data today could ironically help to continue to drive a weaker USD.
EUR – EURUSD bears uncomfortable if we can’t hold below yesterday’s close on the close of the week today, fears of a dovish ECB next Thursday notwithstanding.
JPY – traders fleeing safe haven on the recovery in risk sentiment, making the JPY one of the weakest currencies at the moment. The 107.00 are in USDJPY is rather important for whether USD or JPY is weakest.
GBP – the latest idea for the parliamentary opponents to Boris Johnson is to aim for late October for UK elections, while Johnson holds out hopes for the mid-October poll. GBP in a holding pattern.
CHF – the franc looks far too strong given where markets are otherwise – room for consolidation in EURCHF back to 1.1000-1.1100.
AUD – AUDUSD challenging the first important resistance around 0.6830 ahead of the US jobs report, but plenty of more wood to chop for a full chart reversal (closer to 0.7000 needed.)
CAD – more open minded for the potential to challenge 1.3000 if risk sentiment continues to improve from here.
NZD – upstart NZD has more room to run versus the USD before running into major resistance versus the USD – starting with 0.6485-0.6500 area.
SEK – the Riksbank helping SEK to the upside by maintaining its bias to hike, but the backdrop of improved sentiment doing the heavier lifting and a continuation of yesterday’s developments could help EURSEK finally put in a heavier consolidation, as far as 10.50.
NOK – EURNOK finding more separation from 10.00, but the sell-off doesn’t pick up more significance until working through 9.90 and really more like 9.80-9.75. The backdrop move away from safe havens is supportive here, as long as it lasts.
Upcoming Economic Calendar Highlights (all times GMT)
- 1030 – Russia Central Bank Rate Decision
- 1230 – US Aug. Nonfarm Payrolls Change
- 1230 – US Aug. Average Hourly Earnings
- 1230 – US Aug. Unemployment Rate
- 1230 – Canada Aug. Employment Data
- 1400 – Canada Aug. Ivey PMI
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