Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
NZD blasted on jobs data, USD steady
John J. Hardy
Chief Macro Strategist
Summary: The other shoe dropped in the Antipodes as the New Zealand dollar dropped steeply on the latest jobs report. Elsewhere, the US dollar continues to trade firmly across the board after a weaker than expected 10-year treasury auction yesterday.
The US treasury auction of 10-year notes failed to generate a decisive move in US long yields, from which USDJPY seems to be taking its cue at the moment. The auction showed rather weak demand, reversing the rally of the last two days, though that reversal in turn lost some steam later in the day and overnight, leaving us none the wiser on the direction for long US yields.
Today’s auction of the Treasury’s longest duration bonds – the 30-year T-bond – is the next chance to spark movement. At times in recent months, bigger moves in the treasury market seem to swing into gear before those for equity markets, hence our intense interest in the direction for long US yields here. A sell-off in US treasuries and rise in US equities, for example, likely keeps USDJPY and EURUSD as the more interesting ways to express USD strength, while risk off and lower US yields could see upside USD/EM trades in the spotlight.
Overnight, the kiwi was blasted for steep losses on a very weak Q4 jobs report. The employment growth disappointed at a 2.3% YoY rate versus +2.6% expected and most recent QoQ figure dipping to a paltry +0.1% vs. +0.3%. Even worse was the rise in the headline unemployment rate to 4.3% vs. an upwardly revised 4.0% in Q3 and compounding this, the participation rate dropped 0.1% as well. This is all lagging data, but the drop in the front end of the NZ yield curve is justified and the kiwi may have topped for the cycle here.
Trading interest today
• Lightening up on AUDUSD short exposure – taking off half below 0.7100 – bringing stops below 0.7200 and looking for 0.7000 for remainder.
• Maintaining EURUSD downside exposure for minimum 1.1300 but looking to retain exposure for downside break
• Maintaining downside interest in EURJPY short with stop above 125.70
• Maintaining AUDCAD shorts with stops above 0.9485
Chart: NZDUSD
NZD slammed for steep losses overnight on the weak jobs report, catching fresh AUDNZD shorts from the previous day’s AUD rout off guard and seeing a pronounced reversal in NZDUSD. This sell-off looks like a rally neutraliser, resetting the chart to neutral at best and arguably pointing to a test of the early 2019 lows.
The 200-day moving average is the current focus but wasn’t much of a barrier in recent experience. Further out, we’ll need a sense of whether risk off drives a deeper dive to the cycle lows below 0.6500 or if a stronger than expected US economy first sees the market reassessing the US rate outlook, resulting in the same. As for New Zealand, the tumble in yields at the front end of the curve has been profound, and yet we have yet to actually price the first Reserve Bank of New Zealand rate cut for this year, although 2-year rates have fallen below the current 1.75% policy rate to 1.63%.
Today’s auction of the Treasury’s longest duration bonds – the 30-year T-bond – is the next chance to spark movement. At times in recent months, bigger moves in the treasury market seem to swing into gear before those for equity markets, hence our intense interest in the direction for long US yields here. A sell-off in US treasuries and rise in US equities, for example, likely keeps USDJPY and EURUSD as the more interesting ways to express USD strength, while risk off and lower US yields could see upside USD/EM trades in the spotlight.
Overnight, the kiwi was blasted for steep losses on a very weak Q4 jobs report. The employment growth disappointed at a 2.3% YoY rate versus +2.6% expected and most recent QoQ figure dipping to a paltry +0.1% vs. +0.3%. Even worse was the rise in the headline unemployment rate to 4.3% vs. an upwardly revised 4.0% in Q3 and compounding this, the participation rate dropped 0.1% as well. This is all lagging data, but the drop in the front end of the NZ yield curve is justified and the kiwi may have topped for the cycle here.
Trading interest today
• Lightening up on AUDUSD short exposure – taking off half below 0.7100 – bringing stops below 0.7200 and looking for 0.7000 for remainder.
• Maintaining EURUSD downside exposure for minimum 1.1300 but looking to retain exposure for downside break
• Maintaining downside interest in EURJPY short with stop above 125.70
• Maintaining AUDCAD shorts with stops above 0.9485
Chart: NZDUSD
NZD slammed for steep losses overnight on the weak jobs report, catching fresh AUDNZD shorts from the previous day’s AUD rout off guard and seeing a pronounced reversal in NZDUSD. This sell-off looks like a rally neutraliser, resetting the chart to neutral at best and arguably pointing to a test of the early 2019 lows.
The 200-day moving average is the current focus but wasn’t much of a barrier in recent experience. Further out, we’ll need a sense of whether risk off drives a deeper dive to the cycle lows below 0.6500 or if a stronger than expected US economy first sees the market reassessing the US rate outlook, resulting in the same. As for New Zealand, the tumble in yields at the front end of the curve has been profound, and yet we have yet to actually price the first Reserve Bank of New Zealand rate cut for this year, although 2-year rates have fallen below the current 1.75% policy rate to 1.63%.
The G-10 rundown
USD – the US dollar firm across the board as the market may begin to fear that the US economic outlook isn’t softening fast enough to justify a full dovish shift from a Fed that continues to actively tighten via balance sheet reductions.
EUR – watching the bottom of the EURUSD range at 1.1300 as a potential catalyst for more downside volatility. Fresh bad data out of Germany this morning with Industrial Production dropping. EU existential risks creeping back into view as we discuss below in CHF.
