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: Risk appetite rolls over
John J. Hardy
Chief Macro Strategist
Summary: The JPY cross rally was tamed by a turnaround in risk sentiment yesterday. Today’s focus for the US dollar squarely on Fed Chairman Powell’s testimony in Washington. Elsewhere, the Brexit endgame sees sterling surge as Corbyn open for idea of second referendum and May talks delay.
Trump lauded the equity market performance since the 2016 election just as the market was surging to a new high near opening hours yesterday, likely linked to hopes from the weekend that the US and China are ready to hammer out deal terms in the coming weeks. Alas, the price action quickly turned around and the US session closed on a sour note yesterday with further selling overnight.
The busy President Trump’s complaint about the price of oil yesterday, meanwhile, seemed to inspire a deep sell-of in energy markets, but we suspect that these were soft for a correction anyway, with prior complaints about the price of oil from the Tweeter in Chief not showing any consistent impact on the market. In currencies, the general reaction was along the lines one would expect, with oil-sensitive currencies, especially CAD, weak on the session and the rally in JPY crosses tamed once again, just as breaks of resistance were unfolding. Trend trading in this market has largely been a lost cause in recent history.
The most independent mover among major currencies was sterling, which rallied again and is now challenging the long-established lower range in EURGBP after Labour leader Jeremy Corbyn yesterday voiced support for a second Brexit referendum if the right terms for Brexit can’t be achieved and Prime Minister May was out talking up an article 50 delay to avoid parliament taking more control over the process tomorrow with an amendment to avoid a No Deal exit at the March 29 deadline.
The chief focus for the day will be on Fed Chairman Powell, where the bar looks very high for dovish surprises, given how far the market has swung in its expectations for the Fed. In fact, given the heavy criticism Powell has faced, he may take a rather defensive posture to push back against the idea that the Fed will always wax dovish as long as markets push them sufficiently hard into doing so.
Trading interest
Tactical interest for trading USDCAD spot on the long side if the price action stays above 1.3150.
Previously, we have discussed AUDUSD shorts, and we need a sell-off bar or two to take the price action back well below 0.7100 for encouragement that downside remains the side of least resistance.
For downside potential in JPY crosses, we would look for a weak close in EURJPY today below about 125.50 for establishing short positions with stops above the 126.30 high.
Chart: USDCAD
USDCAD executed a fairly sharp comeback from the very weak closing bar from Friday, a fairly strong sign of support. The bulls will likely receive further fuel for a rally if risk appetite finally rolls over again and the oil market pokes around for new support. A firmer sign for a test-of-top scenario would be a solid rally bar that takes us back to the 1.3375 resistance.
The busy President Trump’s complaint about the price of oil yesterday, meanwhile, seemed to inspire a deep sell-of in energy markets, but we suspect that these were soft for a correction anyway, with prior complaints about the price of oil from the Tweeter in Chief not showing any consistent impact on the market. In currencies, the general reaction was along the lines one would expect, with oil-sensitive currencies, especially CAD, weak on the session and the rally in JPY crosses tamed once again, just as breaks of resistance were unfolding. Trend trading in this market has largely been a lost cause in recent history.
The most independent mover among major currencies was sterling, which rallied again and is now challenging the long-established lower range in EURGBP after Labour leader Jeremy Corbyn yesterday voiced support for a second Brexit referendum if the right terms for Brexit can’t be achieved and Prime Minister May was out talking up an article 50 delay to avoid parliament taking more control over the process tomorrow with an amendment to avoid a No Deal exit at the March 29 deadline.
The chief focus for the day will be on Fed Chairman Powell, where the bar looks very high for dovish surprises, given how far the market has swung in its expectations for the Fed. In fact, given the heavy criticism Powell has faced, he may take a rather defensive posture to push back against the idea that the Fed will always wax dovish as long as markets push them sufficiently hard into doing so.
Trading interest
Tactical interest for trading USDCAD spot on the long side if the price action stays above 1.3150.
Previously, we have discussed AUDUSD shorts, and we need a sell-off bar or two to take the price action back well below 0.7100 for encouragement that downside remains the side of least resistance.
For downside potential in JPY crosses, we would look for a weak close in EURJPY today below about 125.50 for establishing short positions with stops above the 126.30 high.
Chart: USDCAD
USDCAD executed a fairly sharp comeback from the very weak closing bar from Friday, a fairly strong sign of support. The bulls will likely receive further fuel for a rally if risk appetite finally rolls over again and the oil market pokes around for new support. A firmer sign for a test-of-top scenario would be a solid rally bar that takes us back to the 1.3375 resistance.
