Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Dollar dips on 'stable CNY deal' rumours
John J. Hardy
Chief Macro Strategist
Summary: Reports that China and the US are considering CNY stabilisation as part of an upcoming trade deal sent USD lower Tuesday, with today's FOMC minutes the next focus.
Bloomberg broke a story yesterday that the US and China may agree to keep the yuan stable as a part of an eventual trade deal; the US apparently wants to avoid China devaluing its currency to offset the impact of tariffs. The article cites unnamed people involved in the US-China trade discussions. This boosted risk appetite and saw the US dollar trade a bit weaker, with USDCNY back close to the 6.70 lows. A small additional boost to sentiment was further evidence of US President Donald Trump’s apparently relaxed attitude about the March 1 deadline for talks, as he said yesterday that it is “not a magical date”.
Fresh signals from the Bank of Japan that it is gearing up for outright easing. The BoJ’s Kuroda specifically linked currency moves (i.e., a stronger JPY) as a potential trigger for fresh easing measures in testimony before parliament. Given the backdrop of stronger risk appetite overnight, the yen was happy to sell off on the news. Kuroda is out speaking again this morning and trying to put a spin on his currency comments (likely to avoid unwanted attention from the US), saying that current BoJ policy is not weakening the yen. Hmm. Another weak Japanese trade balance figure overnight perhaps weighed at the margin as well.
Tonight we look forward to the Federal Open Market Committee minutes and specifically, look for enlightenment on what caused Fed chair Powell and company to pull the emergency brake so soon after the relatively hawkish guidance at the December FOMC meeting, largely credited with triggering the final, vicious downdraft in equities in late December.
I wouldn’t expect any Eureka moments from these minutes, which will likely air concerns that the acceleration of market volatility and ramping of credit spreads drove fresh concerns that a systemic financial market event could impact confidence and inflation expectations, etc. This and the dawning realisation that the Fed’s balance sheet policy needs reassessment as much as or more than interest rate guidance, particularly given the torrent of Treasury issuance to finance Trump’s tax cuts.
Trading interest
We discussed AUDUSD, EURUSD shorts and EURJPY shorts via options in recent days – still an idea for the two-month or longer time horizon if not already positioned.
Chart: EURJPY
Typical of many of the majors, EURJPY can’t find direction and pulls up to tease resistance once more after teasing support less than a week ago. While the BoJ stands ready for further easing measures and has now linked these to eventual currency strength, the downside here remains the side of least resistance if risk appetite ever rolls over again – for example if the market has become excessively buoyed by the Fed’s dramatic pause and hopes for the implications of this trade deal.
Fresh signals from the Bank of Japan that it is gearing up for outright easing. The BoJ’s Kuroda specifically linked currency moves (i.e., a stronger JPY) as a potential trigger for fresh easing measures in testimony before parliament. Given the backdrop of stronger risk appetite overnight, the yen was happy to sell off on the news. Kuroda is out speaking again this morning and trying to put a spin on his currency comments (likely to avoid unwanted attention from the US), saying that current BoJ policy is not weakening the yen. Hmm. Another weak Japanese trade balance figure overnight perhaps weighed at the margin as well.
Tonight we look forward to the Federal Open Market Committee minutes and specifically, look for enlightenment on what caused Fed chair Powell and company to pull the emergency brake so soon after the relatively hawkish guidance at the December FOMC meeting, largely credited with triggering the final, vicious downdraft in equities in late December.
I wouldn’t expect any Eureka moments from these minutes, which will likely air concerns that the acceleration of market volatility and ramping of credit spreads drove fresh concerns that a systemic financial market event could impact confidence and inflation expectations, etc. This and the dawning realisation that the Fed’s balance sheet policy needs reassessment as much as or more than interest rate guidance, particularly given the torrent of Treasury issuance to finance Trump’s tax cuts.
Trading interest
We discussed AUDUSD, EURUSD shorts and EURJPY shorts via options in recent days – still an idea for the two-month or longer time horizon if not already positioned.
Chart: EURJPY
Typical of many of the majors, EURJPY can’t find direction and pulls up to tease resistance once more after teasing support less than a week ago. While the BoJ stands ready for further easing measures and has now linked these to eventual currency strength, the downside here remains the side of least resistance if risk appetite ever rolls over again – for example if the market has become excessively buoyed by the Fed’s dramatic pause and hopes for the implications of this trade deal.
The G-10 rundown
USD – the greenback back lower, if not dramatically so, after the Bloomberg story. Still feels unsafe to trade the uncertainty until we have a look at whatever trade deal takes shape. Complacency looks rather profound and the Fed continues to actively tighten. A truly stable yuan would likely require a Fed in outright easing mode.
EUR – the euro is neutral to the crossfire of themes in this market – down versus sterling but up versus a struggling JPY. Not seeing any positive catalysts for the euro besides passive reactions to more negative developments elsewhere. Yesterday, the European Central Bank's Guindos was talking up the ECB’s toolbox potential (I would argue that the most effective tool is fiscal and they don’t have this one in that toolbox) and chief economist Praet has also talked up the ECB’s ability to change guidance if conditions warrant.
JPY – the yen is the weakest of the lot as the Bank of Japan making it clear that there is only one direction for policy to move from here, and it’s an easy sell as complacency has spread like wildfire.
