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...
FX Update: Corona virus concerns return, taking JPY higher
John J. Hardy
Chief Macro Strategist
Summary: Markets in mainland China were shaken by aggressive official moves to get ahead of the corona virus outbreak, with the fallout still rather limited across global markets, as the early European session is already seeing the market trying to shake off the overnight action, though the JPY remains bid on lower safe haven bond yields. CAD gutted by more dovish BoC than expected.
The Bank of Canada meeting produced an even more dovish turn than we expected, as the statement noted the recent slowdown in the economy and in particular noted that the “outgap has widened” and in the policy guidance, was clearly wary of the risk of a continued slowdown even if its forecast was not explicitly negative. In the press conference, Governor Poloz was more or less forced to indicate that the “door” is open for a rate cut: “I’m not saying that the door is not open to an interest rate cut, obviously it is, it is open”. The Trim CPI measure for December, posted just ahead of the meeting, dipped to 2.1% vs. 2.2% in November. The 2-year CAD swaps are some 10 bps lower from recent levels, driving a strong CAD selling impulse and taking USDCAD more firmly back into the old range that extends higher toward 1.3300+. An ugly sell-off in crude oil, and the massive discount on key Canadian grades (more than 20 dollars below WTI) are further weighing on CAD.
The Aussie got a bump from strong headline jobs growth in December, but aside from the fact that the Australia employment change data series is highly erratic, the full-time position growth remains a concern as the last three months have been near or below zero, with all job growth in part-time work. The unemployment rate dipped back to 5.1%, a 9-month low. The reaction in Australia rates was very muted, but the AUD pulled back sharply higher versus the USD and NZD, a performance that looks fairly resilient given the fresh concerns about the corona virus outbreak in China overnight.
Today, we continue to watch the risk for a wider risk-off contagion, regardless of the cause, as this crazily risk-hungry market looks ripe for a correction technically and the steady grind lower in long US yields looks a bit spooky given the complacent backdrop – the US 10-year yield benchmark has poked below the 1.75% pivot area, helping drive JPY upside and a sign of weak belief in the longer term inflation and growth outlook.
Plenty of discussion on the ECB policy review and how ECB president Lagarde will spin this today, but we have a hard time seeing near term catalysts for the euro from this unless we see an explicit mention of the deleterious effects of NIRP as a hint that the ECB would like to copy the Riksbank in exiting negative rates eventually. It’s likely too early for that.
Chart: USDCAD
USDCAD jumped to attention on the more dovish than expected Bank of Canada meeting yesterday, with the drop in Canadian rates pointing to higher risk of a rate cut in coming meetings. Plenty more room for USDCAD to explore the full extent of the prior range to 1.3300+ and perhaps even the longer term range into 1.3500+ on further USD strength, weak Canadian data and/or a further markdown in crude oil prices. Local support perhaps around 1.3100 – the pivot area on the way up.
The G-10 rundown
USD – the US dollar is neutral to developments here it seems, offering low beta at the moment to risk-off impulses, but these have been so far too weak to judge the currency’s underlying reactivity to developments.
EUR – the euro under pressure ahead of an ECB where the market asks whether its policy review can come up with anything compelling – in short: doubtful, and green shoots of hope from something like the German ZEW survey reading need to see confirmation in tomorrow’s EU flash PMI’s for January.
JPY – the fresh concerns linked to the corona virus driving usual risk off patterns and we have the US 10-year treasury benchmark pressing below 1.75% this morning – helping the JPY stronger across the board – a deepening of these kinds of developments are the only readily apparent source of JPY volatility.
GBP – sterling ambitions curtailed by latest risk off patterns and USD and JPY firmness, though EURGBP looks heavy and is the most immediately technically compelling pair to track. Yesterday’s CBI survey release for Q1 posted a stunning rebound to +23 (highest since 2016 Brexit vote) vs. -20 expected and -44 in Q4.
CHF – the fresh spikes in concern on the corona virus feeding some safe haven seeking in CHF, but CHFJPY sell-off suggests JPY offers far higher beta to this theme.
AUD – the Aussie looking resilient here, but would prefer to trade that notion in crosses like AUDNZD and AUDCAD for now, while we watch whether this gentle rejection of new local lows in AUDUSD blossoms into something more.
CAD – the Bank of Canada dovish turn exceeded our expectations and the USDCAD has further confirmed the rejection of the late sell-off, pointing the needle back toward the top of the old range on further deterioration in Canada fundamentals and/or accelerating weakness in crude oil.
NZD – an important data release tonight in the form of Q4 CPI, which will test the important AUDNZD pair (confirmation that upside is side of least resistance) and the status of NZDUSD and the pivot area south off : In general we are biased for a weaker NZD.
SEK – watching reactivity to ECB today and EU data, which needs to pick up further in addition to fiscal signals in Sweden to drive more notable SEK rally.
NOK – little reaction to Norges Bank this morning, where the statement expresses belief in receding risks in the global growth backdrop while noting signs of a slowing Norwegian economy. Crude oil prices correcting lower no help either. EURNOK is bumping up against the pivotal 10.00 area – needs to maintain below to keep a constructive view on NOK
Today’s Economic Calendar Highlights (all times GMT)
- 1245 – ECB Meeting
- 1330 – ECB President Lagarde Press Conference
- 1330 – US Weekly Initial Jobless Claims
- 1530 – US Weekly Natural Gas Storage
- 1600 – US DoE Crude Oil and Product Inventories
- 2145 – New Zealand Q4 CPI
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