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: Sterling sending strongest signal in quiet market
John J. Hardy
Chief Macro Strategist
Summary: FX volatility is pegged near the lows for the cycle, with the USD shifting a bit lower while sterling is making a bit more of a fuss on Boris Johnson discussing corporate tax cuts at the weekend and polls suggesting his Conservatives could win a solid majority in the December elections.
The market is extending higher this morning after Friday’s strong close in global equity markets as a US-Trump Xi phone call at the weekend and new liquidity provision measures from China look supportive, while markets turn a blind eye to the crescendo of violence in Hong Kong. At the margin, the markets may also find it encouraging that the polls seem to show a declining interest in seeing US President Trump impeached now that we are two long days of testimony into the hearings. The USD began turning generally lower mid-last week as EURUSD found support at the obvious 1.1000 area and AUDUSD precisely bounced at a key support we discuss below – but we are far from a signal suggesting that the US dollar is turning determinedly lower.
While the market remains very hopeful on hopes for a benign US-China trade deal outcome, there is still a risk that the Hong Kong issue derails the negotiations at some point as the US Congress moves forward with efforts to question the US-Hong Kong trade status if China is seen as interfering too deeply in Hong Kong territory, with Marco Rubio attempting to fast track a Senate bill to that effect. At some point, a bill like this or the Hong Kong human rights bill already passed by the House but not yet by the Senate would have to make their way to the President’s desk for a signature or a veto. So far, Trump has kept entirely quiet on the Hong Kong issue, a stance that will prove impossible to maintain. Trump moving to support any possible sanctions linked to the Hong Kong movement would likely prove incompatible with any trade deal.
The week ahead looks thin on macro event risks. The highlight, besides FOMC meeting minutes mid-week is perhaps the Friday round of flash November Markit PMI’s from around the world, particularly those for Europe. Weak US data was largely ignored on Friday, including the 15-month low in the US October Industrial Production and another weak core Retail Sales print for October, which also saw September’s figure revised lower to -0.1% month-on-month.
Chart: AUDUSD
AUDUSD found support precisely at its 61.8% retracement level of the recent rally wave, a lifeline to bulls hoping for another challenge back higher. AUD trades should already be disappointed that the pair remains mired down here despite maximum support from factors that traditional drive AUD strength, especially strong risk sentiment. The bulls will need to see the pair back up through 0.6900 and more to turn the needle back higher and a failure of last week’s lows would suggest a pivot back to testing the lows for the cycle.
The G-10 rundown
USD – the weaker greenback so far merely a consolidation of the prior USD rally. Not sure we get any signal of interest from the FOMC minutes this week and pulling a signal on local USD drivers here difficult.
EUR – stimulus in China is nominally EUR supportive, but only to the extent that EU export activity begins picking up. EURUSD needs to survive above 1.1000 to stay in neutral or better here.
JPY – USDJPY crept back towards 109.00 on the strong risk sentiment, but got some support broadly last week as long safe haven sovereign bonds put in a rally, a driver that will likely prove the most important for whether the formerly weak JPY is turning the corner back to strength.
GBP – the polls have oddsmakers pointing to a high likelihood of a Conservative majority after the December 12 election. Boris Johnson was also out talking up corporate tax cuts at the weekend, adding to promises of strong fiscal expansion – and all of the above sterling supportive. GBPUSD back challenging close to the key 1.3000 on all of this.
CHF – EURCHF has bounced strongly after a test below 1.0900 late last week (intervention fears – no evidence in the SNB’s weekly data…) but remains rangebound between 1.0850 and 1.1050.
AUD – as discussed above, AUDUSD bounced at a key technical level, but we should already be disappointed with the Aussie’s performance in this environment, though iron ore prices remain sluggish and the Australia mining giants are not participating in the risk melt-up.
CAD – The Bank of Canada Governor Poloz set for a “fireside chat” on Thursday, which should further deepen the market’s understanding of the bank’s thinking on its new status as owner of the developed world’s highest policy rate. The recent USDCAD rally was held back from higher levels by a softer greenback last week.
NZD – the market still reeling from last week’s surprise no-cut from the RBNZ – longer term AUDNZD trades might consider that the pair is re-entering a more compelling area here near 1.0600.
SEK – EURSEK having a look at that pivotal 10.60 area and needs to cut through to make a point – strong Euro, strong EU macro data and especially any signs of fiscal stimulus from the EU and more importantly Sweden would be welcome for SEK bulls. Now that the anti-immigrant Sweden Democrats are polling as the nation’s most popular party, the odds have to be rising of defensive action from the sitting government.
NOK – EURNOK trying to get interesting on Friday and overnight with a look near the middle of the key 10.00-05 level and really needs to cut through this to offer compelling signs that the highs for the cycle are in the rearview mirror.
Today’s Economic Calendar Highlights (all times GMT)
- 1500 – US Nov. NAHB Housing Market Index
- 0030 – Australia RBA Meeting Minutes
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