GBP – hard to find attribution for the move in sterling yesterday – possibly flow linked – as prime minister Theresa May heads to Brussels today to discuss changes to the Brexit deal with Claude Juncker. Not much range left to play with in EURGBP if something hopeful emerges.
CHF – would normally expect more CHF downside on the backdrop of risk on and a weak JPY, but ECB sounding the dovish notes perhaps keeping the key EURCHF stuck in the range. USDCHF barely hanging on to parity here.
AUD – Would a stable yuan prevent an Australian credit crunch? Life difficult for AUDUSD bears if price action goes above 0.7200. Tempering enthusiasm for AUD should be stories like this one, pointing to diplomatic tensions between China and Australia.
CAD – USDCAD slipping into the 1.3150-1.3200 pivot zone on a weaker US dollar. CAD seems less reactive than AUD to swings in the US dollar and the two-year US-Canada rate spread has bobbed around within a ten-bps range for months. Friday sees Canada releasing its December Retail Sales report.
NZD – our chief interest here in relative strength versus the AUD, as AUDNZD needs to reverse back above 1.0500 to revive any bullish hopes. We have discussed the trade tension angle with China as a possible catalyst for NZD weakness and New Zealand is an easier target than Australia if China wants to press its point.
SEK – an interesting test for the krona yesterday as the Sweden CPI release for January missed badly for the core reading, pushing SEK over the edge across the board, as Riksbank expectations were nudged back lower. Interesting reversal later in the session in USDSEK on USD weakness, but NOKSEK and EURSEK have remained above the former resistance levels (10.50 in EURSEK the important one if the SEK is to continue weakening).
NOK – NOKSEK upside has been a prominent theme and saw a further boost yesterday above 1.0800. Disappointing that EURNOK has not worked more aggressively lower, given the backdrop of strong risk appetite and oil prices. A warning or an opportunity?
Upcoming Economic Calendar Highlights (all times GMT)
08:00 – South Africa Jan. CPI
11:00 – Sweden Riksbank’s Floden to speak
15:00 – Eurozone Preliminary Feb. Consumer Confidence
18:10 – US Fed’s Kaplan (Non-voter) to speak
19:00 – US FOMC Meeting Minutes
USD – the greenback back lower, if not dramatically so, after the Bloomberg story. Still feels unsafe to trade the uncertainty until we have a look at whatever trade deal takes shape. Complacency looks rather profound and the Fed continues to actively tighten. A truly stable yuan would likely require a Fed in outright easing mode.
EUR – the euro is neutral to the crossfire of themes in this market – down versus sterling but up versus a struggling JPY. Not seeing any positive catalysts for the euro besides passive reactions to more negative developments elsewhere. Yesterday, the European Central Bank's Guindos was talking up the ECB’s toolbox potential (I would argue that the most effective tool is fiscal and they don’t have this one in that toolbox) and chief economist Praet has also talked up the ECB’s ability to change guidance if conditions warrant.
JPY – the yen is the weakest of the lot as the Bank of Japan making it clear that there is only one direction for policy to move from here, and it’s an easy sell as complacency has spread like wildfire.
GBP – hard to find attribution for the move in sterling yesterday – possibly flow linked – as prime minister Theresa May heads to Brussels today to discuss changes to the Brexit deal with Claude Juncker. Not much range left to play with in EURGBP if something hopeful emerges.
CHF – would normally expect more CHF downside on the backdrop of risk on and a weak JPY, but ECB sounding the dovish notes perhaps keeping the key EURCHF stuck in the range. USDCHF barely hanging on to parity here.
AUD – Would a stable yuan prevent an Australian credit crunch? Life difficult for AUDUSD bears if price action goes above 0.7200. Tempering enthusiasm for AUD should be stories like this one, pointing to diplomatic tensions between China and Australia.
CAD – USDCAD slipping into the 1.3150-1.3200 pivot zone on a weaker US dollar. CAD seems less reactive than AUD to swings in the US dollar and the two-year US-Canada rate spread has bobbed around within a ten-bps range for months. Friday sees Canada releasing its December Retail Sales report.
NZD – our chief interest here in relative strength versus the AUD, as AUDNZD needs to reverse back above 1.0500 to revive any bullish hopes. We have discussed the trade tension angle with China as a possible catalyst for NZD weakness and New Zealand is an easier target than Australia if China wants to press its point.
SEK – an interesting test for the krona yesterday as the Sweden CPI release for January missed badly for the core reading, pushing SEK over the edge across the board, as Riksbank expectations were nudged back lower. Interesting reversal later in the session in USDSEK on USD weakness, but NOKSEK and EURSEK have remained above the former resistance levels (10.50 in EURSEK the important one if the SEK is to continue weakening).
NOK – NOKSEK upside has been a prominent theme and saw a further boost yesterday above 1.0800. Disappointing that EURNOK has not worked more aggressively lower, given the backdrop of strong risk appetite and oil prices. A warning or an opportunity?
Upcoming Economic Calendar Highlights (all times GMT)
08:00 – South Africa Jan. CPI
11:00 – Sweden Riksbank’s Floden to speak
15:00 – Eurozone Preliminary Feb. Consumer Confidence
18:10 – US Fed’s Kaplan (Non-voter) to speak
19:00 – US FOMC Meeting Minutes
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