Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
USD edges lower, sterling eyes Brexit summit
John J. Hardy
Chief Macro Strategist
Summary: The US dollar has weakened to pivotal levels in places ahead of this week’s key US-event risks tomorrow – the March CPI data and FOMC minutes. Elsewhere, sterling traders are reluctant to drive price action in either direction but may finally get an excuse to do so in the wake of tomorrow’s Brexit summit.
Another day of local new highs for the equity market and extremely low volatility in FX, though with a detectable and broad weakening of the US dollar, a weakening now of sufficient degree to potentially register minor breakouts in AUDUSD and USDCAD if the action persists.
The narrative has switched to optimism on global growth in the absence of policy tightening – i.e., that the Fed will be happy to remain “patient” and not indicate any intent to hike rates if the outlook remains positive and even if inflation picks up again, given the discussion of a “symmetric” inflation targeting (allowing inflation to run hot for a time to compensate ).
To really encourage this narrative, as discussed yesterday, we need to see the long end of the US yield curve pulling back higher without risk sentiment running for cover at the implications – so the 2.50-2.60% zone in the US 10-year benchmark is our pivot zone for judging whether this theme could have legs and drive a notable extension of the risk sentiment rally, leading to further commodity dollar, Scandie and EM strength.
An important day ahead for the Brexit outcome as the crunch summit could see the announcement of a long extension of the Article 50 deadline by nine or even twelve months. Theresa May wants a June 30 extension, but the UK parliament can overrule her today. Then tomorrow we have to consider what concession the EU side extracts for granting the delay.
A second referendum? That’s a risky gambit, but punting the responsibility back to the people may prove the only possible course through the political logjam. Even assuming we avoid all cliff edge scenarios, will parliament feel it has the authority to assume that the people’s vote means it can cancel Brexit or agree to a soft Brexit with the UK permanently locked into the EU customs union?
Trading interest
Long AUDNZD on dips for 1.0700+, stops below 1.0450
Watching for how the US dollar trades after tomorrow’s key event risks for positioning bias
Chart: AUDUSD
AUDUSD up having a look at a new 20+ day high close today, driven by support from key commodities like iron ore and even gold (recent record posted in AUD terms) and hopes that the global growth outlook is turning more positive again. The chief factor holding the Aussie back is the concern on the domestic housing front, where housing prices and construction activity have been in a freefall in recent months.
Looking higher, there is considerable work to do for the bulls to argue that an uptrend is forming – a solid close above the 200-day moving average and eventual follow through above 0.7350-0.7400 look awfully far away when we’ve been trading in a highly constricted trading range for the last 6-7 months and still await a US-China trade deal, which is still some weeks away according to the latest management of expectations late last week.
The narrative has switched to optimism on global growth in the absence of policy tightening – i.e., that the Fed will be happy to remain “patient” and not indicate any intent to hike rates if the outlook remains positive and even if inflation picks up again, given the discussion of a “symmetric” inflation targeting (allowing inflation to run hot for a time to compensate ).
To really encourage this narrative, as discussed yesterday, we need to see the long end of the US yield curve pulling back higher without risk sentiment running for cover at the implications – so the 2.50-2.60% zone in the US 10-year benchmark is our pivot zone for judging whether this theme could have legs and drive a notable extension of the risk sentiment rally, leading to further commodity dollar, Scandie and EM strength.
An important day ahead for the Brexit outcome as the crunch summit could see the announcement of a long extension of the Article 50 deadline by nine or even twelve months. Theresa May wants a June 30 extension, but the UK parliament can overrule her today. Then tomorrow we have to consider what concession the EU side extracts for granting the delay.
A second referendum? That’s a risky gambit, but punting the responsibility back to the people may prove the only possible course through the political logjam. Even assuming we avoid all cliff edge scenarios, will parliament feel it has the authority to assume that the people’s vote means it can cancel Brexit or agree to a soft Brexit with the UK permanently locked into the EU customs union?
Trading interest
Long AUDNZD on dips for 1.0700+, stops below 1.0450
Watching for how the US dollar trades after tomorrow’s key event risks for positioning bias
Chart: AUDUSD
AUDUSD up having a look at a new 20+ day high close today, driven by support from key commodities like iron ore and even gold (recent record posted in AUD terms) and hopes that the global growth outlook is turning more positive again. The chief factor holding the Aussie back is the concern on the domestic housing front, where housing prices and construction activity have been in a freefall in recent months.
