Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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NY Open: FX fading as Powell takes the stage
Michael O’Neill
FX Trader, Loonieviews.net
It is the final weekend of August and for many, the month can’t end fast enough. Trade issues, tariffs, and Trump Tweets about the Fed’s interest policies led to a choppy trading environment. The US dollar is closing out the week with losses against the major G-10 currencies, led by a 1.40% rise in EURUSD from the New York close on August 17 to 1400 GMT today. The Japanese yen was the only loser, shedding 0.76%. The Australian dollar has almost erased all of its domestic political turmoil losses while the Canadian dollar is flat and directionless.
This morning’s release of US Durable Goods Orders data for July was worse than expected and led to fresh US dollar selling.
Wall Street opened in positive territory, undeterred by the soft Durable Goods data and apparently unconcerned about the Powell speech. Oil prices extended European gains, supported by the prospect of Iran oil sanctions limiting supply and the lack of negative fall-out from the US/China talks.
The report will be forgotten by the time Fed Chair Jerome Powell begins his speech (1400 GMT) Mr Powell is expected to reaffirm the Fed’s independence after President Trump's complaints about interest rates, earlier this week. This year’s Jackson Hole Symposium lacks the star power of other years. Bank of Japan Governor Haruhiko Kuroda, Bano of England Governor Mark Carney, and European Central Bank President Mario Draghi are missing in action.
Next week’s US data includes US Q2 GDP (forecast 4.0%) and on Wednesday and PCE index on Thursday. Key Eurozone data isn’t available until Friday when inflation and unemployment reports are released. Hire than expected core inflation could trigger EURUSD demand. Canada Q2 GDP (forecast 3.0%, y/y) will be critical for USDCAD traders. An upside surprise would boost the odds for a September 5 rate hike. The week will end with the US month-end portfolio rebalancing flows.
Sterling appears to be defying gravity. GBPUSD is in a one-week uptrend while prices are above 1.2810, looking for a test of resistance at 1.2940. The rally is despite the UK government releasing a host of Brexit papers and Chancellor of the Exchequer Philip Hammond warning of the economic consequences of a “no-deal” Brexit.
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