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.
USD eyes the highs, but what's the catalyst?
John J. Hardy
Chief Macro Strategist
Summary: The US dollar remains bid as the trade war narrative continues to drive weak risk sentiment. Sterling is in the dumps as we await May’s exit and the UK goes to the polls for EU Parliamentary elections – a de facto referendum on a hard Brexit.
The US dollar continues to pull slowly stronger as risk sentiment weakened overnight, arguably driven by the escalating trade war narrative. Some point to further defiant rhetoric in the Chinese press while the USDCNY rate pokes near the highs for the cycle. A weak flash May PMI from Japan overnight dropped below 50 again after 50.2 in April, underlining the risks of our “False Stabilisation” theme.
Adding to that, while French flash PMIs this morning improved slightly, the flash May German Manufacturing survey dropped even further to 44.3 from an already eye-watering 44.4 in April. The tough part is eliciting any reaction in EURUSD, which reacted all of two or three pips to the release of the Federal Open Market Committee minutes late yesterday.
We're not sure where the market is looking for a catalyst outside of the obvious USDCNY focus around 7.00...
Sterling continues to drop aggressively as it seems unlikely that PM May’s plans for a fourth vote for a deal will ever see the light of day, and yesterday’s resignation of a key cabinet minister is seen as a sign that her resignation is a matter of days, if not hours, away. The timing couldn’t be more interesting, given that the EU Parliamentary elections are to be held today in the UK and the Brexit party looks set to reap votes from not only disaffected Tories, but potentially also pro-Brexit Labour voters.
Certainly, the most motivated to vote will be pro-Brexit voters in an election that historically has very low turnout. Effectively, it’s a referendum for or against hard Brexit. Sterling is suffering the lose-lose mindset that this either leads eventually to a no-deal Brexit or a Corbyn government if elections are called. The political situation is very fluid.
Trading interest
• Adding USDCAD long interest (stop well below 1.3400) to USD longs versus AUD and EUR (EURUSD perhaps most compelling through relatively short-dated options near the money, given utter complacency and low implied volatility).
• AUDNZD longs for strategic trade (stop below 1.04, targeting 1.10-1.12).
Chart: USDCAD
USDCAD saw a compelling reversal for the bulls yesterday, as a brief poke to new lows on a strong Canadian retail sales report was scooped up and a sharp sell-off in crude oil after the weekly US inventory report added energy to the upside. This looks like a reasonable technical hook for bulls to re-engage for a try at the cycle top above 1.3600.
Adding to that, while French flash PMIs this morning improved slightly, the flash May German Manufacturing survey dropped even further to 44.3 from an already eye-watering 44.4 in April. The tough part is eliciting any reaction in EURUSD, which reacted all of two or three pips to the release of the Federal Open Market Committee minutes late yesterday.
We're not sure where the market is looking for a catalyst outside of the obvious USDCNY focus around 7.00...
Sterling continues to drop aggressively as it seems unlikely that PM May’s plans for a fourth vote for a deal will ever see the light of day, and yesterday’s resignation of a key cabinet minister is seen as a sign that her resignation is a matter of days, if not hours, away. The timing couldn’t be more interesting, given that the EU Parliamentary elections are to be held today in the UK and the Brexit party looks set to reap votes from not only disaffected Tories, but potentially also pro-Brexit Labour voters.
Certainly, the most motivated to vote will be pro-Brexit voters in an election that historically has very low turnout. Effectively, it’s a referendum for or against hard Brexit. Sterling is suffering the lose-lose mindset that this either leads eventually to a no-deal Brexit or a Corbyn government if elections are called. The political situation is very fluid.
Trading interest
• Adding USDCAD long interest (stop well below 1.3400) to USD longs versus AUD and EUR (EURUSD perhaps most compelling through relatively short-dated options near the money, given utter complacency and low implied volatility).
• AUDNZD longs for strategic trade (stop below 1.04, targeting 1.10-1.12).
Chart: USDCAD
USDCAD saw a compelling reversal for the bulls yesterday, as a brief poke to new lows on a strong Canadian retail sales report was scooped up and a sharp sell-off in crude oil after the weekly US inventory report added energy to the upside. This looks like a reasonable technical hook for bulls to re-engage for a try at the cycle top above 1.3600.
