Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Oil-linked currencies first to attempt full recovery.
John J. Hardy
Chief Macro Strategist
Summary: The combination of a powerful risk-sentiment boost since Friday and a massive boost to crude oil prices since yesterday has helped a near full turnaround in oil-linked currencies, particularly NOK, as EURNOK is back to trading near one-month lows on the change of mood. Elsewhere, USDCAD has also reversed most of the recent damage, while the Aussie has more work to do to post a significant reversal. Meanwhile we mull whether Jackson Hole will bring any signal worth a strong market reaction.
FX Trading focus: EURUSD remains in limbo, Oil-linked currencies reverse recent losses
EURUSD has backed up just enough to encourage the idea we have seen a reversal by poking at the 1.1750 area, but as I wrote yesterday, we would still like to see a go above 1.1800 post Fed Chair Powell’s speech on Friday for a sense that the USD is weakening more broadly. The euro remains very passive here as we await developments in Europe to suggest there is any pulse of interest. The German election is the next step there. Flash August PMI’s yesterday from Europe were certainly supportive enough (but Bund remain firm as yields limped back lower after yesterday’s brief flash in the pan rise – a dysfunctional market). But in the UK we saw a fairly large miss on the services side in the UK (55.7 vs. 58.7 expected) a similar pattern in the US (55.2 vs. 59.2 expected, which echoes the huge drop in the University of Michigan sentiment survey for the preliminary August figure).
It was the nearly five-dollar per barrel recovery in oil prices from recent lows yesterday and toda that has driven the biggest movers in the G10 currency space, NOK and CAD, which have largely fully reversed the extension of the sell-off – with EURNOK never having posted a new high before reversing lower, as seen in the chart discussion below. Elsewhere, AUDUSD, for example is not there yet – needing 0.7300-50 to suggest a reversal, while. I have a hard time reading the quality of the recent sentiment recovery move, but it could be on rather thin liquidity and is certainly unlikely to continue with anything resembling the current momentum. Jackson Hole, meanwhile, while it may fail to present a hawkish message, will have a hard time adding further support to the market at its current levels and the market may begin to fret the forward trajectory of the economy rather than central bank moves that could prove irrelevant in the near term anyway, as I discuss below.
Chart: EURNOK
The Scandies have enjoyed this comeback in risk sentiment and stirrings out of optimism in Chinese markets and hopes for eventual stimulus there may be a further help at the margin. For EURNOK, certainly, this latest resurgence in oil prices that has gone a long way to reject the price break lower helps offer the sense that, barring any new general meltdown in sentiment, EURNOK has avoided a further squeeze risk and may be ready for a try below the 200-day moving average on a further boost to oil prices and hopes for the global growth outlook – but first, we’ll have to see if the 10.36 area support falls and eventually the 200-day moving average near 10.29.
Jackson Hole – damp squib or significant risk? The market reactivity around Fed Chair Powell’s Jackson Hole speech may prove rather muted, first and foremost because there may not be much to react to, as there is just enough uncertainty around delta variant for the Fed to want to dance around the taper issue for another couple of months to ensure that the outlook isn’t tanking due to virus disruptions before acting. Still, once the Fed does move to taper, we suspect it will want to carry it out at a more rapid pace than we are seeing in some estimates of $15 billion per month. It still isn’t unreasonable for the September FOMC meeting to be “live” for a taper message as we have the better part of a month for (hopefully) improvement on the covid situation in the US. Second, the Fed has already stored up a rather large “arsenal” of further QE in allowing its overnight reverse repo facility to balloon to north of $1.135 trillion, which is closing in 10 months of full QE-equivalent even if the Fed were to stop purchasing assets tomorrow. Some of this is driven by the treasury’s wind-down of its general account at the Fed, a process that is now more or less complete now that the account is nearing $300 billion (from $1.6 trillion in February!).
Watch out for moderate House Democrats holding up progress of infrastructure bill – a game of “chicken” is underway in the US House of Representatives as moderate Democrats are withholding votes on Biden’s huge social-spending bill of $3.5 trillion as they demand that the House first pass the bipartisan Senate infrastructure bill before proceeding. The fiscal cliff risk grows if the Democrats can’t reach agreement.
Table: FX Board of G10 and CNH trend evolution and strength
The reversal of price action since Friday has seen the USD and JPY uptrends severely demoted in momentum terms, while CAD and NOK have been the most significant beneficiaries, as has gold, which is having a poke at key levels above 1,800 in XAUUSD terms. Still, recent developments will need to extend considerably to suggest a full reversal of the established trends.
Table: FX Board Trend Scoreboard for individual pairs
Note that spot gold in USD terms managed a trend reversal yesterday, with USDCHF slipping back into the negative, even if it needs to break 0.9000 for any significant development. Note that USDCNH is close to a trend-flip, although the range has been so tight there that we’re not sitting on the edge of our seats. Elsewhere, the new developments are in obscure CAD- and GBP- crosses.
Upcoming Economic Calendar Highlights (all times GMT)
- 1400 - US Aug. Richmond Fed Manufacturing Survey
- 1400 - US Jul. New Home Sales
- 2245 - New Zealand Jul. Trade Balance
- 2355 - Australia RBA’s Connolly to speak
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