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: The US dollar is trying to break down again
John J. Hardy
Chief Macro Strategist
Summary: The US dollar index finds itself close to the lows of the year this morning as EURUSD posted a new high and the USD was offered almost across the board this morning. The move may be able to extend here with little fuss if the US treasury market stays calm and the FOMC minutes tomorrow evening fail to shift the view on the Fed. Elsewhere, Hungary and Chile are making rare splashes in our daily comments today.
FX Trading focus: USD tilting over the edge… in places.
The US dollar is tilting lower again, with GBPUSD and especially EURUSD the major pairs driving the impression of a weak US dollar here, as we have commented recently on the breakout higher in EU yields, particularly the Bund yield. With the ECB having already promised to front-run its asset purchases (a built in taper, dare one say?) and with the services sectors set for a bounceback and the economy ready to receive a tardy stimulus cherry on top, the ECB will have a hard time cobbling together a coherent message on the need for further support for the economy at the June meeting, although if EURUSD is above 1.2350, they would likely.
It all looks pretty straightforward for USD bears at the moment, with wind at the back in terms of Fed expectations (the Fed priced near the lows of the cycle in terms of the lift-off timing for their first rate hike despite the extremely hot April CPI print of last week and rising breakevens that are driving US real yields back to the recent lows), but we continue to keep a nervous eye on the longer end of the US yield curve – any new volatility there combined with the positive correlation we have noted recently in US treasury and equity prices could suddenly turn the tables on the situation. As I noted on Friday as well, the ugly chop-fest in many of the USD crosses has made life difficult for both trend and pattern traders in recent days, particularly in the likes of AUDUSD.
Speaking of AUDUSD (and especially egregious chop-fests), the RBA minutes out overnight remind us that the commodities market and investors flows are going to have to do all of the heavy lifting for supporting any new AUD rally as the RBA is clearly looking at employment and equally wages in judging its policy shifts. On that note, we have Q1 wage data up tonight (with 1.4% YoY expected, a significant explainer of the RBA's reluctance to turn guidance more hawkish) and the April jobs report is up on Thursday.
Chart: GBPUSD
GBPUSD has traded today above its highest daily close and just below the intraday high just shy of 1.4250 reached back in late February. This after a near perfect test of the 1.4000 support just a couple of sessions ago, the critical support line in the sand, although bulls will want this move to hold above perhaps 1.4150 for a follow on rally to perhaps the post-Brexit vote high of 1.4375 initially, even if the first significant psychological level higher is more like 1.5000 – which looks a bit of a stretch for me to call just yet – we’ll start with 1.4500 for starters if this trend holds.
HUF goes vertical on euro optimism and Hungarian central bank guidance suprise. When the outlook is looking more positive for Europe, we would expect satellite currencies to perform well, and that has been the case recently for CEE currencies if less so for the rangebound SEK and NOK. But the action in HUF found an entirely new gear yesterday as the Hungarian central bank surprised with a comment that the policy rate will have to rise to counter inflation and possibly as soon as at next month’s meeting. The market seemed to have smelled some of this coming in the days prior to this, as 2-year HUF swaps had already risen 10-15 basis points, but they tacked on another 13 basis points yesterday on this surprise, and the HUF rose over a percent versus the EUR, back to the lowest level in EURHUF since August of last year. The move makes sense, given the hot 5.1% inflation reading for April in Hungary, and if risk sentiment stays elevated in Europe, there is plenty more room for HUF upside, even if I am skeptical on the ability for HUF to trend higher for more than 2-4% against the euro for now.
CLP lower on constitutional assembly vote – a vote held at the weekend in Chile to provide the constituents for a new constitutional assembly that will draw up a new constitution to replace the one from the Pinochet era, one that is so overwhelmingly left-leaning, that the left bloc won’t even have to face the risk of a veto from the opposition. CLP was already underperforming copper (Chile is world’s largest producer) as the fear was already established of extremely high royalty payments and steeply progressive taxes on big mining companies that would provide little incentive to expand production above a certain price for copper. The development saw CLP gap nearly 3% lower to start the week yesterday and the Chilean stock market was down over 9% yesterday.
Table: FX Board of G-10+CNH trend evolution and strength
In the FX Trend evolution breakdown, the precious metal strength stands out and makes sense in light of weak US real yields and the weak US dollar. Seems like the JPY should be paying more attention to lower real yields as well – but not much of ahead nod there as much of the excitement has centered on commodities and inflation recently, even if the likes of AUD and NZD performance have underwhelmed.
Table: FX Board Trend Scoreboard for individual pairs
The AUDUSD “uptrend” has yet to reverse – what an incredible go nowhere chart… Note the blistering USDCAD reading and that pair approaching 1.2000. I have a hard time getting behind that level if oil doesn’t rally significantly more and very soon. Speaking of oil, disappointing to see EURNOK bogged down above 10.00, given the backdrop.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Apr. Housing Starts and Building Permits
- 1400 – UK Bank of England Governor Bailey to Speak
- 1505 – US Fed’s Kaplan (non-voter) to speak
- 0030 – Australia May Westpac Consumer Confidence
- 0130 – Australia Q1 Wage Index
- 0600 – UK Apr. CPI
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