The G-10 rundown
USD – the US dollar is being driven by liquidity considerations and the Fed remains behind the curve. Until the Fed brings out the big bazooka, the USD strength could be set to continue.
EUR – the euro is neglected within the G3, but absorbing strength via a EURGBP rise. The only support for the currency arguably from position squaring as carry trades are squared. But see no reason to like the single currency here – at risk from all directions for now, both existential over the parliamentary elections and from the trade war escalation risks.
JPY – putting on a show of strength again here, something the yen only does when yields are dropping and risk sentiment is at its worst.
GBP – sterling risks not letting up as instead of a wait for another vote, we have no clue what will happen from hour to hour. Next step is getting a look at the strength of the Brexit party vote after today’s EU Parliamentary elections in the UK.
CHF – new local lows here in EURCHF and we’re not far from the huge 1.1200 area in that pair – some of the CHF strength possibly the flip-side of GBP weakness as well as general weak risk sentiment.
AUD – the only concern here is that market sentiment is already very weak. Interesting to note domestic Australian markets celebrating the easy RBA message and Morrison victory at the election when the latter has promised fiscal tightness (tight fiscal and easy monetary are toxic for a currency).
CAD – a smart turnaround back to the weak side makes sense, given the risk-off tone and weaker oil prices. The loonie was boxing above its weight recently. Further tactical downside risk barring sudden brightening of sentiment.
NZD – we would like to call the lows for AUDNZD, but may need a specific NZD-negative catalyst.
SEK – famously unreliable Swedish unemployment rate drops 0.9% in April from March- we have never understood that data series. Not enthused about SEK’s prospects if the EU outlook and trade war risks deteriorate.
NOK – shouldn’t oil weakness weigh a bit more on NOK? Having a tough time understanding the latest aggressive rise in short Norwegian rates – out of sync with the rest of the world.
Upcoming Economic Calendar Highlights (all times GMT)
1130 – ECB Meeting Minutes
1230 – US Weekly Initial Jobless Claims
1345 – US Markit Flash May PMIs
1400 – US Apr. New Home Sales
2245 – New Zealand Apr. Trade Balance
2330 – Japan Apr. CPI
USD – the US dollar is being driven by liquidity considerations and the Fed remains behind the curve. Until the Fed brings out the big bazooka, the USD strength could be set to continue.
EUR – the euro is neglected within the G3, but absorbing strength via a EURGBP rise. The only support for the currency arguably from position squaring as carry trades are squared. But see no reason to like the single currency here – at risk from all directions for now, both existential over the parliamentary elections and from the trade war escalation risks.
JPY – putting on a show of strength again here, something the yen only does when yields are dropping and risk sentiment is at its worst.
GBP – sterling risks not letting up as instead of a wait for another vote, we have no clue what will happen from hour to hour. Next step is getting a look at the strength of the Brexit party vote after today’s EU Parliamentary elections in the UK.
CHF – new local lows here in EURCHF and we’re not far from the huge 1.1200 area in that pair – some of the CHF strength possibly the flip-side of GBP weakness as well as general weak risk sentiment.
AUD – the only concern here is that market sentiment is already very weak. Interesting to note domestic Australian markets celebrating the easy RBA message and Morrison victory at the election when the latter has promised fiscal tightness (tight fiscal and easy monetary are toxic for a currency).
CAD – a smart turnaround back to the weak side makes sense, given the risk-off tone and weaker oil prices. The loonie was boxing above its weight recently. Further tactical downside risk barring sudden brightening of sentiment.
NZD – we would like to call the lows for AUDNZD, but may need a specific NZD-negative catalyst.
SEK – famously unreliable Swedish unemployment rate drops 0.9% in April from March- we have never understood that data series. Not enthused about SEK’s prospects if the EU outlook and trade war risks deteriorate.
NOK – shouldn’t oil weakness weigh a bit more on NOK? Having a tough time understanding the latest aggressive rise in short Norwegian rates – out of sync with the rest of the world.
Upcoming Economic Calendar Highlights (all times GMT)
1130 – ECB Meeting Minutes
1230 – US Weekly Initial Jobless Claims
1345 – US Markit Flash May PMIs
1400 – US Apr. New Home Sales
2245 – New Zealand Apr. Trade Balance
2330 – Japan Apr. CPI
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)