Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Chart Highlights: Pivotal charts ahead of FOMC, BoC and BoJ
John J. Hardy
Chief Macro Strategist
Summary: We pull out a few interesting pairs that are near pivotal levels and could be on the move in coming sessions on central bank meetings, especially the FOMC meeting tomorrow and the Bank of Japan on Thursday. The USDJPY chart looks particularly ready to shake out of recent torpor in the sessions ahead.
The Deutsche Bank 3-month FX implied volatility index has dipped below 6%, an extremely low measure by historic standards, with the record just above 5.0%, achieved briefly during the summer of 2014. This fits with the backdrop of very strong risk sentiment, which faces a test over the coming sessions as we first have a look at important central bank meetings tomorrow (FOMC) and Thursday (Bank of Japan) followed by important US economic data on Friday (jobs report and ISM Manufacturing) and into early next week, as well as possible further breaking news on the US-China trade deal at any time, if recent noise on that front proves correct. Below are a few charts that could be set to pivot in coming days on incoming event risks as well as due to pivotal chart setups.
USDJPY – pivotal levels ahead of FOMC and BoJ
The USDJPY price action has been particularly moribund of late, but the pair is now staring down a critical chart level into 109.00 ahead of the FOMC meeting tomorrow and the Bank of Japan meeting just a few hours later, with this BoJ meeting set up as an important one by the BoJ’s promise of a policy review and the market pricing slightly below 50/50 odds of a 10 basis point rate cut. The 109.00 level is an important absolute level with implications stretching back many months and the 200-day moving average only adds interest. Arguably we also have an upside down head and shoulders formation, with the neckline somewhat difficult to define.
USDCAD weekly – Does 1.3000 offer any support?
An important test for this pair tomorrow over the FOMC meeting and the Bank of Canada meeting already earlier in the day tomorrow. Already, dramatic rate spread widening in favour of CAD, where two-year rates are now several basis points above their US counterparts suggests that the pair should be trading lower, but the key area on the chart for CAD to prove itself against the big dollar is the 1.3000 area, the lowest level in just over 12 months. With both currencies facing potential surprises, the USDCAD will bear watching for whether a full-fledged breakdown unfolds here.
AUDNZD weekly
The Aussie is one currency that could prove particularly leveraged to US-China trade deal outcomes that look more promising and bring a more profound sense of détente than expected. Already, the AUD is on the move here versus its smaller Antipodean counterpart, the kiwi. A long speech yesterday from RBA governor Lowe suggests that the bank is against negative interest rates, perhaps adding a bit of a boost to AUDNZD, where the chart looks constructive for longer term gains and is on the move here locally as well. A close at new local highs here would suggest potential for the next layer of resistance starting with perhaps 1.1000, but possibly extending to the longer-term range high of interest near 1.1300.
EURSEK – last tactical resistance levels in view
EURSEK saw a sufficiently large sell-off recently to warrant some attention from bears as the sequence above 10.85 was rather robustly rejected, the last leg of selling come as the Riksbank’s most recent meeting showed a determination to get the policy rate back to zero even with the economic outlook not seen improving meaningfully. But for the bears to win the day sooner rather than later this latest bounce-back needs to fade around 10.80-85, otherwise the bearish case will have to await further developments. Stay tuned.
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