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: Crunch day for sterling. Yen thrives on risk off.
John J. Hardy
Chief Macro Strategist
Summary: All eyes on sterling today as GBPUSD slips below 1.2000 and UK Prime Minister Johnson faces a critical vote that could set in motion a pitched October Brexit endgame. Elsewhere, the usual suspects are responding to a weakening of risk appetite.
Trading interest
- Maintaining EURJPY shorts with stops lowered again to 117.50. Targeting 112.00
- Long USDCAD with stops moved up to 1.3260, for 1.3500+
- Re-establishing AUDNZD longs with stops below 1.0570 for 1.0950
Risk-on, risk-off behavior is beginning to take over, driven by diminished hopes that the US and China will meet for trade talks. Overnight, South Korea reported headline inflation at 0.0% year-on-year overnight, pointing to the ongoing deflation in Asia and strong likelihood of further easing in the region. (As well, the official CFETS yuan basket includes a 10% weighting to the Korean Won and USDKRW is near multi-year highs, giving a basket argument for China to allow its currency to fall against a strong US dollar.) E
The RBA failed to cut, giving our AUDNZD upside argument a small boost (we are looking to re-establish longs again, with risk tonight on AU Q2 GDP data).
Chart: GBPUSD
All eyes on sterling today as GBPUSD has broken 1.2000, effectively posting the lowest intraday spot price since 1985 (a one-off flash crash in late 2016 aside). The new fear that has dragged sterling even lower is perhaps more the fear that parliaments attempt to wrest away control of the Brexit endgame from Boris Johnson will see snap elections, which the prime minister has threatened to call today (for October 14) if the parliamentary vote succeeds in forcing a Brexit extension. Any further extension of uncertainty could do more harm than good in the first place (with or without the election scenario). The electoral picture is very complicated now with many moving parts, given the various parties and the first-past-the-post UK election system. More analysis to come, but the most immediate sterling downside threat is that Boris Johnson’s push to take control of Brexit fails and the 2/3 vote for snap elections succeeds. A Corbyn government could mean parity in GBPUSD eventually, but we’ll start with “downside risk” for now if we are about to shift to an October snap election scenario. 1.16-1.1500 is possible before elections.
The G-10 rundown
USD – The USD strength, especially now that EURUSD has broken down and that CNY continues to head lower, sets the clock ticking faster for eventual intervention, whether from the Fed or from the Trump administration. I would expect loud presidential tweets threatening a new approach at minimum soon from DJT.
EUR – the 1.1000 level was a critical one to break and sets loose EURUSD to the downside as we await next week’s ECB and where the focus will lie
JPY – yen managing to rise to the top of the heap on risk-off behavior, suggesting more upside potential from this source if global market mood continues to sour.
GBP – Critical vote today – see chart caption above. FT’s big read at the weekend discusses the particulars of the “Corbyn revolution” and gives an idea why the material threat of a left-Labour government could see significant further downside risk for sterling.
CHF – risk-on, risk-off likely will see CHF tracking JPY in the crosses.
AUD – Aussie gets a minor boost as RBA fails to panic this time around, but the dovish guidance makes it clear that the cutting continues.
CAD – Bank of Canada is the pivotal event risk, with the strong USD felt more in USDCAD if the Bank of Canada waxes dovish as we expect. Oil fundamentals don’t look supportive for CAD either.
NZD – we continue to like AUDNZD higher, possibly to 1.1300 area in coming months. Long term fundamental supports from relative current account fundamentals and valuation.
NOK – our commodities strategist Ole S. Hansen outlines the supply risks to the oil price in today’s Market Call podcast and risk from weak risk appetite further compounds the downside risk for NOK – but let’s see a newly daily close in EURNOK clear of 10.05
SEK – the krona tries to get a boost from the strong Manufacturing PMI yesterday, but risk off weighs, as likely could the Riksbank if they climb down from their insistence in maintaining a bias to hike rates.
Upcoming Economic Calendar Highlights (all times GMT)
- 1400 – US Aug. ISM Manufacturing
- 1700 – New Zealand Aug. QV House Prices
- 2100 – US Fed’s Rosengren (Voter) to Speak
- 2230 – Australia Aug. AiG Services Index
- 0130 – Australia Q2 GDP
- 0145 – China Aug. Caixin Services PMI
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