Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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JPY plays its classic role in risk-off market
John J. Hardy
Chief Macro Strategist
Summary: Developing risk-aversion and softer global equities are setting the stage for a JPY safe-haven rally.
Yesterday, Wall Street managed to close nearly almost unchanged after early trading was marked yet again by risk aversion. In currencies, the episode saw the Japanese yen playing its traditional role as the safe-haven currency of choice on signs of global risk deleveraging, with key support coming into view for USDJPY.
Another weak session for Italian BTPs yesterday, and EURUSD mulled a more profound break of 1.1500 before pulling back toward that magnetic level of the moment in later trading. Today, Italian lawmakers will debate the proposed budget as German-Italian 10-year yield spreads are stretched to the widest for the cycle at around 300 basis points.
Yesterday saw the Japanese yen more clearly playing its traditional role as safe haven currency as global equities were under pressure for a third session in a row before New York managed to claw back most of the intraday losses into the close. USDJPY more or less survived the 113.00 area pivot, but EURJPY showed signs of breaking down with the move below the 131.00 area pivot zone and 200-day moving average. In light of recent market action, whether JPY crosses fully break down here or survive for now may be more linked to global risk appetite more than the direction in bond yields – a shift from previous behaviour.
Late yesterday, the focus was on USDCNY trading up against the highs for this part of the cycle above 6.90 and the report that China’s reserves saw a surprise drop in September of some $18 billion, versus a small rise expected. The renminbi is ready to seize global markets’ undivided attention if China allows USDCNY to drift above 6.95-7.00.
Chart: USDJPY
USDJPY having a look lower on the risk-off move yesterday, but that move found support as equities found support and bonds sold off again. We’re still curious whether the yen could actually outperform in a rising yields/wobbly risk appetite market if the market attacks the BoJ’s cap on the 10-year JGB- something it is already doing as it trades at 16 bps this morning. The 113.00 area is the local pivot zone with more profound breakdown levels down toward 111.00 and lower.
Another weak session for Italian BTPs yesterday, and EURUSD mulled a more profound break of 1.1500 before pulling back toward that magnetic level of the moment in later trading. Today, Italian lawmakers will debate the proposed budget as German-Italian 10-year yield spreads are stretched to the widest for the cycle at around 300 basis points.
Yesterday saw the Japanese yen more clearly playing its traditional role as safe haven currency as global equities were under pressure for a third session in a row before New York managed to claw back most of the intraday losses into the close. USDJPY more or less survived the 113.00 area pivot, but EURJPY showed signs of breaking down with the move below the 131.00 area pivot zone and 200-day moving average. In light of recent market action, whether JPY crosses fully break down here or survive for now may be more linked to global risk appetite more than the direction in bond yields – a shift from previous behaviour.
Late yesterday, the focus was on USDCNY trading up against the highs for this part of the cycle above 6.90 and the report that China’s reserves saw a surprise drop in September of some $18 billion, versus a small rise expected. The renminbi is ready to seize global markets’ undivided attention if China allows USDCNY to drift above 6.95-7.00.
Chart: USDJPY
USDJPY having a look lower on the risk-off move yesterday, but that move found support as equities found support and bonds sold off again. We’re still curious whether the yen could actually outperform in a rising yields/wobbly risk appetite market if the market attacks the BoJ’s cap on the 10-year JGB- something it is already doing as it trades at 16 bps this morning. The 113.00 area is the local pivot zone with more profound breakdown levels down toward 111.00 and lower.
The G-10 rundown
USD – The US dollar was challenged by the yen yesterday, as we have the difficult-to-navigate combination of weak equities and weak bond markets. Upcoming Treasury auctions tomorrow (three- and 10-year) and Thursday (30-year T-bond), a test for both Treasuries and the dollar.
EUR – EURUSD having a hard time getting full separation from 1.1500 – but not much to support if it does. A strong euro requires that the Italian budget situation is squared away, European yields are rising and risk appetite is reasonably stable.
JPY – playing its traditional role in correlating to the latest swings in risk appetite as market volatility heats up. We have the added factor here of the BoJ’s “cap” on the 10-year JGB yield and the market gaming the central bank’s intentions.
