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: USD bears may look through Turnaround Tuesday narrative
John J. Hardy
Chief Macro Strategist
Summary: Market staged a vigorous bounce overnight after the mayhem yesterday across global markets, with support found right at the threshold of a bear market in the major US equity indices and as Chinese president Xi Jinping visited the epicenter of the coronavirus outbreak in Wuhan. We focus on further broad USD downside risks from here within the G5 with or without a market bounce.
Trading interest
- Going long GBPUSD in 1.3050 area with stop below 1.2850 for 1.3500
- Returning USDJPY short to full size above 104.00 – stop adjusted slightly to above 105.50
Again today, please have a listen to today’s Saxo Market Call podcast, in which we put yesterday’s move in context and ponder what is coming next. We put a lot of effort in the show and today’s produce is as good as any other.
Markets staged a solid bounce overnight after yesterday’s carnage saw the worst equity market session in many markets since the single worst trading sessions during the financial crisis in 2008. Technically, it is very important that the bounce came right near the 20% correction level in the S&P 500 from the all-time top just a few weeks ago. This is a massive psychological level – even in the financial crisis, the initial break lower was halted within a percent of the 20% level in January of 2008, only slightly broken intraday in March, and didn’t fall until July. The market sell-offs in 2011 and 2018 were corralled very close to the 20% level as well. So if yesterday’s lows fail, it represents a major failure.
We have the unfortunate conviction that the coronavirus fallout could prove even worse for the US than what we are seeing in Europe, with a two to four-week delay. For more, please listen to the great Juliette Declercq on the MacroVoices podcast discussing the unpleasant, but necessary topic of risks to the intensive care capacity in healthcare systems from this virus outbreak. The US and its “personal freedom first” principles as well as a worse-than-botched signaling from the White House on the risks from this virus point to the risk of a tardy response to the outbreak in the US, which could then mean a worse peak strain on resources. So far, the activity shutdown in the US has been extremely limited – we are miles away from peak impact.
In FX, so many currencies are simply moving with a combination of beta to risk appetite and to oil prices, so not a lot of differentiation occurring, but a sober technical assessment of the USD suggests the might greenback is slipping a turning lower and that we should be looking for ways to get short, even if most risk-correlated currencies have yet to find a low if the deleveraging panic and economic outlook have yet to turn the corner.
Chart: GBPUSD
We’ve no idea how long the post-Brexit trade deal negotiations will drag out from here and leave GBP bulls waiting for the green light from that angle, but from a risk/reward perspective, and from a technical perspective, GBPUSD looks in a good place here for potential further gains, having recently rejected the run down to nearly the 200-day moving average and posted a solid rally. Some backfill risk, but if the price action stays north of 1.2850 (preferably 1.3000), we will continue to focus higher, for a run into the massive 1.3500 (pull up a very long term chart – it is quite clear what we mean.)
The G-10 rundown
USD – the USD is in the process of turning lower – first against the most liquid DM’s and likely only later vs. riskier G10 and maybe even much later versus EM’s once we get toward the bottom of this crisis.
EUR – the euro has turned the corner versus the US dollar as the US will mount ever escalating efforts from here to bring the liquidity needed to get ahead of the crisis. The difficulty will be in gauging the risk of throwback magnitude in EURUSD on existential risks for the EU on its coronavirus crisis response. 1.1200 is the first major line in the sand there.
JPY – JPY crosses are clearly the high beta currency pairs to risk appetite – we still like USDJPY lower, but recognize the risk of a stop-out on spot positions – traders not wanting to take the risk in the volatile spot market might consider long put spread positions (caps the upside potential, but raises the breakeven level)
GBP – sterling has done well over the . It is nigh impossible to quantify the coronavirus risks for the UK and sterling relative to other mainland countries, but the UK government is certainly ready to move more quickly with mitigating fiscal measures, which could keep sterling a relative safe harbor here – more above in the GBPUSD chart caption.
CHF – if EURCHF was maintaining above 1.0600 due to SNB intervention, it appears the latter is failing – and look at the crazy comeback in CHFJPY – suggests that JPY will outperform if this proves a false dawn for risky assets.
AUD – investors Down Under bracing for a recession and QE on the way, keeping a lid on AUD rallies – still concerned that AUD can’t turn the corner until we have turned the corner on the global outlook.
CAD – USDCAD is having a look at the highest reaches of the range since 2017 as 1.3800 approaches – above there we only have. Up to oil markets and further general deleveraging panic for we realize potential toward 1.4000+
NZD – surprised to see AUDNZD still so heavy overnight despite Xi in Wuhan and a comeback in the copper price – not sure liquidity reliable enough for the pair to be sending reliable technical signals at the moment.
SEK – EURSEK ripped all the way to 10.80+ on yesterday’s market meltdown (and perhaps aggravated by the margin by a Riksbank deputy governor announcing he is infected with the coronavirus). Yesterday showed that SEK remains vulnerable to these deleveraging events.
NOK – a solid comeback for NOK overnight on the oil bounce – but that bounce needs to extend far more profoundly to engineer a EURNOK reversal – which technically requires a move back below 10.25.
Upcoming Economic Calendar Highlights (all times GMT)
- 0900 – Norway Feb. Region Survey
- 2200 – Australia RBA’s Debelle to Speak
- US Democratic Primary elections – Idaho, Michigan, Mississippi, Missouri, North Dakota, Washington
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