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: Treasury yields need to pivot higher if USD to avoid breakdown.
John J. Hardy
Chief Macro Strategist
Summary: The last couple of sessions have shown that the US dollar has largely delinked from simple risk sentiment consideration and is likely more sensitive to the next move in US treasury yields, particularly at the long end of the US yield curve. For some pairs, particularly the USD/commodity dollar pairs, the US dollar is running out of room to consolidate lower without indicating a more significant reversal. The week ahead looks important for the market narrative.
FX Trading focus: USD direction from here likely a question of treasury yield direction.
We saw a tremendous squeeze in equity markets late last week, taking the full move off the intraday lows in the S&P 500 on May 20 to over 10% if we included today’s follow through higher in equity futures ahead of today’s non-session in the USA (US markets are closed today for the Memorial Day holiday). In corporate credit, spreads have tightening sharply, suggesting a surge of risk capital into the space. The US dollar has not responded to these developments over the last two sessions, underlining the recent point that the greenback seems far more primed to respond to the direction in US treasury yields, particularly at the long end of the curve.
The narrative that seems to have developed over the last couple of weeks since the May 4 FOMC meeting that the anticipated Fed tightening has peaked for now after Powell pushed back against rate hikes greater than 50 basis points. The same goes for inflation, according to this narrative, after the April core PCE inflation reading on Friday showed the expected 0.3% drop to a 4.9% YoY rate. A few weak data points in the most interest-rate sensitive sector of housing buttressed this overall view as did other data points at the margin elsewhere (weekly jobless claims and regional manufacturing surveys). Pushing back against this would be a decent set of ISM’s this week – particularly in the more important services sector, and another strong advance in oil prices after we closed at the second-highest weekly close for the cycle last week. China coming back from Covid lockdowns would be a dramatic new driver of greater inflation risks from here.
In short, watching for whether the important data points this week from the US through this Friday’s payrolls and earnings data support or challenge this narrative, preferring to lean on the latter, with the direction of the USD pivotal on the charts against the most pro-cyclical G10 currencies like AUD, NZD and CAD. EURUSD resistance around 1.0800 is important ahead of the German flash May CPI today and EU flash May CPI tomorrow as that area falling could open up for 1.1000+.
Chart: AUDUSD
AUDUSD is rising toward the “final” resistance zone for the bearish case – into the 0.7260 that is both the 200-day moving average and an important pivot high back earlier this month. For those thinking nothing final is final, there is a last gasp level up at the 61.8% retracement of the entire sell-off sequence up just ahead of 0.7350. To provide a tactical bearish hook for fresh short positioning, the pair needs to dip back down through 0.7125 and perhaps toward 0.7050, breaking up this recent tight rising channel.
The Hungarian forint (HUF) is worth watching over the coming weeks as EURHUF jumped last week on an order from the Orban government that it will look for ways to assess a windfall tax on a number of sectors, including banking and energy, in order to plug holes created by the withholding of EU budget funds due to the Orban government violating governance rules. Now Orban is trying to use the leverage of the absolute majority rule by threatening to veto the EU oil embargo plans currently under discussion if the EU won’t relent on the budget funds and throw in an ECB swap line as well. It’s a high-risk game Mr. Orban is playing and he has only aggravated the governance violations that the EU finds objectionable by declaring a state of emergency last Wednesday that allows him to rule by decree. The EU can throw Orban under the bus at any time of its choosing, even if has a long history of not standing up for its principles at the last second. HUF traders beware.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD slipping more into the negative, with some of the medium- to longer term trend measures preventing a more negative trend reading, with the CNH looking more negative on average. The CHF leads the pack on the upside due to the recent consolidation in yields together with the first real warnings recently that inflation is a more clear and present danger on the SNB’s radar. NOK is finally climbing more aggressively on the new local high here in oil prices.
Table: FX Board Trend Scoreboard for individual pairs.
Lots of yellow in the “Age” columns indicating zero day for possible new trends. Many of these are the JPY pairs as the yen failed to get much out of the recent consolidation in bond markets and is losing out on a fresh surge in crude oil prices and risk sentiment. Note USDNOK trying to join other vanguard USD pairs in showing a new USD down-trend, while gold and silver have yet to turn positive against the rather weak USD of late.
Upcoming Economic Calendar Highlights (all times GMT)
- 1500 – US Fed’s Waller (Voter) to speak
- 1700 – ECB's Nagel to speak
- 2030 – New Zealand RBNZ’s Hawkesby to speak
- 2300 – South Korea Apr. Industrial Production
- 2330 – Japan Apr. Jobless Rate
- 2350 – Japan Apr. Jobless Rate
- 2350 – Japan Apr. Industrial Production
- 0030 – New Zealand May ANZ Business Confidence survey
- 0130 – China May Manufacturing/Non-manufacturing PMI
- 0130 – Australia Apr. Building Approvals
- 0130 – Australia Apr. Private Sector Credit
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