GBP – a hopeful stance on Brexit continues, but it feels so tenuous as there is still plenty of time for a headline or two to send the action back the other way.
CHF – the Swiss franc shows little safe haven behavior relative to the JPY – not sure if this is because the market’s hopeful Brexit stance is providing some offsetting pressure, but it’s remarkable to see EURCHF continuing to bob back higher despite obvious strains in core-Italy yield spreads.
AUD – not much bounce in the Aussie with all of the negative focus on China – resistance in AUDUSD into the 0.7100 area for a fresh go at the psychological 0.7000 area and then onto the sub-0.6900 lows potentially.
CAD – USDCAD bid up into 1.3000+ yesterday. The recent move has neutralised the downside risks, but a strong close well above 1.3000 needed to get the USD bulls interested here. A new storm in Gulf of Mexico is seeing production shutdowns and could be supporting at the margin.
NZD – the kiwi even weaker than the Aussie and AUDNZD making a bid into the 1.1000 area, which could set a bit more upside in motion, particularly on weak global risk appetite.
SEK – something not right in Sweden, where the plot on the Riksbank leading the ECB has been lost a bit and we wonder if the collapse in some of Sweden’s bank shares and concerns that Sweden’s housing bubble will become a risk sooner rather than later. Technically, nothing definitive just yet, but we would like EURSEK to stay below 10.50 to keep a downside focus and notch our conviction level on SEK strength potential a bit lower as long as risk appetite is wobbly. Swedish CPI up Thursday.
NOK – NOKSEK can’t make up its mind on the big 1.10 level here, but NOK absorbing a slightly negative August GDP print this morning fairly well and EURNOK bears should feel comfortable if oil prices hold above 80.00 and EURNOK below 9.60.
USD – The US dollar was challenged by the yen yesterday, as we have the difficult-to-navigate combination of weak equities and weak bond markets. Upcoming Treasury auctions tomorrow (three- and 10-year) and Thursday (30-year T-bond), a test for both Treasuries and the dollar.
EUR – EURUSD having a hard time getting full separation from 1.1500 – but not much to support if it does. A strong euro requires that the Italian budget situation is squared away, European yields are rising and risk appetite is reasonably stable.
JPY – playing its traditional role in correlating to the latest swings in risk appetite as market volatility heats up. We have the added factor here of the BoJ’s “cap” on the 10-year JGB yield and the market gaming the central bank’s intentions.
GBP – a hopeful stance on Brexit continues, but it feels so tenuous as there is still plenty of time for a headline or two to send the action back the other way.
CHF – the Swiss franc shows little safe haven behavior relative to the JPY – not sure if this is because the market’s hopeful Brexit stance is providing some offsetting pressure, but it’s remarkable to see EURCHF continuing to bob back higher despite obvious strains in core-Italy yield spreads.
AUD – not much bounce in the Aussie with all of the negative focus on China – resistance in AUDUSD into the 0.7100 area for a fresh go at the psychological 0.7000 area and then onto the sub-0.6900 lows potentially.
CAD – USDCAD bid up into 1.3000+ yesterday. The recent move has neutralised the downside risks, but a strong close well above 1.3000 needed to get the USD bulls interested here. A new storm in Gulf of Mexico is seeing production shutdowns and could be supporting at the margin.
NZD – the kiwi even weaker than the Aussie and AUDNZD making a bid into the 1.1000 area, which could set a bit more upside in motion, particularly on weak global risk appetite.
SEK – something not right in Sweden, where the plot on the Riksbank leading the ECB has been lost a bit and we wonder if the collapse in some of Sweden’s bank shares and concerns that Sweden’s housing bubble will become a risk sooner rather than later. Technically, nothing definitive just yet, but we would like EURSEK to stay below 10.50 to keep a downside focus and notch our conviction level on SEK strength potential a bit lower as long as risk appetite is wobbly. Swedish CPI up Thursday.
NOK – NOKSEK can’t make up its mind on the big 1.10 level here, but NOK absorbing a slightly negative August GDP print this morning fairly well and EURNOK bears should feel comfortable if oil prices hold above 80.00 and EURNOK below 9.60.
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