Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Four FX charts: G10 smalls and EM tumble
John J. Hardy
Chief Macro Strategist
Summary: A fresh intensification of the coronavirus fallout fears is driving another wave of weakness across the most China-exposed currencies within the G10, together with many emerging market currencies as well. USDRUB has squeezed to interesting levels in particular today. Elsewhere, we have a look at whether sterling can sustain the post-BoE kneejerk rally after Carney and company decided not to cut rates.
Within the G3 currencies, the action remains as moribund as ever as EURUSD failed to make waves with a break of the 1.1000 level this week and the FOMC didn’t spark any isolated USD strength. But the general risk off starting overnight in the Asian session has certainly driven a wave of further risk off in the traditionally risk-correlated G10 small currencies, particularly the AUD as we discuss below, as well as general weakness across much of EM. We watch for the risk of a further intensification of risk off after this latest bout, suggesting that many markets look a bit complacent here in pricing how long this situation may take to get sorted out.
EURAUD – AUD under press within G10
AUD is the single G10 currency most at risk from its exposure to China on the fear that a prolonged bout of dealing with the coronavirus outbreak will extend the suspension of economic activity and lead to a further reduction in collapsing prices for key commodity exports like iron ore and coking coal, Australia’s chief China-bound exports. AUDUSD is not the only pair to look at (but is worth watching as the key 0.6700 area approaches as we discussed in today’s FX Update), but other AUD pairs show the Aussie very much on the defensive, including EURAUD, which is ripping sharply to new highs on the latest developments – worth tracking all AUD pairs for isolated AUD weakness.
GBPUSD – watching whether BoE no-cut rally sustained
The Bank of England decided not to cut today – a move that was nearly guaranteed to trigger a knee-jerk reaction as the market was very divided on the prospects for a cut. By not cutting, sterling has rushed higher, but has not yet “broken” anything in GBPUSD. Traditionally not a currency that does well in a backdrop of wobbly global markets, and after a strong speculative build of late in speculative GBP longs, we keep our eyes out for whether this move is sustained higher – with an open mind, but ready to look for a short bias on a failure back toward the 1.3000 level or lower.
CHFNOK – intra-European risk-on, risk-off pair extraordinaire
CHFNOK has pulled to new highs for the cycle as the oil- and global growth sensitive NOK is finding itself under intense pressure after long NOK looked like one of the consensus long trades of the year on hopes of a global recovery before the latest coronavirus fears suddenly washed over markets. As well, the recent move by the US Treasury to place Switzerland back on the currency manipulators watchlist likely means the SNB will be far more selective in leaning against further CHF strength as it has done in the past. Speculative positioning may be poorly positioned for more NOK weakness here and traders are advised that ugly spikes can occur in a thinly traded currency like the NOK if this situation gets worse before it gets better.
USDRUB – squeeze as the plot has changed in recent days
Coming into this year, the Russian ruble was enjoying a fresh surge in strength on the country’s very solid compression in credit spreads, rather strong oil prices and still highly positive real interest rates as the policy rate of 6.50% is still way above the latest inflation figures that have steadily declined over the last 10 months or so to 3.0% in December (some of that, of course, is a natural by-product of currency strength). But now, oil prices have cratered on the coronavirus outbreak and oversupply fears while natural gas prices have been pressured by very mild European weather. Today, Russia is moving to close its entire border with China to contain coronavirus fears and the combination of all of the above has the Russian ruble poking at new local lows versus the USD – 63.25 looks an important pivot area on the way up here.
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