Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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USD eyes the highs, but what's the catalyst?
John J. Hardy
Chief Macro Strategist
Summary: The US dollar remains bid as the trade war narrative continues to drive weak risk sentiment. Sterling is in the dumps as we await May’s exit and the UK goes to the polls for EU Parliamentary elections – a de facto referendum on a hard Brexit.
The US dollar continues to pull slowly stronger as risk sentiment weakened overnight, arguably driven by the escalating trade war narrative. Some point to further defiant rhetoric in the Chinese press while the USDCNY rate pokes near the highs for the cycle. A weak flash May PMI from Japan overnight dropped below 50 again after 50.2 in April, underlining the risks of our “False Stabilisation” theme.
Adding to that, while French flash PMIs this morning improved slightly, the flash May German Manufacturing survey dropped even further to 44.3 from an already eye-watering 44.4 in April. The tough part is eliciting any reaction in EURUSD, which reacted all of two or three pips to the release of the Federal Open Market Committee minutes late yesterday.
We're not sure where the market is looking for a catalyst outside of the obvious USDCNY focus around 7.00...
Sterling continues to drop aggressively as it seems unlikely that PM May’s plans for a fourth vote for a deal will ever see the light of day, and yesterday’s resignation of a key cabinet minister is seen as a sign that her resignation is a matter of days, if not hours, away. The timing couldn’t be more interesting, given that the EU Parliamentary elections are to be held today in the UK and the Brexit party looks set to reap votes from not only disaffected Tories, but potentially also pro-Brexit Labour voters.
Certainly, the most motivated to vote will be pro-Brexit voters in an election that historically has very low turnout. Effectively, it’s a referendum for or against hard Brexit. Sterling is suffering the lose-lose mindset that this either leads eventually to a no-deal Brexit or a Corbyn government if elections are called. The political situation is very fluid.
Trading interest
• Adding USDCAD long interest (stop well below 1.3400) to USD longs versus AUD and EUR (EURUSD perhaps most compelling through relatively short-dated options near the money, given utter complacency and low implied volatility).
• AUDNZD longs for strategic trade (stop below 1.04, targeting 1.10-1.12).
Chart: USDCAD
USDCAD saw a compelling reversal for the bulls yesterday, as a brief poke to new lows on a strong Canadian retail sales report was scooped up and a sharp sell-off in crude oil after the weekly US inventory report added energy to the upside. This looks like a reasonable technical hook for bulls to re-engage for a try at the cycle top above 1.3600.
Adding to that, while French flash PMIs this morning improved slightly, the flash May German Manufacturing survey dropped even further to 44.3 from an already eye-watering 44.4 in April. The tough part is eliciting any reaction in EURUSD, which reacted all of two or three pips to the release of the Federal Open Market Committee minutes late yesterday.
We're not sure where the market is looking for a catalyst outside of the obvious USDCNY focus around 7.00...
Sterling continues to drop aggressively as it seems unlikely that PM May’s plans for a fourth vote for a deal will ever see the light of day, and yesterday’s resignation of a key cabinet minister is seen as a sign that her resignation is a matter of days, if not hours, away. The timing couldn’t be more interesting, given that the EU Parliamentary elections are to be held today in the UK and the Brexit party looks set to reap votes from not only disaffected Tories, but potentially also pro-Brexit Labour voters.
Certainly, the most motivated to vote will be pro-Brexit voters in an election that historically has very low turnout. Effectively, it’s a referendum for or against hard Brexit. Sterling is suffering the lose-lose mindset that this either leads eventually to a no-deal Brexit or a Corbyn government if elections are called. The political situation is very fluid.
Trading interest
• Adding USDCAD long interest (stop well below 1.3400) to USD longs versus AUD and EUR (EURUSD perhaps most compelling through relatively short-dated options near the money, given utter complacency and low implied volatility).
• AUDNZD longs for strategic trade (stop below 1.04, targeting 1.10-1.12).
Chart: USDCAD
USDCAD saw a compelling reversal for the bulls yesterday, as a brief poke to new lows on a strong Canadian retail sales report was scooped up and a sharp sell-off in crude oil after the weekly US inventory report added energy to the upside. This looks like a reasonable technical hook for bulls to re-engage for a try at the cycle top above 1.3600.
