Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
FX Update: US-China trade deal on the rocks. US yields signaling risk off?
John J. Hardy
Chief Macro Strategist
Summary: The currency market remains in a relatively low-energy mode despite rising risks of US-China trade tensions, and we see signs of safe haven-seeking as the rally in US treasuries picks up pace. CAD was taken down several notches after US crude oil supply figures triggered the biggest slide in oil prices in weeks and after dovish Bank of Canada rhetoric.
The US Senate yesterday passed a bill aimed at revisiting the Hong Kong trade status on an annual basis to determine whether Hong Kong is “sufficiently autonomous” and sanction individuals responsible for human rights abuses in the territory. The House passed a similar bill recently, and because the agreement in Congress is unanimous, a Trump veto would be immaterial as a supermajority in Congress would override a veto. I am unsure of the timeline here for this bill, and both houses of Congress must pass the same version of the bill for it to become law, but this efforts behind the bill have been very quick by US legislative standards and the time frame is likely quite compressed. China issued a sharp response, claiming it will retaliate.
I do not see how a US-China trade deal of any sort can be accomplished if this bill becomes law. That general sense seems to be settling over markets since late yesterday as risk sentiment has deteriorated sharply from yesterday’s highs. And given the levels of complacency we have thoroughly discussed in recent podcasts – especially this morning’s – volatility has plenty of room to expand here.
When markets lurch into risk off mode as they risk doing here, we might expect currencies to align themselves along the axis of risk as correlations go to one. This could mean especially vulnerable EM currencies, weak G10 smalls and perhaps weak GBP, the euro somewhat in between (but specifically vulnerable on weak Chinese demand fears for its exports) and a stronger USD and maybe even stronger JPY.
Chart: USDCAD
Whiplash for CAD traders yesterday as the loonie suffered a double whammy of a significant slide in oil prices and especially dovish talk from the BoC’s Wilkins. The news has taken the USDCAD pair to its highest level in several weeks. Still, to get significantly beyond the 1.3380 area in USDCAD (multi-month high), we’ll likely need a broadly stronger US dollar and a deterioration in risk sentiment.
The G-10 rundown
USD – the dollar bounce not a surprise given the source of the market’s unease this morning (US-China trade deal concerns) and we assume a deepening concern on this front together with risk off would be USD-supportive.
EUR – China related concerns are a net euro negative and we are all waiting for the next signals from EU policymakers – a EURJPY downdraft one way to trade further risk off on US-China concerns while avoiding the USD.
JPY – the powerful bid in treasuries finally making more of a mark on the JPY, where the general addition of risk off could see the yen rising to the top as EM sinks to the bottom (implications for carry trades, etc.).
GBP – sterling suffered a setback on Corbyn’s strong debate performance yesterday, but as well, I suspect any general downdraft in risk appetite could sideline sterling rally attempts for now.
CHF – the franc less reactive than the JPY to intermarket developments as we continue to find it difficult to pay attention here.
AUD – surprised to see AUDUSD still near 0.6800 after the overnight news flow – significant risks for the AUD will mount if risk off based on US-China trade tensions continues here. The 0.6770 area in AUDUSD a notable technical level/pivot.
CAD – the latest BoC rhetoric seeing a chunkier rally now at the short end of the Canadian yield curve – and there could be more pressure to come if today’s CPI misses to the downside, but especially on tomorrow’s “fireside chat” from BoC Governor Poloz tomorrow.
NZD – NZDUSD looks overambitious at these levels given the backdrop and a close back below 0.6400 would underline that point here.
SEK – our recent comment that SEK strength had been disappointing recently given the backdrop underlined now as SEK getting hammered today on still fairtly moderate risk off – though the Riksbank out with its financial stability review this morning frets rising financial stability risks (This morning, it emerged that the US is investigating Sweden’s Swedbank for money laundering with Russia).
NOK – everything going wrong for NOK as global growth and oil demand concerns will mount on a US-China trade negotiation failure. The oil sell-off and recent rejection of the attempt lower aggravating the NOK sell-off here – new EURNOK highs possible if we see an equity market correction here and lower oil prices.
Today’s Economic Calendar Highlights (all times GMT)
- 1000 – Sweden Riksbank Financial Stability Review press conference
- 1330 – Canada Oct. CPI
- 1530 – US DoE Weekly Crude Oil Inventories
- 1700 – ECB’s Lane to Speak
- 1900 – US FOMC Meeting Minutes
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)