Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
USD strength remains despite shifting sands
John J. Hardy
Chief Macro Strategist
Summary: The US dollar has maintained a solid bid through a fairly significantly shift in the market tone to start the week – a strong showing. Overnight, the RBA was a snoozer, but AUD traders may simply be waiting for more colour on its guidance from Governor Lowe's speech tonight.
The RBA statement overnight was largely a recycling operation and we continue to scratch our head that that Lowe and company have gone to the trouble of explicitly maintaining a 3% GDP growth expectation for 2019 in the policy statement amidst all of the domestic uncertainty on the housing front and overseas, the geopolitical/trade concerns.
Alas, we may get a bit more color tonight, as Governor Lowe will be out speaking and we will also get a look at the Q4 GDP print from Australia in very early Asian hours tonight.
Yesterday’s US equity session finally showed a spike in volatility and did so near a massive resistance line in the S&P 500. Not coincidentally, the US treasury market turned around and rallied after several days of selling off last week.
In FX, no surprise to see the yen turning from broad weakness to broad strength on these developments and we would expect the yen to act as a proxy in FX for the combination of weakening risk sentiment and bond market strength (yesterday’s developments point to this correlation).
The calendar picks up pace today, with the US ISM non-manufacturing up today (January still at a very elevated 56.7 and today’s expected north of 57, that high expectation looks easy to disappoint?), Bank of Canada to follow tomorrow and then the European Central Bank on Thursday.
Trading interest
Long USD: via short AUDUSD (stops above 0.7150), long USDCAD (stops below 1.3250) and increasingly through short EURUSD (stops above 1.1400), although still an idea to look at 1-month downside puts in EURUSD with implied volatility so low.
Considering EURJPY downside again – this is contingent on a more profound shift in risk appetite and strength in the US treasury market – more confirmation if price action taken back below 126.00 and on the other side of ECB meeting.
Chart: EURJPY
EURJPY provides potential downside interest on the other side of the ECB meeting this Thursday if we have finally reached the peak of this rally in global equities and rally in risky assets in general and if the ECB is seen in tilting toward a perma-dovish stance. The first step for bears was yesterday’s reversal, but we won’t have much traction for more downside potential until we work back below 126.00.
Alas, we may get a bit more color tonight, as Governor Lowe will be out speaking and we will also get a look at the Q4 GDP print from Australia in very early Asian hours tonight.
Yesterday’s US equity session finally showed a spike in volatility and did so near a massive resistance line in the S&P 500. Not coincidentally, the US treasury market turned around and rallied after several days of selling off last week.
In FX, no surprise to see the yen turning from broad weakness to broad strength on these developments and we would expect the yen to act as a proxy in FX for the combination of weakening risk sentiment and bond market strength (yesterday’s developments point to this correlation).
The calendar picks up pace today, with the US ISM non-manufacturing up today (January still at a very elevated 56.7 and today’s expected north of 57, that high expectation looks easy to disappoint?), Bank of Canada to follow tomorrow and then the European Central Bank on Thursday.
Trading interest
Long USD: via short AUDUSD (stops above 0.7150), long USDCAD (stops below 1.3250) and increasingly through short EURUSD (stops above 1.1400), although still an idea to look at 1-month downside puts in EURUSD with implied volatility so low.
Considering EURJPY downside again – this is contingent on a more profound shift in risk appetite and strength in the US treasury market – more confirmation if price action taken back below 126.00 and on the other side of ECB meeting.
Chart: EURJPY
EURJPY provides potential downside interest on the other side of the ECB meeting this Thursday if we have finally reached the peak of this rally in global equities and rally in risky assets in general and if the ECB is seen in tilting toward a perma-dovish stance. The first step for bears was yesterday’s reversal, but we won’t have much traction for more downside potential until we work back below 126.00.
The G10 rundown
USD – the USD is maintaining a bid despite the sharp shift in the backdrop (weaker equities, stronger treasuries) points to more broad strength as the side of least resistance.
EUR – EURUSD is trading heavily again after yesterday’s sell-off saw the largest trading range for the pair in weeks. Our question is whether the breakdown happens ahead of the ECB or after – whether the ECB rolls out a TLTRO now or later seems immaterial as this is a weak policy option. Interest in EURJPY downside potential as well as noted above.
