Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
FX Update: Yuan-yen mean reversion is on. USD on a rampage.
John J. Hardy
Chief Macro Strategist
Summary: The sharp devaluation move in the Chinese renminbi over the last week has injected fresh energy in the US dollar rally, especially against commodity- and emerging market currencies. Meanwhile, firming bond markets and weaker commodity prices have finally offered the Japanese yen a strong new source of support, as it has matched USD strength over the last several sessions.
FX Trading focus: Yuan-yen mean reversion. USD on the rampage versus cratering CNH, commodity- and EM-currencies and stering.
My colleague Redmond Wong has penned an excellent piece on the CNY move of the last week and the outlook for strong mean reversion in CNH relative to the Japanese yen, as China has finally moved off its semi-peg against the rising US dollar in recent months in allowing the recent steep valuation in the currency. Meanwhile, after its long bout of extreme weakness, the JPY has begun matching USD strength in recent days and could even outpace the greenback on further commodity weakness and a consolidation in global bond yields. Any nudge from the Bank of Japan indicating a softer attitude toward yield-caps would be an additional kicker, if this Thursday’s meeting may be too premature for expecting such a development.
The CNH move has broadened out the USD strength over the last few sessions and brutally so when we look at the likes of the sudden jolt lower in AUDUSD within the G-10, but also as most EM currencies have been marked sharply lower versus the rising greenback on a wave of risk aversion. As long as commodity prices continue to weaken (possibly a reflexive development in the first place), the CNH move may continue, though I have a hard time believing that the pace of weakness will continue for long at the remarkable >1% move we saw today. (Small update: Just before finishing up this update, China was out cutting its banks’ RRR for forex by a percent to ease pressure on the yuan and triggering a sharp consolidation. This suggests it would like to see a slower pace of weakness, or maybe even hopes of signaling “enough is enough for now” )
Chart: GBPUSD
Sterling is taking a broad beating, as well it should, with the economy beset by supply-side limitations, a contracting fiscal outlook and a cost-of-living crisis that is already showing signs of crimping real growth, with last week’s weak March Retail Sales and second-lowest ever April GfK Consumer Confidence reading helping to spark the sterling meltdown on top of the pressure provided by the strengthening US dollar. And this is before the inevitable roll-over in home prices once higher rates begin to bite (the UK not alone here). All the while, the UK has a yawning current account deficit aggravated over the last 6 months by spiraling costs for its energy imports, while recent weak risk appetite reduces the potential for investment capital inflows to offset. The 1.3000 level in GBPUSD gave way on Friday with brutal force and the follow through to kick off this week looks ominous. On the chart, the eye is drawn toward the massive 1.2000 level – arguably the real range support when not considering the worst chaotic days in early 2020 during the reaction to the global pandemic outbreak.
EUR anti-climax on French presidential election result. With the backdrop of cratering risk sentiment, the strong Macron victory in the French presidential election run-off failed to spark the kind of interest it might have in a different context. Suffice it to say that the euro avoided a potential disaster, but that this was largely expected by the time the weekend rolled around and seems mostly in the price anyway when elsewhere the CNH is suddenly undergoing a violent revaluation, etc. I still like EUR versus the sterling here and for some time forward and in the long term versus the US dollar, though not as long as global markets are in a risk deleveraging moment. Interested in possible reactivity in the EURGBP cross if the 0.8500 area falls in the days to come. Otherwise, the French election situation is still with us in two ways – first if the legislative elections in June produce a PM that is in opposition to Macron and second, if instead if current ECB President Lagarde ends up as the next French PM as Macron apparently hopes. This would set in motion a search for the next ECB president, much needed as Lagarde is out of her depth in the role. She refused to comment on taking the role when asked today.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD has risen to the top of late, but do note the tremendous momentum shift in the JPY over the last week, just as the CNH has move in the opposite direction. The commodity currencies taking it on the chin, and showing up most clearly in the weak AUD as it is the most China-linked G-10 currency.
Table: FX Board Trend Scoreboard for individual pairs.
Watching for further signs of commodity currency weakness and breakout levels in EURGBP – note the EURSEK move lower neutralized – but will it turn higher. Elsewhere, the funk in gold is deepening – watching chart levels at 1,900 and below.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Mar. Chicago Fed National Activity Index
- 1430 – US Apr. Dallas Fed Manufacturing Activity
- 1500 – Canada Bank of Canada Governor Macklem before parliamentary committee
- 1700 – ECB's Panetta to speak
- 2300 – South Korea Q1 GDP
- 2330 – Japan Mar. Jobless Rate
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