Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Should USDJPY trade above 110.00?
John J. Hardy
Chief Macro Strategist
Summary: The question of the week and perhaps even for the next month or more is whether the US-China trade deal signing this week provides any pivot point in global markets, where the melt-up in risk assets has gone parabolic in places. USDJPY looks overdone to the upside unless safe haven yields pull to new cycle highs.
Yesterday featured yet another jump to new record highs for US equities, with an almost parabolic acceleration in some of the mega-cap US names and in a stock like Tesla, which by all appearances is in the throes of a short squeeze. Adding to the positive mood ahead of the US-China trade deal signing in Washington tomorrow are the US removing the label for China as a “currency manipulator” yesterday and the announcement over the weekend of a resumption of formal economic dialogue between the US and China on a semi-annual basis. We can’t help but believe that the trade deal signing this week could prove a major market turning point, particularly if the wording in the deal disappoints – a high risk.
In market action, outside of a plunging USDCNY rate, the US dollar remains widely firm, with even most EM currencies unable to tack up further gains and even pushing a bit lower as the market finds itself in a less rosy mood this morning. With the trade deal signing, it would not be surprising to see USDCNY go very quiet rather than continuing on anything resembling its current trajectory.
We note that the JPY could correlate positively with the USD in the crosses (strong USD = strong JPY) if the market move shifts here as both currencies serve as safe havens and we are not comfortable with the USDJPY level above 110.00 in general as long as US yields remain capped below 2.00%.
The calendar today is rather thin outside of a US CPI release later today, with core inflation expected unchanged at 2.3% and not much of a catalyst outside an exceptional surprise either way, but no print is likely to spark much Fed comment unless we are stretching above 2.5% at the core here and the PCE inflation – currently 1.6% year-on-year – is not confirming.
Chart: USDJPY
USDJPY poking above 110.00 overnight and into this morning as global yields ticked back higher and the equity melt-up accelerated yesterday, though equities are struggling a bit this morning. As stated above, we have a hard time supporting this move above 110.00 without new highs in the longer US 10-year yield benchmark, for example, above 2.00%, and the recent overlapping, churning price action weakens the relevance of the pair clearing the recent range. Still, a sharp sell-off well back into the range is needed to provide any explicitly bearish tactical signal.
The G-10 rundown
USD – the US dollar seems to continue to default to the strong side, and given all that the Fed has thrown into the punchbowl to weaken it, USD bears should be alarmed until or unless the Fed continues to up the game.
EUR – the EURUSD suffered a bearish reversal, but has yet to follow through lower, even if the chart is tactically bearish as long as we remain below the 1.1150-75 area.
JPY – the yen a recent weakling, but would expect is character to change if the US-China trade deal signing provides a pivot point for general market consolidation – more interesting, potentially, in crosses like CADJPY or NZDJPY than in USDJPY.
GBP – sterling struggling here, with GBPUSD having now cemented its move below 1.3000 and a local pivot around 1.2905 the last level ahead of perhaps the 200-day moving average below 1.2700.
CHF – the franc hasn’t shown any tendency to weaken as equities have flown higher – is that immunity down to the SNB. Meanwhile, this morning, we have EURCHF pressing on the cycl
AUD – the Aussies looks pretty weak here in folding back lower against the US dollar even as the CNY charges higher. The only bullish argument here for the Aussie, outside of hopes for a revival of Chinese demand for its commodities exports, is that insurance payments to cover bushfire damage offset risks to the economy.
CAD – the USDCAD price action looks comfortable above 1.3000 now – next step for bulls is to take the chart out of its neutral status to a more explicitly upside bias, with a rally above 1.3150 helping on that account.
NZD – we are constructive on AUDNZD upside for the medium term – with a lot of wood to chop still in NZDUSD before we can call a structural bearish reversal there, even if 0.6600 looks like local trigger there.
SEK – Swedish home prices rose 5.00% year-on-year, according to a Swedish housing survey this morning, but any gains are unsustainable in the medium term in a bubbly market and after the Riksbank’s policy moves this year – which will be felt with a 9-12 month lag.
NOK – EURNOK slipped above the 200-day moving average and NOKSEK turned tail at recent highs, but NOK bulls don’t have technical reason for concern for bears until challenging above 10.00 in EURNOK.
Upcoming Economic Calendar Highlights (all times GMT)
- 1100 – US Dec. NFIB Small Business Optimism
- 1330 – US Dec. CPI
- 1400 – US Fed’s Williams (Voter) to Speak
- 1800 – US Fed’s George (Non-voter) to Speak
- 0030 – Japan Bank of Japan’s Kuroda to Speak
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