Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: GBP up as Brexit talks to extend. RBA takes AUD down.
John J. Hardy
Chief Macro Strategist
Summary: There will be no Brexit talk deadline today, a relief for sterling bulls, but a situation that merely extends the uncertainty. Elsewhere, the RBA November 3 meeting is likely shaping up for a new easing push from Lowe and company as their overnight musings on longer term QE took the AUD down a few notches. Elsewhere, we watch the relative strength race between the USD and JPY as 105.00 has come into view in USDJPY.
Trading focus:
JPY still in the cross-hairs
As I have noted recently, the yen is receiving a double whammy of support from the strength in safe haven bond yields (the most important driver) and weak risk sentiment of the last couple of sessions. I speculated in this morning’s Saxo Market Call podcast whether one of the factors keeping the EURJPY from lower levels is the EU sovereign bond market, where bond traders have had a field day since the spring in bidding up peripheral debt (piggy-backing ECB flows) as EU sovereign spreads tighten. This element is entirely missing in Japan’s moribund JGB market, but the JPY remains undervalued in real-interest rate terms. We focus on the 105.00 area in USDJPY for a wider realization of this level – every prior attempt below this level since 2018 has been gathered up within a few trading days.
Pause button pressed for sterling
Just ahead of yesterday’s update, the headline crossed my screen that Boris Johnson would not walk away from talks today, which the market took as a hopeful sign that the current status of the talks is sufficiently amicable to indicate that a deal is reachable. According to sources in the major news media, both sides suggest that late October or the first week of November are the more likely timeframe for an agreement. On balance, the fact that talks are ongoing are promising for sterling, but we still likely will need that critical breakthrough for sterling to post any larger directional move. Until then, a break below 0.9000 in EURGBP would represent a fuller reversal of the prior rally and could lead to the exploration of the bottom of the range just below 0.8900, which also happens to coincide with the 200-day moving average.
AUD hit on RBA consideration of longer term bond purchases
The Australian 10-year yield dropped a chunky 7 basis points overnight (from 0.84% to 0.77%) on RBA governor Lowe out indicating that the RBA is considering extending the maturities of its bond purchases and mulling whether lowering 5-10 year yields would help the Australia labour market. The Governor complained that Australian 10-year yields are still too high. This has the market placing bets that the RBA is set for a bigger move at the November 3rd meeting, which could include a rate cut and now more likely to see a proper QE programme that includes purchases to lower Australian yields all along the curve.
Chart: AUDUSD
The AUD is lower across the board on the RBA’s consideration of extending bond purchased out the yield curve and the local line of consolidation has fallen overnight in AUDUSD as the pair really only has the huge 0.7000 area to consider from here to the downside tactically. To get the pair significantly below that level, we would likely need to see further weakness in China’s currency, commodity prices like iron ore heading lower, and generally weak risk sentiment. The first area lower beyond 0.700 is the 200-day moving average just below 0.6800.
The G-10 rundown
USD – looking generally firm, but not the centre of attention at present. As long as US stimulus fears weigh on risk sentiment, likely to continue to see resilience.
EUR – considerable speculation around the ECB’s next measures, but the ECB is already doing plenty if we have a look at EU peripheral spreads, and the focus is likely to increasingly shift to the fiscal – watching for signals from the EU Summit today and tomorrow on that front.
JPY – very interested in the relative horse race of the USD and JPY as 105.00 and below approaches to see which achieves top status as a safe haven currency if yields continue lower and risk sentiment is rocky.
GBP – potential for further gains here, but still need the key breakthrough and wonder if the ceiling is a bit low for sterling even in the best of outcomes – more thoughts later now that talks likely to drag on for two more weeks or more.
CHF – a grinding bit here in CHF as EURCHF slowly moves lower – maybe more sensitive to global bond safe-haven seeking that risk sentiment swings per se?
AUD – Australia hit by the RBA and could trade on weak side until the November 3 RBA meeting, especially if global outlook remains further clouded by Covid-19 concerns and China’s yuan suffers a bout of consolidation after its recent run.
CAD – USDCAD has room to consolidated to 1.3250 without raising eyebrows, but seems low beta to the overall USD situation. CAD traders need keep an eye on oil prices as these traded near resistance yesterday.
NZD – the kiwi enjoying strength against the sudden downshift in the Aussie, but the RBNZ will be quick to take care of preventing pronounced NZD strength eventually. For relative strength in that pair, watching the 200-day moving average around 1.0620. Big level for NZDUSD is 0.6500.
SEK – the krona may be overachieve in short term, but still have a “fade the rallies” stance in EURSEK as long as we remain south of 10.500 for a move into sub-10.00 territory in 2021.
NOK – the EURNOK level of 10.75-80 is the one to crack tactically for NOK bulls – could be a short term walk in the desert here for those bulls if the Covid-19 partial shutdowns continue to weigh on the oil outlook over the winter.
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