Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
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Chief Investment Strategist
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FX Update: USD pokes around, in search of catalysts
John J. Hardy
Chief Macro Strategist
Summary: The USD outlook as muddy as ever as we await incoming data and must bear the risk that US-China trade negotiation headlines stretch from here until well over the horizon with no definitive outcome. We could see interesting signals from the Bank of Canada later this week.
Volatility remains low across currencies, though yesterday did provide a few diversions. First, stories emerged yesterday – Eunice Yoon of CNBC being one – claiming Chinese sources were pessimistic on the trade deal outlook, given their prior belief that the US side was ready to roll back tariffs, which the White House then denied. This news saw some minor risk-off, JPY firming type behavior but failed to keep a lid on equities. Then later it emerged that Powell and Trump met at the White House, with Trump claiming that he protested the Fed’s high policy rate “relative to the interest rates of other competitor countries.” And adding that the rate “should be lower than all others (we are the U.S.). Too strong a Dollar hurting manufacturers & growth!” Whatever USD weakness this may have generated has mostly faded
More noise from Trump’s own administration in support of Hong Kong protestors' demand yesterday, as well as from Trump’s own party in the Senate. Self-designated point man Marco Rubio is making a considerable fuss on Hong Kong and Senate majority leader McConnell specifically called on Trump to speak up on the Hong Kong issue. If Trump does speak out it would likely spook the market on concerns that the US-China relationship, trade-deal-wise and in general, would only deteriorate.
Little to get excited about technically here, but do note the well defined technical levels in EURUSD and AUDUSD (1.1000 and 0.6770, respectively) as clear-cut levels that suggest the USD is not for turning lower if these are taken out.
Also note that CAD could be in for a bit more tactical volatility in coming days on today’s data points and the Bank of Canada’s Wilkins out speaking, but especially as Bank of Canada governor Poloz will be out Thursday with a “fireside chat”, suggesting a long and transparent musing on the Bank’s stance that could send interesting signals on how the Bank sees its current, DM-world highest policy rate and where it’s focus lies in determining the path from here.
Chart: AUDJPY
AUDUSD and AUDJPY are in rather similar boats, but both have made a turn lower that has rejected the prior top. Given that AUDJPY is traditionally a barometer for risk appetite, it’s rather interesting that it has failed to sustain the former rally as global equities are in a veritable melt-up. Part of that is no doubt down to the RBA crushing its policy rate lower over the last year, but also as prices for key export commodities like iron ore have suffered over the last few months. From here, any stumble in the trade-deal narrative and further concerns of weak global growth or a correction in risk appetite could weigh doubly on this pair, opening up further downside risks.
The G-10 rundown
USD – the greenback showing little volatility as we await incoming data or any catalyst, trade-deal or otherwise that can generate directional conviction.
EUR – not seeing a reason to get excited about the Euro’s prospects until we see stronger, more unified policy signals from the EU and a sense that the EU economy is turning around (next interesting data on Friday with the flash Nov. PMIs) . Bad US-China trade deal outcomes could be bad for the euro.
JPY – an interesting rally yesterday that quickly fizzled and if USDJPY heads back above 109.00, the quality of the recent bearish reversal there fades further. Treasuries heading back lower this morning together with yet another surge in risk sentiment driving JPY weakness this morning in Europe.
GBP – sterling wants to head higher, but totally lacks momentum and traders may look for binary outcomes after the elections for a larger, more impulsive move via options structures (call spreads, for example, assuming a reasonably large rally).
CHF – the franc drifting around without conviction – watching 1.0850 and 1.1050 in EURCHF for a reason to pay attention.
AUD – a small downdraft in the AUD overnight on the news as the RBA minutes revealed that the RBA felt that a cut was in play at the recent meeting, but decided against it to avoid unsettling consumers. The downside level of 0.6770 a pivotal one if the USD perks up again.
CAD – waiting for USD direction and any signals from Canadian data and the BoC. Generally seeing more risk of a dovish than hawkish surprises from the BoC, but BoC’s Poloz could simply muse on the inefficacy of monetary policy in general.
NZD – NZDUSD trying to look peppy near local resistance, but the 0.6465 area highs is still some way off and we see AUDNZD value from here down to perhaps 1.0500 for longer term structural longs.
SEK – EURSEK is heavy at the bottom of the zone, but we have been here many times before and would like to see a distinct catalyst to encourage a downside view – EU and/or Sweden data looking up, for example, but more compelling would be a fiscal impulse from one or both.
NOK – EURNOK bears suffering a setback yesterday as the new local lows reversed and the 10.05-00 pivot zone survives. The inability to cut lower given the supportive NOK-backdrop is a disappointment. Seasonality will continue to weigh against the NOK into year-end.
Today’s Economic Calendar Highlights (all times GMT)
- 0900 – Italy Industrial Sales/Orders
- 1330 – Canada Sep. Manufacturing Sales
- 1330 – Canada Oct. Home Price Index
- 1330 – US Oct. Housing Starts and Building Permits
- 1400 – US Fed’s Williams (Voter) to Speak
- 1800 – Canada Bank of Canada’s Wilkins to Speak
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