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 week to watch the USD and US-China
John J. Hardy
Chief Macro Strategist
Summary: An interview with US Fed Chair Powell nudged the US dollar lower to start the week, but that effect may quickly fade as the chief source of risk this week may prove to be fresh developments in the increasingly fraught US-China relationship and the USD is largely holding its own as the week gets underway, even if volatility is sorely lacking.
Risk sentiment has apparently received a boost from the late Sunday TV programme 60 minutes and its interview with Fed Chair Jay Powell on the outlook for the US economy and the Fed’s willingness to continue providing the necessary support. While the Fed Chair by no means donned rose-tinted goggles on the shape of the recovery, his reassurance that the Fed is far from out of ammunition and other comments provided a tone that was perhaps seen by many as offsetting some of the negative reaction to last Wednesday’s speech. Powell again pushed against the idea of negative policy rates.
The FX reaction to Powell’s speech was less detectable, with the US dollar only a notch or two lower in places and notably stronger against the Chinese renminbi overnight. The recent drumbeat of developments and the latest US move against Huawei have us concerned that situation could continue to escalate from here. On that note, the USDCNY rate remains the most important exchange rate for the outlook here on any further signs of a worsening geopolitical strains or even threats that the US-China trade deal faces a collapse. This morning, the rate was 7.1150 and thus above the highest daily close for this year, with any approach to 7.20 likely to signal broadening unease and a large break above trig. In FX, the fallout from lower CNY would be likely felt most acutely in EM and with the G10 by AUD and NZD.
Not much on the calendar today as we await headlines from the US and China this week, but we also watch for an ugly rise in tensions on the US domestic political front as the Democrats massive $3 trillion stimulus passed by the House will not pass the Republican-majority Senate or get Trump’s signature. US Treasury Secretary Mnuchin and Fed Chair Powell are both set to testify before the US Senate Banking committee tomorrow on the CARES act, the rollout of which has not been without considerable controversy.
Chart: EURUSD still heavy
The EURUSD exchange rate is not necessarily the most sensitive to the overall USD direction, but is a key piece in establishing the broader USD levels and particularly whether the pressure on the USDCNY rate is waxing or waning. The 1.0800 level has proven very sticky of late, with several forays below quickly gathered up. A failure and daily close through 1.0750 could set the broader FX market on edge from here and add to the attention on the USDCNY rate to boot.
The G-10 rundown
USD – interesting to watch both the US domestic political front with tomorrow’s joint appearance of Powell and Mnuchin before a Senate committee as they face questioning on the CARES act.
EUR – slow burn EU existential questions are constantly there in the background – that story could heat up in June with the next EU council meeting. For now, watching the technical EURUSD developments as noted above.
JPY – Japan’s Q1 GDP growth was better than expected at -0.9% QoQ, showing that Japan managed to avoid the kind of damage that hit the EU, which registered a -3.8% drop for the same quarter. EURJPY downside risks still a theme.
GBP – sterling has rebounded from the worst of the pressure this morning – still solidly above the next key psychological level for GBPUSD at 1.2000, but performance not impressive given where other markets and currencies are trading. The EU’s Barnier said he was “not optimistic” on the outlook for a trade deal late last week. EU-UK Summit up next month.
CHF – EURCHF trading heavily just above the assumed SNB-defended floor of 1.0500 after the SNB reported another rise in weekly sight deposits.
AUD – the AUD riding high as of this writing as US equity futures and the European bourses are shooting out the lights. Enthusiasm for commodity exposure has seen BHP Billiton shares pulling sharply higher overnight. The chief concern for AUD would be US-China trade tension headlines this week. The latest RBA meeting minutes up tonight.
CAD – solid boost in oil prices and no surprises in the Bank of Canada’s Financial system review keeping the USDCAD price action bottled up in the range – awaiting a move outside of the 1.3850-1.4250 range to signal a break.
NZD – one data series we have not commented on in recent years is the foreign ownership of NZ sovereign bonds, which has been steadily declining since 2016 and picked up pace this year and is likely to continue apace given the zero rates and clear RBNZ intention to move to negative rates. NZ runs a sizeable -3% current account deficit and this is a clear additional tailwind for NZD bears.
SEK – for now, EURSEK finding a low ceiling at the 200-day moving average below 10.70. The chart has posted what looks a major top, but the real test for the SEK bullish case would be any more sizable decline in risk sentiment.
NOK – the key resistance around the 11.05 area in EURNOK still intact and getting some support from rising crude oil prices, though it takes a lot to lift longer time prices further out the curve to build a better case for a full reversal lower in EURNOK.
Upcoming Economic Calendar Highlights (all times GMT)
- 1400 – US May NAHB Housing Market Index
- 0130 – Australia RBA Meeting Minutes
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