Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: USD finds support on resurgent treasury yields.
John J. Hardy
Chief Macro Strategist
Summary: The greenback found strong support on Friday just after it had gone over the edge in many USD pairs. The move coincided with a strong rebound in US treasury yields, theoretically in reaction to the US Retail Sales report, though the move seemed out of proportion with the incoming data. The reversal in many USD pairs suddenly sets the situation on edge for USD bears here, who may be out of business for a while if the market is forced to reprice the Fed Funds curve higher again.
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FX Trading Focus: USD jumped as US treasury yields backed up, with the incoming data a weak justification for the move. GBP on its back foot ahead of CPI data. Where are we meant to focus this week?
The US treasury market sold off heavily on the US Retail Sales report Friday, suggesting that the move had something to do with that report. But there was little in the numbers to justify an almost 15 basis point jump in 2-year yields by the end of the day, with yields also rising all along the curve. The Fed’s Christopher Waller (a voter as Board of Governors member) was out with hawkish rhetoric Friday as well, but most of the reaction was over the indifferent retail sales data. By the end of the day, the market had bumped its odds higher for a rate hike at the May 3 FOMC meeting and slightly more than fully priced a 25 basis point higher rate through the June FOMC meeting.
The USD bullish view here would build on the idea that the market was far too quick to discount the Fed forward rate curve so extensively in the panic that ensued from the Silicon Valley Bank collapse and other banking sector turmoil of late. Indeed, the latest weekly US commercial bank deposit data saw deposits rising a chunky $60B through April 5. Other evidence that bears close watching this week is what the medium and smaller US regional banks are reporting in their earnings calls for Q1 and the guidance they provide. A couple of these banks (including M&T) are reporting today and a full picture of the scale of the pressure on banks should be available by the end of this week as a flurry are reporting Tuesday-Thursday. Otherwise, it is a thin week on the US data calendar (judging from Friday’s action, data seems just an excuse here anyway) outside of housing related numbers like today’s NAHB survey number (probably stabilizing further after February rebound?) and regional manufacturing surveys.
Chart: GBPUSD
GBPUSD reversed hard on Friday on a combination of both sudden new USD strength and an extension of recent sterling weakness, perhaps as the Bank of England is a known dragger-of-its-heels on tightening policy further and as it maintains a far more aggressive forecast on impending disinflation. The UK March CPI report is up on Wednesday. The move erases the entire attempt at the prior 1.2525 pivot high from earlier this month and the prior major double top in the 1.2445 is also a consideration. Still, given the scale of the rally off the sub-1.1900 lows, we would arguably have to reverse down through the 61.8% retracement of the large up-wave around 1.2087 to firmly reset the focus lower. Still, the high momentum capping of the price action has set the bar quite high for GBPUSD bulls locally.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD reversal not yet picking up yet in the overall trend picture, while the JPY weakness deepens and the former sterling strength has now entirely evaporated (note that GBP has the strongest directional two-day momentum reading of the G10 currencies.) CHF could prove vulnerable if yields continue to rise.
Table: FX Board Trend Scoreboard for individual pairs.
Note the extension of the AUDNZD move higher ahead of the quarterly NZ CPI release on Thursday – critical for that pair. NZDUSD also looks heavy on range support. AUDUSD never got anything going to the upside and is thoroughly stuck here between 0.6600 and 0.6800. And I am not sure I can recall a trend surviving no setbacks for 95 days, but that is currently what this EURNOK rally has achieved.
Upcoming Economic Calendar Highlights
- 1200 – Poland Mar. CPI Core
- 1230 – US Apr. Empire Manufacturing
- 1300 – UK Bank of England’s Cunliffe to speak
- 1400 – US Apr. NAHB Housing Market Index
- 1500 – ECB President Lagarde to speak
- 0200 – China Q1 GDP
- 0200 – China Mar. Industrial Production
- 0200 – China Mar. Retail Sales
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