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: USD is down for the count ahead of payrolls data tomorrow.
John J. Hardy
Chief Macro Strategist
Summary: The action yesterday and into today has further cemented a v-shaped bearish reversal in the US dollar that suggests the greenback may have topped out for now. In fact, the weak USD itself is contributing to positive risk sentiment, with the JPY and CHF vying to fall as quickly as the big dollar, while the formerly weakest-in-class Aussie is mounting its own reversal attempt to the upside.
FX Trading focus: Risk-on tone as safe havens decline. AUD bids for bullish reversal
The pattern across currencies suggests a very risk-on environment as the safe haven currencies have started off the new month with a big jolt lower, as the trio of USD, JPY and CHF were all sharply lower and have extended a bit lower still in places today, just as the formerly weakest in class, the Aussie, has now more or less completed a v-shaped bullish reversal in the key pairs where it was weakest: in AUDUSD (chart below) and in the classic risk proxy AUDJPY. Of course, now that I am writing this, I am noticing that EURCHF is reversing hard from new multi-week highs, but the chief point is the weaker US dollar anyway, which suggests positive risk sentiment for EM and pro-cyclical currencies, especially as US yields are lost in the desert sideways at the moment.
On that note, a Bloomberg article reminds us of the extreme USD liquidity situation, pointing out that basis swaps suggest the least demand for US dollars relative to their available, at least, in years. Whether that remains the case into the end of the year when the US treasury issuance situation shifts and the Fed begins to taper may be another matter, but for now, the world is awash in US dollars and the greenback looks very much on the defensive.
Tomorrow, we get the US nonfarm payrolls change print, where a miss is likely better for the market than any outsized payroll gains, as it keeps the Fed sitting on its hands and treasuries likely stuck in a rut as well. But we are leading up to some negative energy and significant volatility in Q4 I am afraid, as asset markets are having too good a time of it, even if the good times might extend in the nearest term.
Chart: AUDUSD
AUDUSD has now completed a proper V-shaped reversal of its recent sell-off, which may not lead immediately to further gains toward the next key 0.7500 area, but is a kind of exclamation point encouraging the view that we have seen the lows for now after the run down to the 0.7105 area lows before this rally emerged. A record Australian trade surplus data point overnight helped remind us of the longer term shift in the current account fundamentals, which have accelerated in the Aussie’s favour over the last year, with the Covid outbreak and the RBA’s pedal to the QE metal (and the recent commodity setback) providing off-setting pressure until the last week or so. This rally – also in the crosses since yesterday – suggest that the AUD underperformance could be set to ease for a while here and mean revert to the positive side.
An unprecedented ISM Manufacturing series. The August ISM Manufacturing survey came out at 59.9 vs. 58.5 expected and 59.5 in July, a strong performance and stronger than I expected, given a pronounced deceleration in some of the regional surveys this month. In the sub-indices, an odd picture emerges of what is going on here, as the New Orders series has remained very elevated for eleven months with consistent strong readings unlike anything in the history of the survey (the latest at 66.7 and the New Orders sub-index has not dipped below 60 in the last eleven months running). This is very hard for a “diffusion” or comparative survey to achieve, as they inevitably mean-revert to more neutral level as things can’t continue improving or worsening forever. In the past, the Employment sub-index has generally tracked the New Orders survey directionally, but in August, the Employment index dropped below 50, suggesting net contraction – an unprecedented mismatch.
From the ISM’s official report, we get a sense of what is going on: “Business Survey Committee panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. The new surges of COVID-19 are adding to pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — that continue to limit manufacturing-growth potential.” If that doesn’t sound inflationary and negative for real growth potential, I’m not sure what does.
Weak US August ADP private payrolls data – not normally a good predictor of the official data series, but this survey was out at +374k vs. +625 expected, but at the margin, seems a slowing expansion of the services sector might have been possible in August due to the delta outbreak, which would impact services more quickly than other sectors of the economy.
Table: FX Board of G10 and CNH trend evolution and strength
The key thing to point out here is the strong recovery in the AUD which has neutralized its recent weakness over the last week in rapid fashion in a proper v-shaped recovery. Safe haven weakness continues.
Table: FX Board Trend Scoreboard for individual pairs
Hmm – hard to drum up interest in sterling trying to look higher versus CHF, JPY, and (almost) the US dollar until we see a positive catalyst for sterling, as sterling is among the weaker currencies, simply not the weakest in recent days.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Weekly Initial Jobless Claims
- 1230 – US Jul. Trade Balance
- 1230 – Canada Jul. International Merchandise Trade
- 1400 – US Jul. Factory Orders
- 1700 – US Fed’s Bostic (voter) to speak
- 1900 – US Fed’s Daly (voter) to speak
- 0145 – China Aug. Caixin Services PMI
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