The G10 rundown
USD – again, suspect that we are overpriced for the implications of the Fed’s dovish shift and a roll-over in risk appetite has us leaning for USD upside.
EUR – a very weak election for the Five Star Movement in Sardinia, where support for the party dropped by two-thirds. Is the support for a populist stance fraying? This is a key question ahead of the late May EU Parliament elections. For now, German 10-year Bund yields poking below 10 basis points this morning – speaks volumes about the outlook for the EU economy.
JPY – JPY crosses weakly mimicking the latest ups and downs in risk appetite. Market may be reluctant to go notably long JPY until notable carry trades (read: EM) and risk appetite generally are under pressure.
GBP – sterling bulling up to the range extremes in EURGBP and GBPUSD – do we get enough information value from the next couple of days to drive an extension higher still? Sceptical…
CHF – EURCHF volatility virtually nonexistent and USDCHF pausing right at the parity area.
AUD – the recent one-day sell-off on coal shipment worries was erased but we’re too embedded in the range to extract any significance from that as we await a bigger theme to develop.
CAD – a smart rejection of the Friday sell-off bar in USDCAD has us constructive at least within the range for more upside towards 1.3350+, especially if the oil market correction cuts deeper. Canada CPI for January up tomorrow and December and Q4 GDP up on Friday.
NZD – pesky kiwi stays bid but may soften against the G3 currencies and USD and JPY in particular if risk appetite rolls over more aggressively here. RBNZ’s Bascand last night argues new bank capital requirements will help.
SEK – EURSEK still free of the former resistance above 10.50, so focus for now on whether the pair pursues a full test-of-top.
NOK – weak oil markets bump the price action back higher in EURNOK – if risk appetite rolls over again, we may risk another squeeze back toward 9.90 or 10.00 again.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – ECB’s Lane to speak
1000 – UK BoE Members before Parliament
1330 – US Dec. Housing Starts / Building Permits
1400 – US S&P Corelogic Home Price Index
1430 – ECB’s Mersch to speak
1445 – US Fed Chairman Powell Testimony released, testimony begins
1500 – US Feb. Consumer Confidence
2145 – New Zealand Feb. Trade Balance
USD – again, suspect that we are overpriced for the implications of the Fed’s dovish shift and a roll-over in risk appetite has us leaning for USD upside.
EUR – a very weak election for the Five Star Movement in Sardinia, where support for the party dropped by two-thirds. Is the support for a populist stance fraying? This is a key question ahead of the late May EU Parliament elections. For now, German 10-year Bund yields poking below 10 basis points this morning – speaks volumes about the outlook for the EU economy.
JPY – JPY crosses weakly mimicking the latest ups and downs in risk appetite. Market may be reluctant to go notably long JPY until notable carry trades (read: EM) and risk appetite generally are under pressure.
GBP – sterling bulling up to the range extremes in EURGBP and GBPUSD – do we get enough information value from the next couple of days to drive an extension higher still? Sceptical…
CHF – EURCHF volatility virtually nonexistent and USDCHF pausing right at the parity area.
AUD – the recent one-day sell-off on coal shipment worries was erased but we’re too embedded in the range to extract any significance from that as we await a bigger theme to develop.
CAD – a smart rejection of the Friday sell-off bar in USDCAD has us constructive at least within the range for more upside towards 1.3350+, especially if the oil market correction cuts deeper. Canada CPI for January up tomorrow and December and Q4 GDP up on Friday.
NZD – pesky kiwi stays bid but may soften against the G3 currencies and USD and JPY in particular if risk appetite rolls over more aggressively here. RBNZ’s Bascand last night argues new bank capital requirements will help.
SEK – EURSEK still free of the former resistance above 10.50, so focus for now on whether the pair pursues a full test-of-top.
NOK – weak oil markets bump the price action back higher in EURNOK – if risk appetite rolls over again, we may risk another squeeze back toward 9.90 or 10.00 again.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – ECB’s Lane to speak
1000 – UK BoE Members before Parliament
1330 – US Dec. Housing Starts / Building Permits
1400 – US S&P Corelogic Home Price Index
1430 – ECB’s Mersch to speak
1445 – US Fed Chairman Powell Testimony released, testimony begins
1500 – US Feb. Consumer Confidence
2145 – New Zealand Feb. Trade Balance
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