JPY – as noted above, yen may have bottomed in broad terms and possibly even in USDJPY if US long treasuries remain supported and volatility/downside returns to equity markets.
GBP – sterling traders preferring to sit on their hands, perhaps waiting for the series of Brexit votes next week. After reversal in GBPUSD, prefer expressing potential for further sterling strength via EURGBP, as long as the price action remains south of 0.8650 tactically.
CHF – EURCHF perhaps weighed down by the expectation of a downbeat/dovish ECB this week – price action bottled up there.
AUD – in its latest statement, the RBA persists in keeping a hopeful outlook, but the market isn’t really buying it. Bears perhaps reluctant to sell AUDUSD as we await the terms of a US-China trade deal, but we still prefer downside resolution in AUDUSD below the 0.7050-0.7000 area.
CAD – the Bank of Canada likely to wax more cautious than the RBA at tomorrow’s Bank of Canada meeting. If oil and risk appetite roll over here as well
NZD – AUDNZD our chief interest in detecting any reason to trade NZD versus AUD and the latest price action providing few clues – a key test with tonight’s Australia event risks.
SEK – EURSEK blasted through all retracement levels and tested the recent highs this morning – frustrating recent hopes that the bearish reversal would bite – now bearish hopes rest on the double-top (last couple of weeks) and triple top (price action since May) scenarios.
NOK – a shift to risk off and consolidating oil prices not helpful for EURNOK bears – let’s see how the price action shapes up if the pivot high from February around 9.84 is taken out.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Feb. Services PMI
1000 – Euro Zone Jan. Retail Sales
1300 – US Fed’s Rosengren (voter) to speak
1500 – US Feb. ISM Non-manufacturing
1500 – US Dec. New Home Sales
1535 – UK BoE’s Carney to speak
1600 – New Zealand Feb. House Prices
2210 – Australia RBA’s Lowe to speak
0030 – Australia Q4 GDP
USD – the USD is maintaining a bid despite the sharp shift in the backdrop (weaker equities, stronger treasuries) points to more broad strength as the side of least resistance.
EUR – EURUSD is trading heavily again after yesterday’s sell-off saw the largest trading range for the pair in weeks. Our question is whether the breakdown happens ahead of the ECB or after – whether the ECB rolls out a TLTRO now or later seems immaterial as this is a weak policy option. Interest in EURJPY downside potential as well as noted above.
JPY – as noted above, yen may have bottomed in broad terms and possibly even in USDJPY if US long treasuries remain supported and volatility/downside returns to equity markets.
GBP – sterling traders preferring to sit on their hands, perhaps waiting for the series of Brexit votes next week. After reversal in GBPUSD, prefer expressing potential for further sterling strength via EURGBP, as long as the price action remains south of 0.8650 tactically.
CHF – EURCHF perhaps weighed down by the expectation of a downbeat/dovish ECB this week – price action bottled up there.
AUD – in its latest statement, the RBA persists in keeping a hopeful outlook, but the market isn’t really buying it. Bears perhaps reluctant to sell AUDUSD as we await the terms of a US-China trade deal, but we still prefer downside resolution in AUDUSD below the 0.7050-0.7000 area.
CAD – the Bank of Canada likely to wax more cautious than the RBA at tomorrow’s Bank of Canada meeting. If oil and risk appetite roll over here as well
NZD – AUDNZD our chief interest in detecting any reason to trade NZD versus AUD and the latest price action providing few clues – a key test with tonight’s Australia event risks.
SEK – EURSEK blasted through all retracement levels and tested the recent highs this morning – frustrating recent hopes that the bearish reversal would bite – now bearish hopes rest on the double-top (last couple of weeks) and triple top (price action since May) scenarios.
NOK – a shift to risk off and consolidating oil prices not helpful for EURNOK bears – let’s see how the price action shapes up if the pivot high from February around 9.84 is taken out.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Feb. Services PMI
1000 – Euro Zone Jan. Retail Sales
1300 – US Fed’s Rosengren (voter) to speak
1500 – US Feb. ISM Non-manufacturing
1500 – US Dec. New Home Sales
1535 – UK BoE’s Carney to speak
1600 – New Zealand Feb. House Prices
2210 – Australia RBA’s Lowe to speak
0030 – Australia Q4 GDP
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