Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: USD and JPY rise to top on negative sentiment shift.
John J. Hardy
Chief Macro Strategist
Summary: The USD moves back into broad rally mode on the latest general dip in risk sentiment, but the JPY proves even more sensitive to the intermarket backdrop. Within the G10 currencies the AUD and CAD appear ready for new cycle lows on any further concern for the outlook from here, while EM currencies are also feeling fresh strain.
Trading interest
- Short EURGBP with stops above 0.8400
- Long USDCAD with stops below 1.3150 for 1.3500+
- Short EURJPY with stops above 119.50
HSBC announced an ugly $7.3 billion writedown and massive layoffs and Apple warned on Q1 revenues overnight, developments that have set a negative tone for the market action this morning. Equities are down modestly, but safe haven bonds are sending a more pointed risk-off signal as we never saw much consolidation recently in the first place. The US is getting back to work today after a long weekend, the 30-year benchmark is down challenging below the 2.00% level and is a mere 10 basis points from the all-time low from late August of last year near 1.90%. Risk-sensitive currencies across EM and within the G10 are generally weak, with AUDUSD back below 0.6700 in early trading and Asian EM threatening new lows for the cycle. The Chinese renminbi is trading weaker, with USDCNY once again poking above 7.00 this morning.
We prefer to take out cue from the safe haven bond developments for now and look for the risk of a broadening and deepening risk off response until policymakers reply in force. The flattening US yield curve suggests that the Fed is behind the curve, but the Powell Fed may have a hard time sending an easing measure without sufficient distress in risky assets, given fears recognized by some Fed officials that its guidance and actions so far have already inflated a bubble. Data up later today is second-tier stuff, but still interesting to get a look at the first regional Empire manufacturing survey for February from the US out later, while the more interesting data awaits on Friday in the form of flash PMI out of Japan and Europe on Friday. A story out of Japan showing the potential for not just external disruption but disruption to the domestic economy was the cancellation of public participation in the popular Tokyo marathon, scheduled for March 1.
Chart: USDCAD
USDCAD has quietly consolidated in a fairly tight range relative to the recent chunky rally off the lows as the market has repriced the loonie lower due to the huge sell-off in crude oil and as the risk from here is that the Bank of Canada is the G10 central bank with the most cutting potential should the outlook weaken further. There is a considerable overhead resistance zone into 1.3350 or so, which the pair will have to clear for a shot at 1.3500+.
The G-10 rundown
USD – the greenback outpaced marginally by the JPY but strength showed clear broadening against smaller G10 and EM currencies on this latest whiff of risk off. Watch out for Trump railing against the new highs in the USD at some point if the equities falter more than a percent or two.
EUR – the euro weak versus traditional safe havens and the US dollar here, but may fail to lead the race to the bottom if broader risk sentiment weakens further as the smaller currencies should prove more vulnerable in such conditions.
JPY – the yen should continued strength here, broadly speaking, as long as the bid for safe haven bonds persists. The strength could pick-up more forcefully as the long US T-bond threatens the cycle lows in yields. EURJPY back in play to the downside on further drops in bond yields.
GBP – the recent sterling recovery and hopes for generous fiscal outlays when the (likely delayed) UK budget is announced next month may not sit well with a retrenchment in risk appetite – but still prefer to remain constructive on sterling in EURGBP
CHF – EURCHF close to the lows for the cycle and seems to find downside as the default direction regardless of the backdrop – 1.0500 may be the next psychological target for bears.
AUD – the Aussie looking weak and ready for new cycle lows in AUDUSD and elsewhere (consider AUDJPY shorts, for example) on the market’s possibly insufficient pricing in of more widespread fall-out to the outlook from the coronavirus outbreak, not to mention Australia’s existing vulnerabilities from its domestic credit cycle.
CAD – the USDCAD consolidation has proven orderly and shallow, keeping bulls in the driver’s seat, though we need to take out the heavy overhead resistance from 1.3300-1.3350 to get the trending ball rolling.
NZD – the kiwi outpacing the Aussie overnight, likely on the Australian economy’s greater sensitivity to the outlook for China, but the overnight in NZDUSD should embolden the bears there.
SEK – the volatile Swedish Unemployment Rate series just outdid itself this morning with a 7.5% print after , although the seasonally adjusted figure was 7.1% vs. 6.9% expected (and 6.6% last month).Given the backdrop of weaker sentiment, the market defaulted to selling SEK, but EURSEK only threatens a reversal if it trades well back above 10.60.
NOK – ugly shift overnight in risk sentiment and EURNOK pulled hard away from the key 10.00 level – the obvious downside catalyst – which underlines risk of test of highs and beyond if we finally see some retrenchment in risk.
Upcoming Economic Calendar Highlights (all times GMT)
- 0930 – UK Jan. Jobless Claims Change
- 0930 – UK Dec. Average Weekly Earnings
- 0930 – UK Dec. Employment Change/Unemp. Rate
- 1000 – Germany Feb. ZEW Survey
- 1330 – Canada Dec. Manufacturing Sales
- 1330 – US Feb. Empire Manufacturing
- 1500 – US Feb. NAHB Housing Markt Index
- 2215 – New Zealand RBNZ Governor Orr
- 2350 – Japan Jan. Exports/Imports
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