The G-10 rundown
USD – the US dollar is being driven by liquidity considerations and the Fed remains behind the curve. Until the Fed brings out the big bazooka, the USD strength could be set to continue.
EUR – the euro is neglected within the G3, but absorbing strength via a EURGBP rise. The only support for the currency arguably from position squaring as carry trades are squared. But see no reason to like the single currency here – at risk from all directions for now, both existential over the parliamentary elections and from the trade war escalation risks.
JPY – putting on a show of strength again here, something the yen only does when yields are dropping and risk sentiment is at its worst.
GBP – sterling risks not letting up as instead of a wait for another vote, we have no clue what will happen from hour to hour. Next step is getting a look at the strength of the Brexit party vote after today’s EU Parliamentary elections in the UK.
CHF – new local lows here in EURCHF and we’re not far from the huge 1.1200 area in that pair – some of the CHF strength possibly the flip-side of GBP weakness as well as general weak risk sentiment.
AUD – the only concern here is that market sentiment is already very weak. Interesting to note domestic Australian markets celebrating the easy RBA message and Morrison victory at the election when the latter has promised fiscal tightness (tight fiscal and easy monetary are toxic for a currency).
CAD – a smart turnaround back to the weak side makes sense, given the risk-off tone and weaker oil prices. The loonie was boxing above its weight recently. Further tactical downside risk barring sudden brightening of sentiment.
NZD – we would like to call the lows for AUDNZD, but may need a specific NZD-negative catalyst.
SEK – famously unreliable Swedish unemployment rate drops 0.9% in April from March- we have never understood that data series. Not enthused about SEK’s prospects if the EU outlook and trade war risks deteriorate.
NOK – shouldn’t oil weakness weigh a bit more on NOK? Having a tough time understanding the latest aggressive rise in short Norwegian rates – out of sync with the rest of the world.
Upcoming Economic Calendar Highlights (all times GMT)
1130 – ECB Meeting Minutes
1230 – US Weekly Initial Jobless Claims
1345 – US Markit Flash May PMIs
1400 – US Apr. New Home Sales
2245 – New Zealand Apr. Trade Balance
2330 – Japan Apr. CPI
USD – the US dollar is being driven by liquidity considerations and the Fed remains behind the curve. Until the Fed brings out the big bazooka, the USD strength could be set to continue.
EUR – the euro is neglected within the G3, but absorbing strength via a EURGBP rise. The only support for the currency arguably from position squaring as carry trades are squared. But see no reason to like the single currency here – at risk from all directions for now, both existential over the parliamentary elections and from the trade war escalation risks.
JPY – putting on a show of strength again here, something the yen only does when yields are dropping and risk sentiment is at its worst.
GBP – sterling risks not letting up as instead of a wait for another vote, we have no clue what will happen from hour to hour. Next step is getting a look at the strength of the Brexit party vote after today’s EU Parliamentary elections in the UK.
CHF – new local lows here in EURCHF and we’re not far from the huge 1.1200 area in that pair – some of the CHF strength possibly the flip-side of GBP weakness as well as general weak risk sentiment.
AUD – the only concern here is that market sentiment is already very weak. Interesting to note domestic Australian markets celebrating the easy RBA message and Morrison victory at the election when the latter has promised fiscal tightness (tight fiscal and easy monetary are toxic for a currency).
CAD – a smart turnaround back to the weak side makes sense, given the risk-off tone and weaker oil prices. The loonie was boxing above its weight recently. Further tactical downside risk barring sudden brightening of sentiment.
NZD – we would like to call the lows for AUDNZD, but may need a specific NZD-negative catalyst.
SEK – famously unreliable Swedish unemployment rate drops 0.9% in April from March- we have never understood that data series. Not enthused about SEK’s prospects if the EU outlook and trade war risks deteriorate.
NOK – shouldn’t oil weakness weigh a bit more on NOK? Having a tough time understanding the latest aggressive rise in short Norwegian rates – out of sync with the rest of the world.
Upcoming Economic Calendar Highlights (all times GMT)
1130 – ECB Meeting Minutes
1230 – US Weekly Initial Jobless Claims
1345 – US Markit Flash May PMIs
1400 – US Apr. New Home Sales
2245 – New Zealand Apr. Trade Balance
2330 – Japan Apr. CPI
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