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: Whiplash pivot in risk sentiment, G3 rise versus the rest
John J. Hardy
Chief Macro Strategist
Summary: The G3 currencies have risen sharply versus most other currencies, led by euro short covering, as risk sentiment has taken a sudden beating before and after weak earnings reports from key US megacap giants Apple and Amazon. At the margin, the market may also be spooked by a fresh spike in USDCNH today as US-China tensions are clearly on the rise.
Have a listen to today’s Saxo Market Call podcast and this morning’s Quick Take, in which we discuss the sudden pivot in risk sentiment and the likely drivers, including a sobering outlook for Q2 from Amazon on rising costs for dealing with the Covid19 outbreak. Elsewhere, we’re especially spooked by the new-old risk of US-China relations deteriorating as we discuss and I add to below.
The ECB meeting did see the bank deepening its commitment to easy terms for the banking sector as the rates on TLTRO loans can drop as low as -1.00% - a direct bank subsidy. Lagarde also announced a new PELTRO or “pandemic emergency” LTRO. But Italian BTP spreads were not notably improved or changed on the day as little was said otherwise with existential implications (nor is the ECB able to go there except by obfuscation on the mix of its purchases.). Still, the euro rallied hard later in the day – and I suspect that the timing of that rally, coming as it did long after the end of the Lagarde press conference, points more to unwinding of consensus EUR shorts across the board more than any narrative we can gin up from this ECB meeting, as EURUSD; for example, was trading near the lows of the day as the ECB press conference was concluding (also, not coincidentally, the high of the day for US stock futures).
USDCNH alert
Overnight, the USDCNH rate ripped higher to 7.13, a move of over +0.7% and thus the largest since March. (The mainland USDCNY rate was not trading due to the May 1 holiday). There was no specific catalyst other than a notable turn in US President Trump’s more pointed comments questioning the origin of the Covid19 virus and other recent comments suggesting he thought China was out to ensure that he would not be re-elected. This is certainly an important barometer for US-China relations and suddenly becomes a massive factor for markets if the rate is allowed to move more than another 0.5% higher or so to new highs for the cycle because it suddenly flags a possible intent to devalue that will thoroughly spook global markets. Stay tuned.
We are watching today’s closing levels for risk sentiment – especially the US indices, of course, with Europe out on holiday today – as a set up for our stance on the USD going into next week, a week expected to produce a monthly tally for job losses in April of over -20 million (already evident in the claims, but nonetheless…). And as we discuss below with USDCNH, we also add a more intensified focus on the risks of a deteriorating US-China relationship and the outbreak of new overt trade policy hostilities.
Chart: USDCAD weekly
Looking at weekly closes for the US dollar versus the more pro-cyclical currencies like the commodity dollars (AUD, CAD and NZD) as an indication of whether the big dollar is ready to retest the upside versus here in sympathy with new found negative sentiment across markets. In the case of USDCAD we saw a successful test of the consolidation lows and a strong move off those levels – a strong close today and we will be on the lookout for progress back toward the cycle highs in the weeks to come.
The G-10 rundown
USD – The USD firming notably against all risk currencies since yesterday and underlines its status as the flipside of risk appetite against risky currencies, while it was notably weak versus the Euro and to a degree the JPY as well.
EUR – as discussed above, the hard euro rally, especially in the crosses, speaks of positioning unwinding of recent risk-on trades more than any narrative I can cobble together from the ECB meeting..
JPY – the focus on EURJPY proved unwarranted, although the JPY has ceom back stronger and then some in the crosses as we have new signs of what we have seen before in recent weeks, a “G3 versus the rest” market as the JPY rallies against risk currencies as risk appetite weakens, but is less compelling in a G3 context (USD, EUR and JPY).
GBP – sterling got oddly ambitious yesterday – watching 1.2500 in GBPUSD as a sign that yesterday’s move was an anomaly and noting that the latest EURGBP attempt below 0.8700 has now reversed, and hard.
CHF – little to say here as heavy hand of SNB makes it untradeable – watching 1.0500 in EURCHF as a possible psychological catalyst if we drift back lower.
AUD – I noted “discomfort” with AUDUSD in my last update the day before yesterday and the pair managed to rally a bit further to a local high of 0.6570. Just as AUD flew the highest among the commodity currencies, it is falling the fastest, likely on the unsettling rally in USDCNH overnight. A close significantly below 0.6450 in AUDUSD points to a bearish technical reversal.
CAD – the USDCAD pair survived the 1.3850 area pivot test and has rallied hard off that level – potential toward 1.4500+ again on any more significant setback for risk appetite and notable that this significant crude rally of the last couple of sessions has largely been shrugged off.
NZD – the kiwi a big holdout against the more China-sensitive AUD, which likely dropped on the overnight move in the CNH overnight – still, wouldn’t expect the kiwi to escape negative focus either and warming up a bearish view on NZDUSD again on a weak close today.
SEK – EURSEK teased a breakdown but the price action didn’t linger below that key 10.69 area 200-day moving average and the rally into today suggests that SEK remains sensitive to risk appetite. As well, if the country doesn’t more quickly get its Covid19 numbers under control after its novel, less vigorous approach to slowing the spread, the risk of a more sustained shutdown rises.
NOK – EURNOK has found a based well above 11.00 for now and the risk of a rally back toward 12.00 or somewhat higher if medium to longer term oil prices (out 6 months or more) move back toward the contract lows or lower (we expect heavy official hands to avoid the kind of disorderly price action that saw 13.0+ in EURNOK)
Economic Calendar Highlights (times GMT)
- 1400 – US Apr. ISM Manufacturing
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