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: USDJPY eyes lowest weekly close in nearly four years
John J. Hardy
Chief Macro Strategist
Summary: The post-FOMC USD rally was rejected yesterday and USDJPY never responded at all to the FOMC as the JPY has rallied consistently and the pair eyes its lowest weekly closing level since September 2016. Elsewhere, sterling trader are struggling with a crossfire of positive and negative stories after the Bank of England meeting yesterday and headlines from Brexit talks.
Trading focus:
JPY strength as USDJPY sell-off eyes fifth consecutive daily drop, lowest weekly close since 2016.
As we focused on yesterday, we are witnessing the sixth challenge of the 105.00 area in USDJPY in recent memory since early 2018 and a close today at the current level below 104.75 would see the lowest weekly close since late September of 2016, nearly four years. The drivers are in part a “catching up” of the JPY with other USD pairs, perhaps the gravity of the CNY move higher in recent weeks, and the end of an ear as Japan’s longest serving prime minister Shinzo Abe exits the stage, even if new PM Suga has promised continuation. We look for a strong close for the JPY this week to signal further strength – possibly taking USDJPY to 100.00 in the weeks ahead – but we’re also very curious if a risk sentiment breakdown could supercharge the move and make it a broader story outside of USDJPY – thinking EURJPY, but also classic risk appetite barometers like AUDJPY.
GBP traders caught in crossfire of negative and positive developments
Sterling went from strength to weakness and then partially back to strength again yesterday on the crossfire of conflicting news stories. The recent bounce in sterling was on the softening tone domestically on Boris Johnson’s Brexit Bill. Then a sterling sell-off materialized in the wake of the Bank of England meeting yesterday when the bank made it clear that was conferring with regulators on the practical requirements for implementation of negative rates, even if it signaled that it was happy with where rates are at present. The news saw 2-year swaps price as much as 5 basis points lower and the forward expectations are now for a BoE policy rate of -0.1%. Likely more important for sterling than negative rates per se, is whether the UK can hammer out a post-Brexit transition trade deal on reasonable terms with the EU, and on that front, we suddenly saw the first set of positive headlines in a long while. The UK side called the latest informal talks “useful” and the EU’s Von Der Leyen told the FT that she is convinced a deal can be done – a very positive development were it not for the NIRP talk. So, from here, NIRP is only profoundly negative if the immediate trigger is harsh and hard Brexit terms, while less so if it is because the UK economy is merely following other economies into a new phase of weakness on second round virus risks, etc.
Chart: GBPUSD
GBPUSD has pumped back and forth on conflicting sterling developments and a similar surge and retreat in the US dollar since the FOMC meeting. It is clear that the 1.3000 level is pivotal for any upside hopes, although even that level is deep in the shadow of the sell-off from the high just below 1.3500. A move above 1.3250 or so needed to begin fully neutralizing this sell-off.
The G-10 rundown
USD – the USD broadly lower and aggressively so in some EM pairs – note the aggressive move lower in USDZAR even with platinum holding back fundamental support for ZAR yesterday. Within G10, still preferring to focus on USDJPY and whether that is more of a JPY story than a USD story here as noted below.
EUR – a bullish reversal in EURUSD yesterday until proven otherwise as risk sentiment pulled back from the (at least tactical-) abyss in the US and the post-FOMC USD rally fizzled. Still, EURUSD has to build a lot of further energy to pull clear of the 1.1900-1.2000 zone that has capped the action for about six weeks now.
JPY – the USDJPY grind lower has been consistent, but other JPY crosses retain sensitive to risk appetite swings and other distractions. Besides the USDJPY close for the week and whether we are headed to 100.00 in weeks ahead, interesting to note the status of the EURJPY sell-off as that pair bounced yesterday together with EURUSD. EURJPY needs a hold below 124.50-125.00 for retain broad interest in JPY strength.
GBP – NIRP potential is negative but Brexit outcomes will eventually weigh more as noted above.
CHF – Falling asleep here as EURCHF bounces back into choppy range and we know that every dip see SNB intervention.
AUD – the aimless Aussie is going nowhere in a hurry – pulling back the focus in AUDSUD to 0.7400 to the upside and 0.7200 to the downside before reacting to price action. Also curious to see if AUDJPY volatility gets supercharged (to the downside) if this late JPY strength persists and a larger risk sentiment consolidation materializes.
CAD – the 1.3250 area so very clear as an upside break catalyst in USDCAD, but the price action pulled back from there after oil prices surged further and the USD eased lower yesterday.
NZD – the pronounced strength here is interesting ahead of next week’s RBNZ and may be a capitulation of NZD shorts in AUDNZD as we note the important 1.0800 area is falling there. The RBNZ has its work cut out for it if it wants to counter a higher kiwi, having already signaled active preparation for negative rates and yet still seeing a strong currency in key pairs.
SEK – EURSEK caught in tiny range as we await flash PMIs out of Europe next week and the Riksbank meeting up on Tuesday. If risk sentiment lurches lower – we may explore resistance into the 200-day moving average near 10.56 currently
NOK – a very weak performance from NOK here as EURNOK eyes upside resistance into 10.75-80 even after a solid oil rally in recent days, if that fades we have strong risk of a squeeze higher towards 11.00.
Upcoming Economic Calendar Highlights (all times GMT)
- 1030 – Russia Key Rate
- 1200 – Russian Central Bank’s Nabiullina to Speak
- 1230 – Canada Aug. Home Price Index
- 1230 – Canada Jul. Retail Sales
- 1400 – US Fed’s Bullard to Speak
- 1400 – US Preliminary University of Michigan Confidence No time given – South Africa SARB Rate Announcement
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