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...
JPY thrives as risk appetite dives
John J. Hardy
Chief Macro Strategist
Summary: The JPY rises to the top as weak US economic data and fresh fears that US-China trade talks are at an impasse saw global equity markets rolling over yesterday. Further JPY upside likely to remain a prominent theme if risk appetite is finally turning back again.
The US retail sales data yesterday was one of the worst macroeconomic data shocks in recent memory. The January ex-Autos and Gas saw a steep –1.4% drop month-on-month, the worst single month drop since March of 2009 and worst December drop since the beginning of the data series in the early 1990s.
The data saw US yields dropping sharply all along the curve – more aggressively at the long end. The consequent dose of risk-off helped engineer a sharp turnaround in the JPY back to strength, just ahead of pivotal levels in USDJPY (the 200-day moving average a bit higher than yesterday’s 111.00+ highs).
The sharp turnaround came despite a firm USD elsewhere and thus a sharper turnaround in other JPY cross suggests we may have finally just seen a key low for the JPY, which is set to thrive if the global outlook worsens and the market continues to head for the solace of safe havens like long US treasuries and as Japan’s carry traders find themselves in a bind in EM and other positive carry positions.
The latest Chinese credit data showed a record injection of credit into the economy ahead of the Chinese New Year, and a recent report from the New York Fed argues that China’s credit growth represents 60% of global – yes, global – credit growth over the last ten years. It is clear that the USDCNY rate has to be under enormous pressure as long as credit growth remains this high, but also likely that a lid is kept on the rate at least until we have the semblance of an outcome to US-China trade talks.
As this week draws to a close, the key question across markets, currency and otherwise, is whether the rally in risk appetite from the late December lows, inspired by the Fed’s turnaround in its policy stance, has now drawn to a close. Much like late 2007, the idea could switch from a focus on celebrating the Fed’s softening tone to the horrible recognition that this turnaround development has come too late and that policymakers in the US and globally are already far behind the curve. Today’s close of trading could prove important for whether we are set for a new bout of unease across markets if we tilt into the weekend with heavy price action in equity markets.
Chart: EURJPY
USDJPY is the most heavily traded JPY cross and the real benchmark for relative JPY strength, but we suspect that a fresh downdraft in risk appetite could see both a strong USD and perhaps even stronger JPY, perhaps most heavily felt in crosses like CADJPY and AUDJPY, but EURJPY is another candidate, given the gathering clouds over Europe after Germany showed no growth in Q4 and EURUSD is trying mightily to break the range lows. So further risk off could set in motion both expanding JPY and EUR volatility in the weeks ahead. Technically, we’ve consistently rejected the rallies at range resistance, but need a close solidly below 124.00 to suggest expanding downside momentum.
The data saw US yields dropping sharply all along the curve – more aggressively at the long end. The consequent dose of risk-off helped engineer a sharp turnaround in the JPY back to strength, just ahead of pivotal levels in USDJPY (the 200-day moving average a bit higher than yesterday’s 111.00+ highs).
The sharp turnaround came despite a firm USD elsewhere and thus a sharper turnaround in other JPY cross suggests we may have finally just seen a key low for the JPY, which is set to thrive if the global outlook worsens and the market continues to head for the solace of safe havens like long US treasuries and as Japan’s carry traders find themselves in a bind in EM and other positive carry positions.
The latest Chinese credit data showed a record injection of credit into the economy ahead of the Chinese New Year, and a recent report from the New York Fed argues that China’s credit growth represents 60% of global – yes, global – credit growth over the last ten years. It is clear that the USDCNY rate has to be under enormous pressure as long as credit growth remains this high, but also likely that a lid is kept on the rate at least until we have the semblance of an outcome to US-China trade talks.
As this week draws to a close, the key question across markets, currency and otherwise, is whether the rally in risk appetite from the late December lows, inspired by the Fed’s turnaround in its policy stance, has now drawn to a close. Much like late 2007, the idea could switch from a focus on celebrating the Fed’s softening tone to the horrible recognition that this turnaround development has come too late and that policymakers in the US and globally are already far behind the curve. Today’s close of trading could prove important for whether we are set for a new bout of unease across markets if we tilt into the weekend with heavy price action in equity markets.
Chart: EURJPY
USDJPY is the most heavily traded JPY cross and the real benchmark for relative JPY strength, but we suspect that a fresh downdraft in risk appetite could see both a strong USD and perhaps even stronger JPY, perhaps most heavily felt in crosses like CADJPY and AUDJPY, but EURJPY is another candidate, given the gathering clouds over Europe after Germany showed no growth in Q4 and EURUSD is trying mightily to break the range lows. So further risk off could set in motion both expanding JPY and EUR volatility in the weeks ahead. Technically, we’ve consistently rejected the rallies at range resistance, but need a close solidly below 124.00 to suggest expanding downside momentum.
The G-10 rundown
USD – the greenback is firm everywhere save for versus the JPY, a strong performance given the very weak macro data out of the US and suggesting that weak data won’t hurt the greenback, as long as risk appetite remains under pressure.
EUR – volatility remains absurdly low and watching and anticipating an expansion if broader market volatility picks up and if EURUSD solidly takes out the range lows toward 1.1215.
