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: US debt ceiling concerns pressurizing?
John J. Hardy
Chief Macro Strategist
Summary: The US dollar picture has lurched into a confusing roller coaster ride as yesterday’s sudden strength yielded to today’s notable weakness, at least against possible safe havens Euro and Yen, a phenomenon possibly driven in part by the debt ceiling. In the background, meanwhile, the commodity dollars and NOK are weakest, while SEK was sold on dovish guidance from the Riksbank today.
Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team
FX Trading focus: Debt ceiling issue is applying the pressure
I said in a piece last week that there would be “difficult terrain” ahead for the US dollar on the debt ceiling issue and that may be what we are seeing playing out this week on the zany price action in some USD pairs over the last couple of sessions. While the US dollar had a one off rally yesterday that was arguably logical on broadly weakening risk sentiment, the huge backup today in EURUSD and sell-off in USDJPY while AUD and other small G10 currencies are as weak or even weaker than the greenback suggests safe haven seeking due to a debt ceiling focus. With expectations nil for any significant shift from the BoJ this Friday, the JPY has not served consistently as a safe haven, though the two-day plunge in global bond yields was too significant to ignore and the yen has picked up some of its old safe haven shine and could continue to do so if treasuries and global sovereign debt remains bid here.
New developments on the US debt ceiling are minimal, with Politico only reporting yesterday that House Republican leadership still supposedly wants to move forward with a vote on its bill, but not having the Republican votes to get it passed. A failed vote is probably a step in the right direction for reaching an eventual solution as it suggests Republicans don’t have the necessary solidarity to take this issue to the wire, but how big would that step be if a vote fails? Could they make a few changes to and re-vote and pass the bill or will House Democrats move quickly to cobble something together with a few Republican defectors? It is entirely unclear. Also, could the debt ceiling have the Fed on pause next week? Odds are slipping for a rate hike next week, if still at greater than 75%. Suspect the USD weakness may stay isolated in the safe haven crosses if risk sentiment suffers broadly.
Chart: EURAUD
The Aussie has been on the defensive this week as softer than anticipated Q1 CPI from Australia supported the dovish RBA guidance and on the China reopening story failing to reignite a bull move in the key commodities that Australia exports. Copper, for example, got a drubbing yesterday. Meanwhile, the euro’s steep climb of late may be getting extra fuel from the US debt ceiling concerns, which are tough to measure directly. Ironically, strong concerns lead to significant safe haven buying of US treasuries as everyone “knows” that the US will never default, while things like CDS contracts on a US default suggest significant concern, but are too tiny market to represent anything more than lottery ticket purchases by punters. Regardless of the cause, EURAUD has gone nearly parabolic here and is challenging the late 2020 high, which is near 1.6830.
The Riksbank hiked 50 basis points today as most expected, but there were two dissenters among the six voters and the guidance was only for 25 basis points of further tightening through September (a hike in either June or September). Swedish 2-year yields dropped around 12 basis points and SEK sold off sharply, although EURSEK remained capped below the cycle highs of 11.48.
In yesterday’s update I suggested that incoming US earnings reports could prove as interesting in the coming couple of weeks as any of the incoming data, particularly the less-reliable soft survey data that has been so confusing of late. On that note, while yesterday’s Microsoft and Alphabet earnings got a rather positive spin despite questionable top-line growth, the UPS earnings miss was certainly a flashing red light. The stock plunged some 10% after reporting weak margins and weak parcel demand while guiding for slowing retail volumes this year. Yes, there has been a post-pandemic slump in the movement of physical goods as the economy switched back to its normal level of services activity, but we should be working into the clear of those effects soon if not already. Other interesting companies reporting this week with operations in the real and services economy include eBay today, Amazon and Mondelez tomorrow. Visa reported strong results yesterday, particularly noting the travel side of activity (wouldn’t that be lagging as larger holidays are planned in advance?). Mastercard reports tomorrow.
Table: FX Board of G10 and CNH trend evolution and strength.
The broader picture continues to make clear that we have commodity dollar and NOK weakness, a neutral USD and a particularly strong EUR and CHF, though do note the JPY momentum shift ahead of Friday’s BoJ meeting.
Table: FX Board Trend Scoreboard for individual pairs.
An odd move in EURCHF today – was that intervention? With USDCHF moving so fast and furious southward, it wouldn’t be a surprise if the SNB would like to tap the brakes on the franc’s ascent of late. A growing number of Aussie crosses are struggling for air here – note AUDJPY and then AUDNZD now back on the verge of flipping back lower.
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