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: Time for some consolidation?
John J. Hardy
Chief Macro Strategist
Summary: Some strong signs of USD consolidation are finally here as the market may be looking to digest the post-US election developments rather than extending them. Key week for JPY ahead.
Beginning yesterday we are finally seeing some significant two-way action coming into USD pairs after the brutal post-election USD rally. It looks like a “tell” that USDJPY was pushing to new 24-hour lows early on Friday despite the evening before having delivered less dovish comments from Fed Chair Powell on the pace of further rate cuts: “
The week ahead could be one of more consolidation and counter-trend moves as the market finds a bit of balance. We are still more than two months away from the Trump presidency and there are plenty of areas of uncertainty that deserve a more cautious stance than the one way moves we saw after Election Day. Some of Trump’s appointments are seen as confrontational and controversial, even with the Republican party. So a few Republican Senators or even smallish groups of House members could yet make it difficult for the Trump agenda starting next January 20 with his inauguration.
Elsewhere, we have sterling looking rather adrift after weak data this morning, including a drop in September Manufacturing production and GDP undershooting slightly in the QoQ estimate this morning and actually negative -0.1% MoM for the September GDP estimate. If EURGBP punches back higher here above perhaps 0.8350-75, the stance flips to negative sterling versus the single currency, neutralizing that recent break lower of the huge 0.8300 area.
Finally, worth noting that USDCAD above 1.4000 bears watching, if nothing else because it is a rare thing indeed. Since 2003, the exchange rate has only risen above that level twice: once in early 2016 at the height of the US dollar spike then and on a crash in oil prices below USD 50 a barrel, and the second time during the pandemic spike in early 2020. It only closed above 1.4000 for the month once, in March of 2020. Driving the action higher are the weak Canadian economy and very dovish Bank of Canada, which contrasts with the unwinding of much of the expected Fed easing in recent weeks. This has taken the US-Canada 2-year yield spread is near 100 basis points, the highest in decades. Crude oil trades near major support and is an additional factor worth watching for the loonie. The chart looks incredibly stretched.
Chart: USDJPY
USDJPY looks to have overshot its mark if US yields remain corralled below 4.50% for the 10-year, and the market needs to consider that the Bank of Japan can and should act with the JPY edging into painfully weak territory versus the dollar above 155.00, as we note above. The Japanese 2-year yield has “quietly” blasted to new highs since 2008 north of 50 basis points as the market has now priced more than 50% in favour of a 25 basis point hike in December (or arguably, more than 90% priced for a 15-bp hike). A reversal back below the pre-US election high near 154.00 would suggest a major interim top in this chart. Critical first support near the 200-day moving average just below 152.00.
Highlights in the coming week’s event risks: (times are GMT where shown):
Note that the list may not be complete and please consult our daily Quick Take for a more complete run-down day to day of incoming event risks.
- Bank of Japan’s Ueda to speak (Mon 0100). After the drubbing the yen has received of late despite a steep rise in Bank of Japan hike expectations, the currency could be sensitive to any rhetorical hints. EURJPY downside looks interesting from a rate spread perspective as the EUR yield advantage in 2-years is at the lowest since late 2022.
- Australia RBA’s Kent to speak (Mon 0630) and RBA meeting minutes (Tue 0030). Interested in AUD catalysts in general (if unlikely to get them from the RBA) as AUDUSD works into the lower third of its post-pandemic range. Lots of possible catalysts in the months ahead in the shape of China’s response to whatever Trump delivers. Weak copper is a concern for AUD. Right now, market is looking for no rate cuts until well into next year.
- US Nov. NAHB Housing Market Index (Mon 1500). A leading US housing market indicator – weakness a risk with US 30-year mortgages rising back above 7.25% after hitting as low as 6.6% in September.
- ECB President Lagarde to Speak (Mon 1830) and Wed (1330) – Watching for clues on 25 or 50 for the December rate cut as market leans far more in favour of the former now.
- US Oct. Housing Starts and Building Permits (Tue 1330)
- Canada Oct. CPI (1330) Unlike in the US, Canada’s official CPI data has continued dropping, with core Trimmed Mean at 2.4% in Sep, though expected to rise to 2.5% for October.
- China Rate Decision (Wed 0100) China has been slashing rates, but the market wants stimulus announcements more than monetary easing.
- UK Oct. CPI (Wed 0700) Important one for sterling status –a higher than expected level not necessarily GBP positive given weak growth – more stagflationary in nature.
- US 20-year Treasury auction (Wed 1800) – the 20-year has the highest yield on the US yield curve – what is demand picture as we look ahead to Trump 2.0.
- Nvidia earnings (Wed after 2100). Not considered an FX catalyst, but this company’s earnings reports are crucial for broader risk sentiment.
- UK Government borrowing figures (Thu 0700) Market may not react, but interesting to watch these monthly figures under the new Labour budget.
- US Weekly Initial Jobless Claims (Thu 1330) – the week prior saw the lowest claims number since April.
- Japan Oct. National CPI (Fri 2330) Given the gathering anticipation of BoJ hike in December, this could trigger considerable volatility in either direction.
- UK Sep. Retail Sales (Fri 0700) – ancient history, but interesting if fails to show continuation of strong upward trend of last few months.
- France, Germany and Eurozone flash Nov. PMIs (Fri 0815,0830,0900) The flash PMIs will be out everywhere, but the European ones get perhaps the most attention.
- UK Flash Nov. PMI (Fri 0930)
- US Nov. Final University of Michigan Sentiment (Fri 1500)
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 4 is strong and above 6 very strong.
The JPY comeback attempt on Friday will take another day to register in the trend readings (writing this as of mid-day Friday, so, depending on how JPY closes the week), but other currencies have been weaker than the yen recently. The US dollar worked up an enormous head of steam and can afford some consolidation without losing its uptrend. Elsewhere, the gold slide has been so decisive that it is showing strong negative readings, requires zooming out to argue for a bullish trend picture there. Note SEK paying for the Riksbank’s outspoken dovishness (and concerns for weak EU and Chinese growth).
Table: FX Board Trend Scoreboard for individual pairs.
The ATR readings are cooling nearly everywhere, but JPY crosses still have elevated “heat”. Note that the EURUSD negative reading is at the most extreme of all trends, possible sign of overreach in the short term. CHFJPY is on the edge of a trend change if the JPY rallies here after 38 trading days in a positive trend.
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