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: A nervous tilt into the weekend, also for the USD
John J. Hardy
Chief Macro Strategist
Summary: The US is at risk of an exponential breakout moment with coronavirus awareness and shutdown in economic activity over the coming days and weeks, a situation that appears to be finally wearing on the US dollar as the expected Fed policy rate is already at zero and USD traders await QE forever and possibly more in response.
Trading interest
- Long (Expiry Nov 6 – days after election) 1.1200 EURUSD calls.
- Short USDJPY for 100.00, stops above 107.50 (or equivalent in option put spreads, etc.)
- Squaring EURJPY shorts for modest profit
- Squaring AUDUSD shorts at slightly worse than breakeven (above 0.6630)
A quick and dirty update today, as time-to-market is more imperative than a lengthy perusal of what is going on here, but the headline is that the USD behavior is changing – and here is possibly why:
US treasury yields are collapsing at breathtaking pace (10-year collapsing to 77 basis points as I write!) – the Markets are already pricing more than 50 basis points of further easing at the FOMC meeting on March 18 and I wouldn’t be surprised at all to see the Fed chopping 100 basis points given the high risk that US economic activity goes into an unprecedented nosedive in coming days and weeks on self-quarantining response to the coronavirus outbreak.
The Fed might even chop 100 bps before the March 18 meeting and tease that it is considering purchasing “other assets” (particularly corporate debt eventually, but also possibly stocks via ETFs a la BoJ?) if the market throws a proper tantrum.
It is interesting to see the patterns in FX changing as the USD struggles here even as risk is off – it appears the market is taking a different approach on the USD – we are keeping an open mind even in AUDUSD on whether further risk selling will see this pair higher or lower. This is a monumental shift, if so, and we prefer to focus on USD shorts now rather than shorting risk currencies (short USDJPY as noted in the Trading Interest above, for example).
EURUSD has cleared a major hurdle above 1.1200 – this opens up the 1.1400+ area.
Keep positioning light ahead of the weekend – news flow over the weekend and the fear of that impending flow ahead of the weekend (in terms of how the market closes today) could keep temperatures very high.
Please have a listen to today’s Saxo Market Call podcast, in which I had a great discussion with my colleague and equity strategist Peter Garnry on these very uneasy markets going into the weekend.
Chart: AUDUSD
The action in AUDUSD here is not particularly remarkable, except in the light of the weak risk sentiment and how that is failing to pressure the pair lower – could we see the AUD outperforming the USD even in a further deleveraging cycle? We keep an open mind and would judge it a very bullish development for the near term already and especially if it clears the 0.6700 area at the as a trigger for a further squeeze higher.
Upcoming Economic Calendar Highlights (all times GMT)
- 1330 – US Jan. Trade Balance
- 1330 – Canada Jan. Int’l Merchandise Trade
- 1330 – Canada Feb. Unemployment Rate
- 1330 – Canada Feb. Employment Change
- 1330 – US Feb. Change in Nonfarm Payrolls
- 1330 – US Feb. Unemployment Rate
- 1330 – US Feb. Average Hourly Earnings
- 1500 – Canada Feb. Ivey PMI
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