JPY – the yen outperformance could be set to continue if risk appetite fades, particularly if sovereign bond yields drop and EM continues to wilt – we suspect JPY carry trading versus EM was a popular theme in the wake of the Fed’s turnaround on its policy outlook in January.
GBP – sterling is being hit by May’s latest misstep, as elements in her own party abstained in the voting on an ill-advised motion that weakens May’s mandate as she heads to Brussels for fresh negotiation. Next step may be a Feb 27 vote on a parliamentary motion to force the government to do all in its power to avoid a No Deal exit from the EU.
CHF – lower bond yields and wilting risk appetite see USDCHF upside interest receding. Fresh downside pressure on EURCHF arrived before the pair could serieously test its 200-day moving average.
AUD – the Aussie weaker and vulnerable to further weakness in risk appetite, but the market may struggle to get aggressive in pricing AUDUSD lower as long as we are bottled up in USDCNY and US-China trade negotiation headline risks.
CAD – a very ugly manufacturing sales data point yesterday out of Canada and the terrible US retail sales data sees collateral damage in CAD crosses. USDCAD firmly focused higher and next focus is clearance of the 1.3375 pivot highs from late January.
NZD – the kiwi is pulling to new highs against the Aussie as the market prefers the Aussies little sister on concerns for both the Australia and Chinese outlooks. Our concern for the kiwi is mostly on the valuation front, but need a catalyst to provide any resistance to further NZD strength.
SEK – a very telling backup after what was supposed to have been a relatively unchanged – and therefore hawkish relative to expectations – Riksbank meeting last week. This suggests the market doesn’t share the Riksbank’s hopeful outlook. As well, a fresh blast lower in risk appetite is not the krona’s friend. Eyes firmly on the cycle highs in EURSEK now.
NOK – Brent crude is holding out well as our commodity strategist points out that global demand for the lower grade Brent is higher than for sweeter grades and Saudi Arabia and Russia are doing what they can to signal supply restraint. But weakening macro data can’t be ignored in oil markets for long and if we are rolling over into a fresh episode of risk off, EURNOK may have a tough time heading lower. It's important for bears that recent highs hold.
Upcoming Economic Calendar Highlights (all times GMT)
09:30 – UK Jan. Retail Sales
13:30 – US Feb. Empire Manufacturing,
14:15 – US Jan. Industrial Production
15:00 – US Feb. Preliminary University of Michigan Sentiment.
USD – the greenback is firm everywhere save for versus the JPY, a strong performance given the very weak macro data out of the US and suggesting that weak data won’t hurt the greenback, as long as risk appetite remains under pressure.
EUR – volatility remains absurdly low and watching and anticipating an expansion if broader market volatility picks up and if EURUSD solidly takes out the range lows toward 1.1215.
JPY – the yen outperformance could be set to continue if risk appetite fades, particularly if sovereign bond yields drop and EM continues to wilt – we suspect JPY carry trading versus EM was a popular theme in the wake of the Fed’s turnaround on its policy outlook in January.
GBP – sterling is being hit by May’s latest misstep, as elements in her own party abstained in the voting on an ill-advised motion that weakens May’s mandate as she heads to Brussels for fresh negotiation. Next step may be a Feb 27 vote on a parliamentary motion to force the government to do all in its power to avoid a No Deal exit from the EU.
CHF – lower bond yields and wilting risk appetite see USDCHF upside interest receding. Fresh downside pressure on EURCHF arrived before the pair could serieously test its 200-day moving average.
AUD – the Aussie weaker and vulnerable to further weakness in risk appetite, but the market may struggle to get aggressive in pricing AUDUSD lower as long as we are bottled up in USDCNY and US-China trade negotiation headline risks.
CAD – a very ugly manufacturing sales data point yesterday out of Canada and the terrible US retail sales data sees collateral damage in CAD crosses. USDCAD firmly focused higher and next focus is clearance of the 1.3375 pivot highs from late January.
NZD – the kiwi is pulling to new highs against the Aussie as the market prefers the Aussies little sister on concerns for both the Australia and Chinese outlooks. Our concern for the kiwi is mostly on the valuation front, but need a catalyst to provide any resistance to further NZD strength.
SEK – a very telling backup after what was supposed to have been a relatively unchanged – and therefore hawkish relative to expectations – Riksbank meeting last week. This suggests the market doesn’t share the Riksbank’s hopeful outlook. As well, a fresh blast lower in risk appetite is not the krona’s friend. Eyes firmly on the cycle highs in EURSEK now.
NOK – Brent crude is holding out well as our commodity strategist points out that global demand for the lower grade Brent is higher than for sweeter grades and Saudi Arabia and Russia are doing what they can to signal supply restraint. But weakening macro data can’t be ignored in oil markets for long and if we are rolling over into a fresh episode of risk off, EURNOK may have a tough time heading lower. It's important for bears that recent highs hold.
Upcoming Economic Calendar Highlights (all times GMT)
09:30 – UK Jan. Retail Sales
13:30 – US Feb. Empire Manufacturing,
14:15 – US Jan. Industrial Production
15:00 – US Feb. Preliminary University of Michigan Sentiment.
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