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: Sterling rises on fiscal stimulus hopes
John J. Hardy
Chief Macro Strategist
Summary: Sterling strength is one of the few themes going at the moment within FX outside off the recent pronounced move lower in the euro. Preliminary PMI surveys out later this week from Japan and the Euro Zone area some of the first data points that will show impact of the Covid-19 virus on activity out of China.
Trading interest
- Short EURGBP with stops above 0.8400
- Looking to pick up USDCAD longs ahead of 1.3200 with stop below 1.3100 for 1.3500+
Markets are starting the week on a positive footing as China’s equity market posted its largest gain in over a week and has now almost entirely erased the sell-off from the Covid-19 virus outbreak despite the profound shutdowns across the country. The FX impact across Asia looks rather different as USDSGD remains close to multi-year highs after a steep run-up in late January and Singapore’s MAS indicating a willingness to allow SGD to devalue if necessary. The Thai baht likewise remains near the bottom of the recent move lower on the hefty impact on its economy from tourist arrivals drying up. We don’t share the markets relative complacency but have no edge in knowing how the Covid-19 situation and fallout will shape up from here.
Sterling closed last week on a high note after the Thursday news that Johnson’s cabinet reshuffle has now resulted in Chancellor Javid’s resignation after Johnson asked Javid to fire all of his advisers, which many have taken as an indication that Boris Johnson’s team is gearing up for a more significant fiscal stimulus package set to be announced in March. The prospects for an economic rebound on fiscal policy doing the heavy lifting would allow the Bank of England to maintain the policy rate unchanged for now. EURGBP closed at its lowest level since the December election and since just after the Brexit vote back in 2016.
Today, US markets are closed for President’s Day
Chart: GBPUSD
Cable has stabilized again after the recent attempt through the important 1.2900 area about a week ago. The recover late last week was driven by Boris Johnson’s cabinet reshuffle and specifically by Chancellor Javid’s resignation, which many are taking as a sign that Johnson’s plans for fiscal stimulus are turning more aggressive. The sterling surge looks for real versus the euro, but to really impress, we’d like to see sterling pulling higher here – and the next major hurdle on that account is the 1.3200-50 area.
The G-10 rundown
USD – the broad USD strength has faded slightly as risk appetite has returned to start the week and traders are snapping up beaten EM currencies outside of Asia.
EUR – watching whether the break below 1.0900 in EURUSD holds here and looking on how quickly the EU can cobble together a fiscal impulse of size – plenty of upside potential there if it ever can. In the meantime, we have the additional risk for the euro if Trump moves against EU auto important with tariff announcements.
JPY – a very ugly GDP print overnight (-6.3% annualized versus -3.8% expected), but the impact was seen largely down to the sales tax hike in October pulling demand forward to the prior quarter and on the impact from a large typhoon. Still – this was far weaker than expected and underlines focus on bringing forward stimulus (also helping EURJPY lower recently?). More interesting to see how the late Q1 data shapes up on possible Covid-19 virus impact, starting with flash Japanese Feb. PMI’s up on Friday this week.
GBP – as discussed above, sterling riding high on hopes for generous fiscal stimulus measures – have to be wary of the risk of unfriendly trade deal negotiations with the EU, but that issue may only become more pressing in second half of this year.
CHF – EURCHF challenging below interesting levels (early 2017 lows) and the SNB feeling less urgency to act here as the Euro is very weak and the US has put Switzerland back on the currency manipulator watchlist – room for the pair to run to at least 1.0500?
AUD – not looking for much from RBA minutes. Aussie traders caught in an awkward area near the post-GFC lows in AUDUSD with uncertainty over how the region’s economy shapes up from here on the ongoing Covid-19 virus impact.
CAD – as oil prices have bounced back modestly, so has CAD, with room to perhaps 1.3200 in USDCAD and even lower before the bullish outlook begins to struggle.
NZD – figuring that AUD shows higher beta than NZD to China outlook – and AUDNZD looks long-term undervalued, but missing a signal.
SEK – to get EURSEK below 10.40 from here, we may need a stronger EU outlook and fiscal stimulus from both the EU and Sweden.
NOK – the oil comeback powering EURNOK lower, but 10.00 looms as an important level and the Norges Bank rate outlook will tilt more steeply for cuts if the domestic outlook deteriorates further.
Upcoming Economic Calendar Highlights (all times GMT)
- US Markets Closed for President’s Day
- 1400 – ECB’s Lane to Speak
- 2000 – New Zealand REINZ House Sales
- 0030 – Australia RBA Minutes
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