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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: NZD knocked lower by RBNZ. JPY surge fizzles
John J. Hardy
Chief Macro Strategist
Summary: The RBNZ made it clear it will move against any further NZD strength in its latest statement, which knocked the NZD sharply lower overnight. Elsewhere, the USD rises and falls continue to slavishly inversely track developments in risk appetite while an unusual JPY surge yesterday has so far failed to hold.
The US dollar wilted broadly yesterday on the fresh surge in risk appetite and has come back this morning, no surprise, on the wobble in the stocks into the US close and then some new defensiveness in risky assets later in the European morning. USDJPY saw a sudden jolt lower yesterday that looked odd relative to the lack of volatility in other assets at the time. The move took out support levels below 106.58 and triggered stops before rebounding smartly – an odd move considering muted trading in safe haven fixed income and strong risk appetite across equities yesterday. The bounce has taken the pair well away from the more important 106.00 area and a move and close back above 107.00 suggests yesterday’s move was a misleading development (possibly on SoftBank’s sale of T-Mobile USA shares, which netted the company $15 billion and could have a one-off FX impact).
The RBNZ maintained its dovish reputation overnight by adding foreign asset purchases to its list of “deployable tools” – a move that suggests any backup in the NZD will meet heavy resistance. I suspect the RBNZ has its eye on the kiwi’s very sharp assent back toward the highs of the range (in broad effective terms) of the period since late 2017. The RBNZ has a history of intervening, so while this may not necessary engineer a new immediate and sustained slide, it does throw up a major obstacle to further strength.
Today’s calendar looks quiet, while concerns about the fresh spread of Covid19, particularly in the US, could (or is it should?) eventually weigh on sentiment.
Chart: AUDNZD
The RBNZ overnight triggering renewed interest in NZD selling – here a rise in AUDNZD – so far a rather weak echo of the move in the NZD lower on the back of the May 13 RBNZ meeting that opened up the discussion of negative-rate potential. Interesting to see if the NZD continues to track lower in the wake of last night’s meeting. The December STIR futures contract for New Zealand only registered a three-tick rise (pricing in rates of 3 bps lower – not exactly an avalanche.) By touting foreign asset purchases as a policy tool, the RBNZ has placed the bar for a stronger NZD from here much higher, even if this meeting fails to set the NZD on an immediate path lower. For AUDNZD, the focus now on whether this local move holds and then on the resistance line ahead of 1.0900.
The G-10 rundown
USD – trying to post a comeback after two days of steep losses and it is tough to distinguish between an inverse chart of the broad USD versus the S&P 500 Index (sent a chart of this on my Twitter: @johnjhardy)
EUR – EURUSD backtracking a bit here after the two-day surge that didn’t seem to have any obvious drivers. The consolidating only looks threatening for a test of the recent lows if 1.1250 is giving way (though as noted above for the USD, general risk sentiment is in the driver’s seat).
JPY – the USDJPY move lower is holding just well enough to keep things interesting, but easy to reverse with a move back above 106.80, arguably – and expect USD and JPY to move in sympathy against other currencies.
GBP – sterling faltering today in its latest attempt to get a solid foothold above 1.2500, but not in danger again until below 1.2400, with UK news heating up next week around Brexit negotiations starting Monday.
AUD – the AUDUSD has been in limbo for weeks now and needs to either vault back below 0.7000 or crumble below 0.6800 to make an impression. The Aussie strength rests on the reflationary macro theme expressed in commodities markets as we discussed in today’s Saxo Market Call.
CAD – USDCAD politely inspected the 200-day moving average below 1.3500 yesterday before bobbing back higher into the recent tight range – offering a hook for bulls to get involved, with a break above the 1.3686 pivot needed to argue that the pair is breaking higher. A close above 1.3575 or so would be first above 21-day SMA since mid-May.
NZD – kiwi smacked lower by the RBNZ and with that, NZDUSD and NZDJPY shorts perhaps offer the most tailwind for trying a contrarian attempt to trade for a risk-off move here.
SEK – risk off as the European session hits mid-morning sees EURSEK rebounding back higher – a choppy chart lacking conviction – and will likely follow risk appetite inversely.
NOK – the NOK may prove more sensitive to risk appetite swings if oil is in for a bit of consolidation as well, and the well etched 11.00 are on the EURNOK chart could have significant stops lined up above – squeeze alert if we actually see a two- to three-day correction in the equity market or worse.
Upcoming Economic Calendar Highlights (all times GMT)
- 1100 – Czech Central Bank Announcement
- 1430 – US Weekly DoE Crude Oil and Product Inventories
- 1630 – US Fed’s Evans (Non-voter) to Speak
- 1900 – US Fed’s Bullard (Non-voter) to Speak
- South Africa Supplementary Budget (no time given)
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