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 firms on fresh yield rise, JPY keeping pace.
John J. Hardy
Chief Macro Strategist
Summary: The US dollar is firm, if not impressively so, on treasury yields posting new cycle highs and on a plunge in risk sentiment. The JPY is trying to keep pace as we await next steps from the BoJ. Sterling is putting on a show of strength after a surprisingly strong preliminary February Services PMI. Elsewhere, the RBNZ hiked 50 basis points and maintained peak rate guidance, a new hawkish surprise, while AUD is weaker on tepid wage growth data.
Today's Saxo Market Call podcast
Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: USD firm, JPY chasing its tail despite higher yields as weak risk sentiment, Ueda hearings weigh. Commodity FX the weak spot.
Risk sentiment finally went on tilt yesterday as US treasury yields lifted all along the curve to new cycle highs, with the Fed terminal rate now almost fully pricing three more 25 basis point rate hikes, which would take the Fed funds rate to 5.25-5.50% somewhere in the summer time frame. Some very slight yield steepening going on as well, with the 10 year Treasury benchmark yield pulling within a few basis points of the 4.00% level. This is highly awkward for JPY traders as the JPY generally wilts on advancing long US yields, but at the same time we are all anticipating a coming policy shift from the Bank of Japan, with nominee for Governor Kazuo Ueda out testifying before the Lower House on Friday (and the wily Kuroda possible set to make a legacy-defining splash at his final meeting on March 10, all while hedging activity for the coming year is active into the end of the financial year in Japan at the end of March. As long as risk sentiment is under pressure here, I would anticipate that potential BoJ tightening/JPY strength might weigh more on crosses like CADJPY, AUDJPY etc., than it will weigh on USDJPY.
I don’t see tonight’s FOMC minutes tonight weighing much in the balance as concerns have shifted in the direction of incoming data and evidence of rising wage pressures (have a listen to today’s Saxo Market Call podcast, for example, on wages set to rise for Walmart and Home Depot, two very large US retailers). The data points next week from the US are more important than the January PCE inflation data this Friday (although any big surprises for the core data are always worth consideration.)
Chart: AUDUSD
AUD under a bit of extra pressure here on the Q4 wage growth coming in lower than expected overnight at 3.3% YoY vs. 3.5% expected. We have to remember that RBA has often linked its rate tightening policy with wage growth, so no fresh ammunition here and AU yields at the front end fell overnight. As well, we have steady pressure on the Chinese renminbi over the last couple of weeks as the China re-opening story is struggling for fresh fuel, all while geopolitical concerns are weighing heavily as we wonder how closely China will link itself with Russia’s aggression in Ukraine after the US’ recent stark warning. AUDUSD is trading heavily here on the cycle lows and the 200-day moving average is not much lower. If risk sentiment is set for a down cycle of a week or more, we could be looking at a test down to 0.6600-0.6550.
The RBNZ surprised the market’s “lean” going into last night’s meeting with the 50 basis point rate hike (expectations suggesting a significant minority looking for a smaller rate hike or no hike due to the recent catastrophic floods as a cyclone struck much of the NZ population). The guidance kept the peak rate forecast of 5.5% if on a slightly longer time frame. The AUDNZD move overnight somewhat flattered the impact from the RBNZ, as there was also Aussie wage data as noted above that impacted Aussie crosses. NZ 2-year rates rose ahead of the decision, but were largely flat after the decision, so NZD may quickly default to neutral performance and be subject to the whims of global risk sentiment, though AUDNZD looks bearish and is more sensitive to sentiment shifts linked to China and commodities. For its part, NZDUSD is heavy near the 200-day moving average, which comes in just below 0.6200, which is also near a pivot low at the beginning of this year.
Yesterday, a much stronger than expected flash UK Services PMI for February at 53.3 did not sit well with the recession narrative, so sterling backed up rapidly. The backdrop is not very sterling friendly, but this may simply mean that sterling avoids further weakness and may put up a fight against the euro, taking EURGBP back deep into the range below 0.8800 rather than any drama in GBPUSD.
Table: FX Board of G10 and CNH trend evolution and strength.
Sterling bounce-back clearly in evidence with its 2-day momentum swing, while the AUD is picking up speed to the downside, together with CAD. SEK is still strong, but has to swim against strong headwinds if risk sentiment remains weak. The JPY status and USD status most pivotal in coming sessions, especially the JPY as it is frozen in its tracks over the last week.
Table: FX Board Trend Scoreboard for individual pairs.
Interesting to note the EURGBP change of trend after yesterday’s steep sell-off – similar for GBPCAD and other GBP crosses, showing the shift in sentiment on sterling.
Upcoming Economic Calendar Highlights
- 1800 – US 5-year US T-note auction
- 1900 – US FOMC Minutes
- 1910 – New Zealand Governor before parliament committee
- 2130 – API's Weekly Crude and Fuel Stock Report
- 2230 – US Fed’s Williams (Voter) to speak on inflation
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