Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Weekly FX Chartbook: Dramatic Shift in Market Narrative
Charu Chanana
Chief Investment Strategist
Key points:
- USD: Broader shift in narrative towards US recession concerns could bring a safe-haven bid if it extends
- JPY: Carry trade unwinding has room to go
- AUD: RBA’s hawkishness meets global risk-off
- GBP: Likely to be the more resilient high-beta currency
- CNH: Spillover strength from yen could be at risk for economic data underperformance
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USD: Recession Concerns Fuel Accelerated Fed Rate Cut Bets
The broader market narrative has taken a sharp turn last week. From worrying about elevated inflation, markets have gone all the way to the other end of the spectrum in one week with concerns about a potential US recession. July’s weak non-farm payrolls report (headline payrolls at 114k vs. 175k expected) along with a sharp rise in unemployment rate (4.3% vs. 4.1% expected) have fuelled concerns that the Fed may be behind the curve in cutting rates. Markets have also become overly optimistic of monetary policy loosening, with money markets now pricing in 50bps of a rate cut in September and more than 120bps of easing through to the end of the year.
US economic data remains in the driving seat now, and the more the US soft landing assumption gets questioned, the further pullback we can see in equity and carry strategies where positioning has also been stretched. However, markets have gone a bit too far expecting the Fed rate cuts compared to the June dot plot and considering the structural inflation forces at play. This may warrant some pushback from Fed speakers this week, but markets are likely to focus more on data until it hears from Powell himself, or the other known voices in the Fed committee such as Waller or Williams.
Monday’s ISM services will have outsized importance, along with Thursday’s jobless claims given the focus on labour market. The ISM services index saw a five figure drop lower in June, which means there could be a scope for recovery. However, if it falls again, markets could price in a greater degree of probability of a recession, and rapid risk-off moves could extend further.
JPY: Carry Trades Go Up the Escalator, Down the Elevator
Last week was a remarkable week for Japanese yen. It was up over 5% against AUD and GBP and 4.7% against the USD. A hawkish pivot from the Bank of Japan, along with a pickup in US recession concerns accelerating Fed easing bets and safe-haven demand amid escalating geopolitical risks underpinned the start of this trend. This resulted in some carry trade unwinding as volatility picked up, hitting high yielding FX both in G10 (USD, GBP, AUD) and emerging markets (MXN, COP, BRL).
US data remains in the spotlight, but it seems unlikely that recession concerns will fade away quickly now. This means that the yen may have just started on a sustained period of appreciation. This strength in the yen is also filtering through to other carry funding currencies such as the Chinese yuan. Meanwhile, safe-haven bids are also propelling the Swiss franc, while activity currencies such as AUD, NOK, GBP are getting thrashed.
AUD: RBA’s Hawkishness Cannot Match Global Risk-Off Play
Last week's softer-than-expected inflation report has eliminated the prospect of a rate hike from the Reserve Bank of Australia (RBA). The OIS curve is now factoring in a November rate cut from the RBA, indicating the RBA is unlikely to support the AUD. The Australian dollar is also under pressure due to a shift in global sentiment adversely affecting activity currencies. Additionally, the AUD is at risk due to the weakness in the Chinese economy and is likely to lose ground against other activity currencies like the NZD, where rate cuts are largely priced in.
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Recent FX articles and podcasts:
- 1 Aug: GBP: Bank of England Cut Won’t Damage Pound’s Resilience
- 31 Jul: JPY: BOJ’s Hawkish Policy Moves Leave Yen at Fed’s Mercy
- 31 Jul: AUD: Softer Inflation to Cool Rate Hike Speculation
- 26 Jul: US PCE Preview: Key to Fed’s Rate Cuts
- 25 Jul: Carry Unwinding in Japanese Yen: The Current Dynamics and Global Implications
- 23 Jul: Bank of Canada Preview: More Cuts on the Horizon
- 16 Jul: JPY: Trump Trade Could Bring More Weakness
- 11 Jul: AUD and GBP: Potential winners of cyclical US dollar weakness
- 3 Jul: Yuan vs. Yen vs. Franc: Shifting Carry Trade Strategies
- 2 Jul: Quarterly Outlook: Risk-on currencies to surge against havens
Recent Macro articles and podcasts:
- 2 Aug: Singapore REITs: Playing on Potential Fed Rate Cuts
- 30 Jul: Bank of Japan Preview: Exaggerated Expectations, and Potential Impact on Yen, Equities and Bonds
- 29 Jul: Potential Market Reactions to the Upcoming FOMC Meeting
- 25 Jul: Equity Market Correction: How to Position for Turbulence?
- 24 Jul: Powell Put at Play: Rotation, Yen and Treasuries
- 22 Jul: Biden Out, Harris In: Markets Reassess US Presidential Race and the Trump Trade
- 8 Jul: Macro Podcast: What a French election upset means for the Euro
- 4 Jul: Special Podcast: Quarterly Outlook - Sandcastle economics
- 1 Jul: Macro Podcast: Politics are taking over macro
Weekly FX Chartbooks:
- 29 Jul: Weekly FX Chartbook: Mega Week Ahead - Fed, BOJ, Bank of England, Australia and Eurozone CPI, Big Tech Earnings
- 22 Jul: Weekly FX Chartbook: Election Volatility and Tech Earnings Take Centre Stage
- 15 Jul: Weekly FX Chartbook: September Rate Cuts and the Rising Trump Trade
- 8 Jul: Weekly FX Chartbook: Focus Shifting Back to Rate Cuts
- 1 Jul: Weekly FX Chartbook: Politics Still the Key Theme in Markets
FX 101 Series:
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