Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: EUR and the French election. CNH just moved for a change.
John J. Hardy
Chief Macro Strategist
Summary: The US dollar has turned lower as long US treasury yields finally beat a more determined retreat today after their recent run to just shy of 3.00% for the 10-year benchmark. Euro traders are holding their breath ahead of the French run-off election on Sunday, with an important Le Pen-Macron debate this evening. Is the single currency set to jump to start next week if Macro wins by a comfortable margin? Elsewhere, SEK is on a roll and CNH has gone bump in the night.
FX Trading focus: EUR and French Election, SEK repricing, AUD, JPY and CNH
I gave considerable coverage to the Swiss franc yesterday, which may be itching to sell-off, both on the CHF-negative rise in global yields and as the market leans for Macron to win this Sunday’s run-off with Le Pen. There is likely some further pent-up selling in store for the CHF on the actual outcome on Sunday, should Macron walk away with a comfortably strong result – if indeed this has been the source of the strong rise in SNB sight deposits in recent weeks (if not last week). But to what degree has the euro also been held back elsewhere by the French presidential election uncertainty – for example against sterling and the US dollar? It’s easy to argue that even without the election, the inferior EU yields due to the reluctant-to-tighten ECB are a sufficient drag on the single currency to keep it lower versus the more credible plans from the Fed and the BoE. We’ll know the truth next week in the wake of the election result, with a decent bid in the 1-week volatilities in EURCHF and EURUSD suggesting that the market is holding its breath to a degree ahead of the result. And we will get some further color on the situation already late today as Le Pen and Macron are set for a live debate tonight. In 2017, Le Pen’s poor showing at the debate was noted, just as this time around, she seems to have an entirely different energy in her campaigning. Certainly, if Le Pen does somehow up-end expectations and emerge with a victory after the Sunday poll, it will be a complete game changer for the EU narrative that has developed in the wake of Russia’s invasion of Ukraine. A Bloomberg article argues it would be on par with the Brexit shock, which is hard to argue against, although market volatility might prove far more muted in the near term.
Chart: EURUSD
Relative to recent volatility, the EURCHF pair may be the more “pure” expression of French Presidential election outcomes, but EURUSD may be in the mix as well, certainly indicating early next week whether the pair trading near 1.0800 of late is more a reflection of the pressure on Europe from punitive energy prices and the ECB dragging its heels on policy tightening relative to global peers or whether there is a EUR discount on the uncertainty of the ECB election. Short-dated implied options volatilities do indicate elevated uncertainty. There is also the May 4 FOMC meeting in the mix the week after next – but certainly the next two weeks are pivotal for this pair and option plays for expiry at least a day or two beyond the FOMC meeting are worth considering for expressing a view either way. 1.1000 suggests a weakening of the down-trend, while 1.1100+ begins to suggest a reversal.
Meanwhile, SEK continues to reprice to the upside. And EURSEK is breaking below the range low and the 200-day moving average for the first time since November today. The Riksbank has been sending strong signals of late that it would like to catch up with the inflation curve and SEK has responded. Just today, Riksbank Governor Ingves said a 2% repo rate seems plausible as the market leans for a full 25 basis point hike at next Thursday’s meeting. Other positives include the EU’s more robust fiscal stimulus outlook and even what should prove a stronger fiscal programme from Sweden too as defense priorities weigh (as it looks set to join NATO and has been threatened by armed nuclear Russian bomber flyovers over the last week) and to pay for the infrastructure and housing needed to absorb its huge immigration wave of the last 10 years. EURSEK 2-year yield spread has plunged to a new multi-year low. NOKSEK looks locally heavy and has plenty of room for some mean reversion back toward perhaps 1.0500.
AUD – RBA arguing in its minutes released overnight that the time for a rate hike is moving forward. Somehow, the market is only 25% for a rate hike at the early May meeting, perhaps as we won’t have the next round of wage data (seen as more important than CPI due to the RBA’s focus on wages as the key for rising inflation) until May 18. But we will get Q1 CPI data next week. AUDUSD so far surviving a key support area, but needs 0.7500+ to reinvigorate the choppy bull trend.
JPY two-way volatility in play overnight and in today’s session – is this the top in JPY crosses for now? First the JPY move lower again yesterday and overnight as US yields rose to fresh highs and the BoJ announced another operation to defend its yield cap of 0.25% on 10-year JGB’s. But after USDJPY rose to a fresh 20-year high of 129.40 overnight, we have the pair coming back down hard as long US treasuries are heavily bid in today’s European session. Could this prove a near-term climax for now? Likely so, if 3.00% is the new cap for now on the US 10-year benchmark.
CNH on the move with a sharp weakening move that took USDCNH above 6.40 yesterday, which is range resistance as well as near the 200-day moving average. Notable that the move is holding on a day in which the USD is also weakening. Hard to know what Chinese officialdom is thinking, but this sends a signal and we should watch for whether a follow-on move develops after the CNH tracked the USD all the way up recently.
Table: FX Board of G10 and CNH trend evolution and strength.
The most interesting developments in recent days have been the CNH losing altitude suddenly, and CHF doing likewise, while SEK is firming.
Table: FX Board Trend Scoreboard for individual pairs.
Given above, SEKCHF charts worth a peek and NOKSEK is trying to roll over now to negative as SEK strength broadens. Note USDCAD with Canadian CPI up today as the pair has traded in a pivotal zone.
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