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: Second wave of coronavirus fears broadens
John J. Hardy
Chief Macro Strategist
Summary: For commodities traders and many China-exposed currencies, coronavirus fears never went away, but the Asian session overnight seems to have brought a second wave of concerns washing over global markets, with the usual suspects under pressure in FX-land, if still with low volatility. Sterling bulls risk a Bank of England rate cut today.
Hard to know why the timing is what it is in this market, but the renewal of coronavirus fears looks more intense here and showing signs of washing over global markets rather than staying limited to Asia and commodities as the major equity futures are also sharply lower overnight on the latest figures and as well, the drumbeat of major companies announcing suspension of activity in China. We urge traders to remain cautious.
FOMC Wrap
The new FOMC statement released last night was one of the least changed statements in modern memory, with one adjective downgraded from “strong” to “moderate” in describing the growth in household spending. An ever so slightly weaker USD during the Powell press conference may have been down to the Fed chair expressing frustration that inflation remained so low at this point in the cycle (market inferring rate cut preference and forward rate projections did tick a few basis points lower. Powell: “We’re not satisfied with inflation running below 2%, particularly at a time such as now where we’re a long way into an expansion and a long way into a period of very low unemployment, when in theory where inflation should be moving up,”
Otherwise, the Fed’5 basis point hike in the interest on excess reserves was a move many expected and didn’t trigger a market reaction as it is seen as a technical move to unwind some of the measures taken during the disruption of money markets late last year. The Fed did indicate in an “implementation note” released together with the statement that it would extend repo operations into April (prior statement only said at least into January), while keeping the language unchanged. From Powell’s discussion of reserves and the expanding Fed balance sheet in the press conference, it sounds like the Fed thinks it can get the reserves back to $1.5 trillion and then ease off the balance sheet growth.
Today we await the Bank of England decision with little anticipation, even as the market is highly divided on the likelihood of a rate cut, as any cut would be seen as buying a last bit of insurance rather than the first of a series. Were it not for the coronavirus situation, it would be easier to call for no cut, given the surge in a number of confidence and other surveys of late, but it’s a finer balance now. We would fade any sterling rallies tactically on a no-cut as this market has both eyes on risk-on, risk-off over the coronavirus situation at the moment.
Also today – watch for a potentially weak US GDP print, dragged lower in part by Boeing’s struggles.
Chart: AUDUSD
The AUDUSD is nearing its cycle low close around 0.6700 as Australia faces severe fallout risks from weakened Chinese demand over the coronavirus situation. Somehow, the market is pricing extremely low risks of a rate cut at next Tuesday’s RBA meeting. Given the unknowns of the situation, why would the RBA wait several months to cut rather than doing so now? Of course, a rebound in global markets on a sudden fading of fears could support the Aussie, but we remain cautious as long as key commodity markets continue to price severe disruptions.
The G-10 rundown
USD – the FOMC and the subsequent un-related risk off have taken Fed rate expectations to a new low, with two cuts now almost fully priced by year-end. But with the yield curve flattening as we discussed in this morning’s Market Call, the market suggests that the Fed is still behind the curve.
EUR – the euro fairly stable this morning – perhaps as a relative liquidity safe harbor as the riskiest currencies are under pressure. Will take heavy lifting to take EURUSD away from the downside focus – though the pair needs to take out the 1.1000 level resolutely on a daily close to signal a test of the lows.
JPY – the JPY rising on the risk off overnight, but seems to need constant pressure from lower bond yields to sustain a bid. Perhaps the most interesting test of the currency would be a risky asset sell-off that fails to see much of a bid in safe haven fixed income.
GBP – the BoE cut a toss-up – but far more likely from coronavirus situation than would have been the case otherwise. Could trigger a further setback for sterling here – watching 1.2900 area in GBPUSD next.
CHF – the franc catching a renewed bid overnight on the risk-off and if this re-intensifies could see EURCHF challenging the important sub-1.0650 lows from 2017.
AUD – as we note above, AUDUSD is running out of range to explore before poking to new lows since the financial crisis.
CAD – the USDCAD rally working its way into the upper reaches of the local range to 1.3300+ and could be set for a full pull to 1.3500 and more if we see a chunkier correction in risk appetite and with it, oil prices, together possibly with any weak Canadian data.
NZD – the kiwi rout picking up pace and NZDUSD challenging the 200-day moving average this morning -a break of which could set up a further unwind into the cycle lows, although the more interesting zone on the way up was around 0.6425-50.
SEK – EURSEK is up in its pivot zone between 10.60-65 and could be set for a squeeze back into the full range higher toward 10.90+ if we see widening fears for global growth from the coronavirus.
NOK – EURNOK challenging above the 61.8% retracement and beginning to break-up the “topping” formation that was in place until now if it can’t immediately back down here. Another ugly down leg in energy prices and we could risk a spike to new highs.
Today’s Economic Calendar Highlights (all times GMT)
- 1000 – Euro Zone Jan. Confidence Surveys
- 1200 – UK Bank of England Rate Decision
- 1200 – Mexico Q4 GDP
- 1230 – UK Bank of England Carney Presser
- 1300 – Germany Jan. Flash CPI
- 1330 – US Q4 GDP Estimate
- 1330 – US Initial Weekly Jobless Claims
- 1800 – ECB’s Weidmann to Speak
- 2015 – Canada Bank of Canada Beaudry
- 2100 – New Zealand Jan. ANZ Consumer Confidence
- 2330 – Japan Dec. Jobless Rate
- 2330 – Japan Dec. Retail Sales
- 2350 – Japan Dec. Industrial Production
- 0030 – Australia Dec. Private Sector Credit Growth
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