Looking higher, there is considerable work to do for the bulls to argue that an uptrend is forming – a solid close above the 200-day moving average and eventual follow through above 0.7350-0.7400 look awfully far away when we’ve been trading in a highly constricted trading range for the last 6-7 months and still await a US-China trade deal, which is still some weeks away according to the latest management of expectations late last week.
The G10 rundown
USD – the weakness getting sufficiently pronounced in places now to require attention – first pairs to threaten a larger move look like AUDUSD and USDCAD. Tomorrow’s US inflation data and Federal Open Market Committee minutes the possible deciders. (Still – look at how profoundly stuck we remain here after the hugely dovish March 21 dovish FOMC surprise.
EUR – some encouragement that the Eurozone growth slowdown is easing or turning the corner would be helpful and drive a solid rally in EURCHF and EURUSD. German 10-year Bund yields back at the pivotal 0 bps level.
JPY – if the USD is weak with a positive risk backdrop, the JPY may show little beta versus the US dollar as the market indulges in short JPY carry trades.
GBP – sterling going nowhere until we get clarity, and if becomes clear that we’ll suffer a further significant wait for the Brexit outcome, this could weigh on sterling across the board.
CHF – EURCHF looking higher, but needs to pull back above 1.1300 to argue for the end of the downside threat.
AUD – note AUDUSD discussion above. AUD is poised to benefit from any deepening hopes that a Chinese and global growth recovery are afoot.
CAD – USDCAD wilting into the first downside pivot area at 1.3300 – the US yield direction we discuss above and the USD status after tomorrow’s US event risks the next test for the pair.
NZD – the kiwi rather firmly under the Aussie’s thumb as AUDNZD may have turned the corner for the cycle. NZDUSD, meanwhile, eyeing the range lows and 200-day moving average in the 0.6725 area ahead of the week’s key USD-linked event risks tomorrow.
SEK – we’ll say it again – EURSEK should be lower given the backdrop – is the market simply not paying attention or is there opportunity here? A close below 10.40 needed to set the ball in motion.
NOK – ditto SEK comments, particularly given the move in Brent crude above 70 dollars/barrel.
Upcoming Economic Calendar Highlights (all times GMT)
1000 – US Mar. NFIB Small Business Optimism
1300 – Mexico Mar. CPI
2100 – US Fed’s Quarles (Voter) to speak
2245 – US Fed’s Clarida (Voter) to speak
USD – the weakness getting sufficiently pronounced in places now to require attention – first pairs to threaten a larger move look like AUDUSD and USDCAD. Tomorrow’s US inflation data and Federal Open Market Committee minutes the possible deciders. (Still – look at how profoundly stuck we remain here after the hugely dovish March 21 dovish FOMC surprise.
EUR – some encouragement that the Eurozone growth slowdown is easing or turning the corner would be helpful and drive a solid rally in EURCHF and EURUSD. German 10-year Bund yields back at the pivotal 0 bps level.
JPY – if the USD is weak with a positive risk backdrop, the JPY may show little beta versus the US dollar as the market indulges in short JPY carry trades.
GBP – sterling going nowhere until we get clarity, and if becomes clear that we’ll suffer a further significant wait for the Brexit outcome, this could weigh on sterling across the board.
CHF – EURCHF looking higher, but needs to pull back above 1.1300 to argue for the end of the downside threat.
AUD – note AUDUSD discussion above. AUD is poised to benefit from any deepening hopes that a Chinese and global growth recovery are afoot.
CAD – USDCAD wilting into the first downside pivot area at 1.3300 – the US yield direction we discuss above and the USD status after tomorrow’s US event risks the next test for the pair.
NZD – the kiwi rather firmly under the Aussie’s thumb as AUDNZD may have turned the corner for the cycle. NZDUSD, meanwhile, eyeing the range lows and 200-day moving average in the 0.6725 area ahead of the week’s key USD-linked event risks tomorrow.
SEK – we’ll say it again – EURSEK should be lower given the backdrop – is the market simply not paying attention or is there opportunity here? A close below 10.40 needed to set the ball in motion.
NOK – ditto SEK comments, particularly given the move in Brent crude above 70 dollars/barrel.
Upcoming Economic Calendar Highlights (all times GMT)
1000 – US Mar. NFIB Small Business Optimism
1300 – Mexico Mar. CPI
2100 – US Fed’s Quarles (Voter) to speak
2245 – US Fed’s Clarida (Voter) to speak
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
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... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer