Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Breakout Monitor: SEK breakdown extends, USD softens ahead of FOMC
John J. Hardy
Chief Macro Strategist
Summary: The recent SEK breakdown has extended as the week gets under way versus the NOK and EUR. Elsewhere, Friday’s sharp turnaround in the greenback’s fortunes has the market suddenly more focused on downside break potential after looking for the opposite last week.
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The late Friday sell-off in the USD reached a sufficient crescendo by the end of the day that the market comes into this week looking at a broader menu of downside USD break risks versus the riskier currencies rather than at new highs versus the EUR and JPY, which was the focus last week (to be fair, the upside USDJPY break levels still not far). It appears that USD bears are hopeful that the Federal Open Market Committee delivers a softening of its guidance on keeping the QT regime on autopilot for the foreseeable future.
Elsewhere we are witness to further pressure on the Swedish krona after Friday’s terrible December retail sales data set things in motion to the downside. Today saw the release of a softer than expected December household lending data that raises concerns that the dramatic shift lower in Swedish house prices in recent months will see Swedish consumers tighten their belts and the gentle removal of accommodation by the Riksbank after years of negative rates is more than the economy or asset prices can bear.
Today’s FX Breakout monitor
Page 1: Note that EURJPY is poised near resistance on the turnaround in risk sentiment late last week – the 125.00 area is critical there. Elsewhere, sterling pairs have taken a breather ahead of the important vote on UK Prime Minister May’s Plan B and a likely series of votes on “amendments” in coming days, one or more of which could be aimed at avoiding a cliff-edge No Deal situation on March 29. Note that NZDUSD actually managed a new 19-day high close – though we are reluctant to follow breaks that occur before we have a look at the FOMC meeting on Wednesday.
The late Friday sell-off in the USD reached a sufficient crescendo by the end of the day that the market comes into this week looking at a broader menu of downside USD break risks versus the riskier currencies rather than at new highs versus the EUR and JPY, which was the focus last week (to be fair, the upside USDJPY break levels still not far). It appears that USD bears are hopeful that the Federal Open Market Committee delivers a softening of its guidance on keeping the QT regime on autopilot for the foreseeable future.
Elsewhere we are witness to further pressure on the Swedish krona after Friday’s terrible December retail sales data set things in motion to the downside. Today saw the release of a softer than expected December household lending data that raises concerns that the dramatic shift lower in Swedish house prices in recent months will see Swedish consumers tighten their belts and the gentle removal of accommodation by the Riksbank after years of negative rates is more than the economy or asset prices can bear.
Today’s FX Breakout monitor
Page 1: Note that EURJPY is poised near resistance on the turnaround in risk sentiment late last week – the 125.00 area is critical there. Elsewhere, sterling pairs have taken a breather ahead of the important vote on UK Prime Minister May’s Plan B and a likely series of votes on “amendments” in coming days, one or more of which could be aimed at avoiding a cliff-edge No Deal situation on March 29. Note that NZDUSD actually managed a new 19-day high close – though we are reluctant to follow breaks that occur before we have a look at the FOMC meeting on Wednesday.
Page 2: The Swedish krona trades lower on fresh bad data and EURSEK is having a look at a larger scale resistance level as we discuss below. AUDJPY is poised just ahead of range resistance after the sharp turnaround in risk sentiment late last week and will likely trade with high beta to further developments on that front over the FOMC meeting and developments in US-China trade negotiations. Gold and silver also managed new cycle high closes on Friday – but traders are likely reluctant to pile on just yet until the Fed gives the green light by softening up its policy guidance.
Chart: EURSEK
EURSEK is the most important pair for SEK valuation and is poking at big range resistance here after another bad data point this morning out of Sweden. A solid break of the 10.35 area could shift the focus to the cycle top above 10.60.
EURSEK is the most important pair for SEK valuation and is poking at big range resistance here after another bad data point this morning out of Sweden. A solid break of the 10.35 area could shift the focus to the cycle top above 10.60.
Chart: EURJPY
EURJPY is eyeing resistance as are a number of JPY crosses after the about face late last week in risk appetite. A close above 125.00 is the technical focus, but may need some support from fundamental developments, like a surge in risk appetite in the wake of a dovish lean from the FOMC meeting late Wednesday, to gain traction.
EURJPY is eyeing resistance as are a number of JPY crosses after the about face late last week in risk appetite. A close above 125.00 is the technical focus, but may need some support from fundamental developments, like a surge in risk appetite in the wake of a dovish lean from the FOMC meeting late Wednesday, to gain traction.
Chart: XAUUSD (spot gold)
Gold and silver ripped higher late Friday on hopes that the Fed will signal a dovish shift of policy – having a break of this magnitude unfold before “the fact” (of the FOMC meeting) raises the stakes for the Fed to actually deliver on this anticipation.
REFERENCE: FX Breakout Monitor overview explanations
The following is a left-to-right, column by column explanation of the FX Breakout Monitor tables.
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout. NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
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