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: FOMC minutes add to sense that Fed is catching up to the curve.
John J. Hardy
Chief Macro Strategist
Summary: The FOMC minutes last night reveal that the Fed is set to launch a rapid pace of quantitative tightening in the wake of the May 4 FOMC meeting, helping to boost the US dollar yesterday, particularly against commodity currencies as key commodity prices have corrected and on the dip in risk sentiment as the market takes the Fed tightening intentions more seriously. Has the Fed caught up with the curve?
FX Trading focus: FOMC minutes reveal a hefty QT schedule.
A further sense that the Fed wants to focus on tightening conditions for asset markets as well as for the economy in general was in evidence in the FOMC minutes last night, which revealed plans for a rapid pace of quantitative tightening after the May 4 meeting. Some Fed members were in favor of not “capping” Fed balance sheet reductions at all – in other words, not rolling whatever treasuries and other assets were expiring in a given month, but in the end, members “generally agreed” that a cap of $60 billion on treasuries and $35 billion on MBS would be an appropriate pace of tightening – still nearly double of the maximum pace during the 2017-19 tightening and really well over double the average pace of the average tightening over much of that time frame. As well, the minutes indicated that more on the Fed were in favour of moving 50 basis points at the March 16 meeting, but went with the 25-basis point move due to the Russian invasion of Ukraine. In response to the FOMC minutes, risk sentiment stayed under pressure and the US dollar surged against risky currencies/EM. Some of the latter may have been on a significant extension of the crude oil sell-off, with the combination of supply improvements as the IEA will be adding to massive US strategic reserves releases and the demand situation in China has been heavily impacted by increasingly widespread lockdowns. Easing oil prices are a potential boon for the yen, as I discuss below.
Chart: AUDUSD
Focusing on AUDUSD for the third day in a row as it is the most interesting technical pair and sits astride at least a couple of themes, including the commodity overlay focus across markets of late, the situation in China, where lockdowns are pressuring activity, and general risk sentiment, where the Fed is fully engaged in playing catch-up in a bid to attain credibility with its latest ratcheting higher of rate expectations and now a vicious tightening regime that will settle over the market in the coming months. So far, the reversal here is most interesting in that it took place just after the modestly hawkish RBA upgrade to guidance this week triggered a sprint above the well-defined range resistance of 0.7556. That move has been reversed, but the up-trend from the lows early this year has not yet been erased and only gets full tested below 0.7400, with the 0.7300 area perhaps the point of final capitulation. Regardless, this pair is an interesting proxy for a number of themes and may have just experienced a key reversal.
Watching the oil market as a factor here, both for long yields and for the commodity price itself as it impacts the JPY in particular. With the Fed clearly serious about slowing the economy and governments clearly dead set on lowering oil prices if they can do so with the release of strategic reserves, I wonder if there is space for the next month or two, at least, for oil prices to ease significantly despite the war in Ukraine to change the sentiment for the short term in the commodity space and therefore for commodity-sensitive currencies, whether exporters or importers. Heftier QT supposedly pressure longer yields higher, and we have seen some US yield curve steepening of late. But Fed achieving some credibility, especially if oil prices are sideways to lower, could mean the medium term growth outlook and inflation expectations could both head south. This would be very supportive for the beleaguered JPY – some optionality in perhaps USDJPY, GBPJPY and even AUDJPY downside etc. an idea for contrarians here for the next one- to two months.
Watching EUR today versus the GBP, USD, and JPY and can’t help but get the feeling that the market nerves are getting rattled ahead of the first round of the French Presidential election this Sunday, which has seemingly crept up out of nowhere as polls have drastically tightened in Le Pen’s favour over the last couple of weeks. More from John Authers. The Sunday results should give a sense of whether the next two weeks until the April 24 run-off of, presumably, Le Pen-Macron is going to be a real nail-biter.
Table: FX Board of G10 and CNH trend evolution and strength.
Some mean reversion helping the JPY here and harming the highest-flying AUD in particular. Have we seen a key reversal in risk sentiment and perhaps even crude oil prices this week or just a consolidation?
Table: FX Board Trend Scoreboard for individual pairs.
Not finding any new news here yet for the individual pairs. Too far from trend changes in most of the interesting places.
Upcoming Economic Calendar Highlights (all times GMT)
- 1100 – Mexico Mar. CPI
- 1130 – ECB Meeting Minutes
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- 1230 – US Weekly Initial Jobless Claims
- 1300 – US Fed’s Bullard (voter) to speak
- 1300 – Poland central bank Governor Glapinski press conference
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