Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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FX Update: USD pivotal ahead of pre-Thanksgiving US data dump
John J. Hardy
Chief Macro Strategist
Summary: The complacency melt-up continues in equity markets and continues to see muted volatility in FX, though the USD has edged to resistance in many places and will have a hard time not reacting to incoming data if it surprises today, especially any notable upside surprise in jobless claims.
Extreme low volatility continues to plague the currency market as complacency reigns and we all wonder whether it is worth taking a position ahead of next week’s more important US data cycle, where we get updates on the ISM surveys and the Friday jobs report. There is a rather large flurry of data up today that may be worth reacting to, and given that the USD is so close to key resistance levels in a number of pairs, the action could spill-over already today on positive or negative data, depending on the spin.
The AUD was weak overnight after Australia’s big lender Westpac predicted two more rate cuts that would take the rate to 0.25%, beyond which the RBA said as recently as yesterday that QE is the policy option as negative rates are not seen as viable. The market is pricing low odds of a December RBA rate cut, but greater than 50/50 for a February cut. By mid-2020, probabilities are only slightly above 35% for that second rate cut, so there is a bit more to wring out of the short end of the yield curve. And any notable weakness in the jobs data will quickly see the two cut scenario fully priced and the market mulling the timing and magnitude of RBA QE.
Data-wise, I will focus most on the weekly initial jobless claims up a day early today because of the US holiday. As mentioned yesterday, a third bad print in a row could prove a warm up for an ugly miss in next week’s November jobs report. We discussed some of the other evidence of a weakening US labor market in this morning’s Market Call podcast.
There’s quite a load of data today from the US, besides the weekly claims number we have two more interesting data points – the PCE inflation numbers and the US Durable Goods Orders numbers. Core durable goods orders are in a bad state in recent months, but another weak reading may be largely ignored over by this market if hopes of a US-China trade deal remain high. Late in the day, the Fed Beige Book will be released.
Chart: USDJPY weekly Ichimoku
USDJPY has turned back higher again as it is tough for the yen to catch any kind of bid in a massive global equity market melt-up. The move has the pair joining EURUSD and AUDUSD in trading near a key USD resistance point. It’s tough to know how much this very quiet market will hang its hat on data points today ahead of the big US holiday weekend (yes markets are open half a day on Friday in the US, but most have the rest of the week off starting today.) but USDJPY is historically quite reactive to US data. Note that the 109.35 area is the 61.8% retracement of the prior sell-off wave and the bottom of the Ichimoku cloud. Strong US data surprises could bring upside pressure and weak ones could keep a lid on the pair for now.
The G-10 rundown
USD – the US dollar is firm and looking to rally farther if nothing upsets the boat – though not sure that the USD falters even on weaker data outside of pairs like USDJPY.
EUR – waiting for that policy review from Lagarde, until then, the technical focus on 1.1000 in EURUSD, though we’re not expecting fireworks on a break – nor is the options market as 3-month implied volatility for EURUSD options has reached an historic low below 4.5% over the last couple of sessions.
JPY – the yen bowing under the onslaught of strong risk appetite and reach for carry even as long US treasuries remain near recent lows in the yields – could be the most reactive currency to negative US data surprises.
GBP – sterling facing modest headwinds on some of the recent polling data suggesting a tighter race than previously – but a big, widely anticipated MRP poll that generates a bottom-up picture of election outcomes is up tonight at 10 p.m. UK time and could generate GBP volatility.
CHF – the franc remains largely inert, but interesting to see if USDCHF breaking above parity as EURUSD breaks down through 1.1000 generates flow. View on CHF is flat until we drift outside of 1.0850-1.1050 range in EURCHF.
AUD – the Aussie lower still overnight, though still within the microscopic range in AUDUSD after Westpac announced a forecast for two rate cuts from the RBA. The pronounced AUD weakness challenges the narrative that prospects for a US-China trade deal are holding up the market in general
CAD – the USDCAD rally signal has weakened as we await fresh impulses from US and Canadian data surprises. US data weakness could see a softer CAD in the crosses, though that will have to be weighed against China-linked weakness in other FX.
NZD –The RBNZ financial stability report focuses on macroprudential policy to prevent lower rates triggering bubbles. AUDNZD has now dipped more firmly below the 200-day moving average around 1.0570.
SEK – The Sweden Household Lending survey posted a 4.8% year-on-year reading in October, matching the original reading for September, though that one was revised higher to 5.0%, so still the weakest data point of the cycle. SEK not noticing and look firm as EURSEK continues to sustain the recent range break below 10.62.
NOK – very supportive backdrop for NOK needs to be weighed against seasonality, which is challenging for the krone into year end. Looking for that close below 10.05-00 before we have the technical trigger for a NOK rally.
Today’s Economic Calendar Highlights (all times GMT)
- 0930 – Euro Zone ECB’s Lane to Speak
- 1330 – US Weekly Initial Jobless Claims
- 1330 – US Q3 GDP revision
- 1330 – US Oct. Durable Goods Orders
- 1445 – US Nov. Chicago PMI
- 1500 – US Sep. PCE Inflation
- 1530 – Weekly DoE Crude Oil/Product Inventories
- 1700 – US Weekly Natural Gas Storage
- 1900 – US Fed Beige Book
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