JPY – no signal for JPY yesterday from the US treasury market so USDJPY rebounds back toward 110.00 as yields steady and risk appetite still relatively strong. Looking for a pivot to strong side in the JPY crosses if EM rolls over and US yields drop.
GBP – sterling suffering at the hands of the stronger USD, Donald Tusk’s “special place in hell” and a likely delay in the next round of voting in parliament. GBP trades mid-range versus the euro as we await Brexit developments far more than anything the Bank of England delivers today.
CHF – EURCHF reversal puts the pair back in the well-tread range down toward 1.1200. Italian yield spread stress rising a bit uncomfortably again as the EU expected to cut Italy’s growth estimates later today – which brings the Italian budget assumptions back into view.
AUD – AUD follow up action to the downside a bit more sedate after the initial shock lower from the Reserve Bank of Australia’s comments. The RBA Monetary Policy Report up tonight. Volatility may quickly slow unless we see something on the US-China trade negotiation front or risk off suddenly rears its head.
CAD – USDCAD backing up into the previous range, which is looking like a reversal if the move above 1.3250 sticks – fits with developments in AUDUSD and NZDUSD, although we prefer CAD to both of the Antipodeans. The Bank of Canada’s Lane out late yesterday fretting about negative factors for Canada relative to the US, including US trade policy, weak oil prices and softer housing market.
NZD – a bad miss on the jobs growth front and rather unsettling rise in the Unemployment rate takes NZD down a few notches as short NZ yields tumble – AUDNZD reversal a bullish development if maintains around 1.0500, the NZDUSD chart also looking lower.
SEK – psychological 10.50 area provides resistance this morning ahead of Sweden’s latest house price data – which showed a huge seasonal bounce (still below year ago levels – but lack of acceleration in the deterioration helpful at the margin. With the return of USD strength, note that USDSEK is poised at the highs since late 2016 near 9.25.
NOK – EURNOK backing up more forcefully as bears will have to pick their fresh entry points now that trend lower has been disrupted. Ultimate resistance at 10.00, most compelling Fibo the 9.90 area 61.8% retracement of the sell-off wave.
Upcoming Economic Calendar Highlights (all times GMT)
12:00 – UK Bank of England Super-Thursday
12:30 – UK BoE’s Carney to speak
13:30 – US Weekly Initial Jobless Claims
14:00 – Mexico Jan. CPI
14:30 – US Fed’s Clarida to speak
19:00 – Mexico Policy Rate
00:00 – Japan Dec. Earnings
00:30 – Australia RBA Monetary Policy Report
00:30 – US Fed’s Bullard (Voter) to speak
USD – the US dollar firm across the board as the market may begin to fear that the US economic outlook isn’t softening fast enough to justify a full dovish shift from a Fed that continues to actively tighten via balance sheet reductions.
EUR – watching the bottom of the EURUSD range at 1.1300 as a potential catalyst for more downside volatility. Fresh bad data out of Germany this morning with Industrial Production dropping. EU existential risks creeping back into view as we discuss below in CHF.
JPY – no signal for JPY yesterday from the US treasury market so USDJPY rebounds back toward 110.00 as yields steady and risk appetite still relatively strong. Looking for a pivot to strong side in the JPY crosses if EM rolls over and US yields drop.
GBP – sterling suffering at the hands of the stronger USD, Donald Tusk’s “special place in hell” and a likely delay in the next round of voting in parliament. GBP trades mid-range versus the euro as we await Brexit developments far more than anything the Bank of England delivers today.
CHF – EURCHF reversal puts the pair back in the well-tread range down toward 1.1200. Italian yield spread stress rising a bit uncomfortably again as the EU expected to cut Italy’s growth estimates later today – which brings the Italian budget assumptions back into view.
AUD – AUD follow up action to the downside a bit more sedate after the initial shock lower from the Reserve Bank of Australia’s comments. The RBA Monetary Policy Report up tonight. Volatility may quickly slow unless we see something on the US-China trade negotiation front or risk off suddenly rears its head.
CAD – USDCAD backing up into the previous range, which is looking like a reversal if the move above 1.3250 sticks – fits with developments in AUDUSD and NZDUSD, although we prefer CAD to both of the Antipodeans. The Bank of Canada’s Lane out late yesterday fretting about negative factors for Canada relative to the US, including US trade policy, weak oil prices and softer housing market.
NZD – a bad miss on the jobs growth front and rather unsettling rise in the Unemployment rate takes NZD down a few notches as short NZ yields tumble – AUDNZD reversal a bullish development if maintains around 1.0500, the NZDUSD chart also looking lower.
SEK – psychological 10.50 area provides resistance this morning ahead of Sweden’s latest house price data – which showed a huge seasonal bounce (still below year ago levels – but lack of acceleration in the deterioration helpful at the margin. With the return of USD strength, note that USDSEK is poised at the highs since late 2016 near 9.25.
NOK – EURNOK backing up more forcefully as bears will have to pick their fresh entry points now that trend lower has been disrupted. Ultimate resistance at 10.00, most compelling Fibo the 9.90 area 61.8% retracement of the sell-off wave.
Upcoming Economic Calendar Highlights (all times GMT)
12:00 – UK Bank of England Super-Thursday
12:30 – UK BoE’s Carney to speak
13:30 – US Weekly Initial Jobless Claims
14:00 – Mexico Jan. CPI
14:30 – US Fed’s Clarida to speak
19:00 – Mexico Policy Rate
00:00 – Japan Dec. Earnings
00:30 – Australia RBA Monetary Policy Report
00:30 – US Fed’s Bullard (Voter) to speak
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