Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Tactical do or die for USD bears over next few sessions
John J. Hardy
Chief Macro Strategist
Summary: key USD pairs are close to key levels, or even beyond in the case of AUDUSD, making life difficult for USD bears, even if the broader picture is not entirely decisive and may not be until we have a look at the US jobs numbers this Friday. Emerging market currencies have rebounded smartly on fading geopolitical fears and a strong CNY.
The market is rebounding from the risk-off move inspired by the US-Iran showdown over the US assassination (or targeted killing, depending on your news source/views) of the Iranian military leader Soleimani. The move across FX largely fit with this overall resumption of risk on, with a couple of notable exceptions, especially the struggling AUD, which is at critical levels here versus the USD and JPY, likely as confidence has been heavily impacted by Australia’s bushfires and perhaps has many in the market fearing that RBA rate cuts could yet yield to quantitative easing, though the market consensus is for a terminal rate of 0.50% through the end of this year. A move in AUDUSD below 0.6900, as we discuss in the chart segment below, spells trouble for bulls in that pair positioning long after the break above that level into year-end.
We posed the question yesterday whether this US dollar is finally for turning lower, and the answer is so far “it depends what you are looking at” as EM trades are as hot as they have ever been on as-good-as-it-gets financial conditions encouraging a reach for yield. Confidence in EM trades also likely bolstered by the USDCNY moving sharply lower overnight through 6.95 and therefore through the 200-day moving average for the first time since last May. One note of caution on the EM front: even as EURPLN notches new lows for the cycle, savers in PLN are now suffering some of the worst negative real rates out there as Poland just printed a 3.4% inflation rate for December, the highest level since 2012. And look over at USDMXN, which is pushing on the lows despite Mexico in recession (though the real rates picture here couldn’t be more different from Poland as Mexico features a 7.25% policy rate with inflation running around 3.0% while Poland has a 1.5% policy rate and now inflation running above 3.0%)
Chart: AUDUSD
The AUD is the weakest of the G10 currencies to start the year as confidence and growth levels are likely to be impacted in the near term by the terrible spate of bushfires, though a fiscal impulse to deal with the aftermath could provide some offset down the road. For now, traders focusing on the major AUDUSD cross will struggle to maintain a bullish view on a close below 0.6900, as the 0.6900-35 area was a key level on the way up and the 0.6900 area is now the 200-day moving average, a technically prominent MA several times in 2019.
The G-10 rundown
USD – the US dollar is not playing ball with the bears here – a further leg higher of about 0.5% depending on the cross suggests we are shifting back to the perma-limbo that plagued much of 2019. A better status check on the greenback on the weekly close and the other side of the US jobs numbers this Friday.
EUR – as the market bounces back from geopolitical concerns, the euro fails to shine. Some have argued that the euro has become the funding currency of choice, will be watching how the single currency correlates with further bouts of risk-off this year to test that hypothesis.
JPY – as markets recoil from the geopolitically inspired risk-off move, the JPY weakens quickly – a bit more upside in yields and general risk appetite and USDJPY likely to reverse the recent sell-off and interesting as well to note the classic risk barometer AUDJPY failing yet to take out the 200-day moving average.
GBP – sterling firming a bit after yesterday’s December UK Services PMI impressively rebounded to just above 50 despite all of the supposed Brexit uncertainty and UK general election. Parliament sitting today and will set the course for a formal withdrawal from the EU at the end of this month, while March 11 has been set as the date for delivery of the next budget.
CHF – the franc marching to the beat of its own drummer as the relief from risk-off trades not see here and EURCHF remains heavy near the cycle lows.
AUD – the AUDUSD struggling in the last zone of support and right on the 200-day moving average this morning. The pair needs to find a bid sooner rather than later to argue for .
CAD – CAD is looking overambitious here as oil prices have pulled back, let’s see if the market treachery that was ever present in 2019 and looks to be hitting the AUDUSD bulls also strikes here for recent USDCAD sellers..
NZD – the longer term upside prospects for AUDNZD we mentioned yesterday have turned into downside tactical price action, though AU-NZ 2-year rate spreads are over 10 basis points off the lows. Would expect RBNZ to be on the warpath below 1.0300 if the selling continues.
SEK – we like EURSEK lower as long as the price action remains below 10.60/65, but patience may be required as we need stronger fundamental story to see more conviction in SEK longs – especially a change in the fiscal outlook for Sweden.
NOK – EURNOK able to press lower despite the recoil in oil prices as risk appetite rebounds, but the pair is looking a bit oversold without fresh catalysts.
Upcoming Economic Calendar Highlights (all times GMT)
- 1330 – US Nov. Trade Balance
- 1330 – Canada Nov. Trade Balance
- 1500 – US Dec. ISM Non-manufacturing
- 1500 – Canada Dec. Ivey PMI
- 1600 – New Zealand Dec. QV House Prices
- 0030 – Australia Nov. Building Approvals
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