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: Getting close to watershed moment for USD
John J. Hardy
Chief Macro Strategist
Summary: CHF and JPY have sold off across the board on rising risk sentiment on Brexit negotiation and US-China trade deal hopes, but especially because bond yields rose sharply yesterday. EURCHF has rallied into interesting levels and sterling rose the most it has in months on a possible UK-Ireland negotiation breakthrough.
The FX Market veritably swirling with developments yesterday and into this morning. We’re tempted to call a turn lower for the US dollar here, but still need to see the coup de grace administered in coming days to make the call, as it wouldn't take much of a USD rally to give the impression that the churning range in the USD will hold for now.
Sterling rallied the most it has in months after UK PM Boris Johnson and Ireland’s Varadkar suggested the possibility of a “pathway” in negotiations to a Brexit deal. The Irish leader said that talks were “very positive and very promising”. Some are interpreting this as a sign that Johnson is willing to allow Northern Ireland to remain in the EU customs union, but an FT article cited a “senior EU diplomat” indicating that Johnson’s position on customs cooperation shifted substantially. We await chief EU negotiator Michel Barnier’s opinion later today on whether talks have progressed sufficiently to move forward. Sterling upside potential remains on a deal, but we’re very cautious on the long term outlook for sterling after a possible one off adjustment if we are indeed headed for a deal before the October 31 deadline.
Yesterday was a bit of a watershed day for long bonds globally, as yields rose sharply. It is tough to attribute any single factor, but rising hopes that the US-China trade talks will move in a market friendly direction, the possible Brexit breakthrough, and the ECB minutes further underlining that the ECB is more or less done on the easing side likely all contributing. The US 30-year auction was neither here nor there, but yields remained high late yesterday and JPY and CHF were the weakest on this development – note EURCHF poking at the key 1.1000 level this morning – pivotal.
Chart: USDSEK
Outside of sterling crosses, one of the bigger moves yesterday was in the Swedish krona, which jerked back to the strong side after a hotter than expected CPI data point for September, but likely also due to the general shift in sentiment that saw safe havens weaker and the smaller currencies generally firmer. The USDSEK chart in particular, after yesterday’s weaker USD, has suffered a considerable reversal here – note the full rejection of the last rally wave in one fell swoop. Still, a move toward perhaps 9.60 needed here to begin confirming a more profound reversal.
The G-10 rundown
USD – the US dollar is limping here – only the very weak JPY keeping the broader USD measures from suggesting strong risks of a turn lower – stay tuned for the weekly close today for deepening signs of a USD turn to the downside.
EUR – the ECB minutes yesterday offering further support for the sense that the ECB is at odds over policy and is effectively at the end of the policy road for now -
JPY – the JPY lower on the chunky sell-off in bonds. If risk appetite is set for a major revival and yields to head higher, the enthusiasm for carry trading yen versus EM and elsewhere likely to return.
GBP – a huge boost to sterling from the apparent breakthrough between Johnson and Varadkar, but has Johnson sold the Northern Irish unionists down the river and what exactly is his new position – looking for further headlines today from the EU’s Barnier. Plenty of room for a one-off adjustment higher in GBP if we are suddenly headed to a deal – but caution on the longer term.
CHF – Brexit relief and higher bond yields helping the CHF sharply lower, but more robust sign of a major turn if EURCHF is able to blast through 1.1000.
AUD – the USD-China trade deal hopes, even if the deal proves very narrow, helping to boost AUDUSD through local resistance – plenty more upside likely to come if equity markets celebrate whatever outcome awaits us.
CAD – the latest Canadian employment data up today – if we are headed to US-China trade détente and a surge in risk appetite, CAD could underperform in the crosses, even if USDCAD turns back lower.
NZD – AUD getting the better over NZD on the US-China trade deal hopes – key risk for NZD crosses next week on the Q3 NZ CPI release next Wednesday.
SEK – the Swedish krona launching a considerable reversal here – tempting to call a turning of the corner in both EURSEK and USDSEK – but we need another percent of upside to call a turn (into 10.70 or lower for EURSEK and 9.60 or so in USDSEK as noted above).
NOK – the consolidation in NOK gentler than in SEK yesterday – risk appetite a key driver for whether a lid stays on EURNOK.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – Canada Sep. Employment Data
- 1400 – US Oct. Flash University of Michigan Sentiment
- 1715 – US Fed’s Rosengren (Voter) to Speak
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