Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Sterling steals the show as no-deal risks fade
John J. Hardy
Chief Macro Strategist
Summary: Sterling surged higher as certainty that a no-deal scenario will be avoided rises sharply on UK Prime Minister May’s latest moves. Meanwhile, USD traders are struggling to find a pulse after Powell testimony failed to excite trading interest.
Powell’s semi-annual testimony before a Senate panel yesterday failed to inspire much interest, although the USD wakes up a hair weaker this morning than this time yesterday, perhaps in part on heavy GBPUSD flows inspired by sterling buying. Projections for the Fed policy rate dropped about a single basis point in the wake of Powell’s testimony and the Q&A as Powell has no real reason to send fresh signals other than “patience” now that markets and financial conditions have stabilised so thoroughly from the meltdown late last year. Equities ended the day slightly lower.
Sterling surged above resistance across the board on what appears a more decisive clearing away of no-deal Brexit risks, with the menu of options seemingly shrinking to either an approval of May’s deal (in a vote on March 12), another extension for further negotiation (on March 13), and even rising odds of a second referendum that would allow the UK to change its mind after opposition Labour leader Jeremy Corbyn voiced support for the referendum option if Labour’s preferred Brexit terms are not on offer (and they won’t be).
A useful Bloomberg article runs down the dates of the final weeks before the original Article 50 deadline of March 29. The FT’s Martin Wolf wrote yesterday (paywall ) that a second referendum is “now essential”. I had long thought that a second vote was not likely, but am now far less convinced. The chief difficulty is that no one really wants May’s deal – Brexiters would prefer a no-deal and Remainers want things to go back to the way they were.
Trading interest
GBP longs via GBPUSD and GBPCHF with stops below 1.3150 for both (trading at the same level because USDCHF at parity….) with a view 200+ pips higher.
USDCAD long idea struggling for air and risks a stopout. Fresh longs may consider stops a bit below 1.3100.
EURJPY shorts still in view with stops above 126.30, adding on a close below 125.50 and looking for a go at 124.00 support initially.
USDJPY looks a tactical shorts on upticks with stops well clear of 111.00 for a try below 110.00
Chart: GBPUSD
The latest developments make it clearer than ever that no-deal risks are fading fast and sterling has sprung to attention, clearing resistance levels virtually across the board. In GBPUSD, the clearing of the 1.3200 area could point to 1.3500 or higher – as sterling longs may be less reluctant to reprice sterling even if May’s deal heads for a vote failure in two weeks on the assumption that this could raise the prospects of a full Brexit reversal down the road via a second referendum.
The G10 rundown
USD – the greenback is largely back on the defensive, but there is no pulse at the moment as we await the US-China trade deal outcome and the next rounds of incoming data that will excite interest in policymakers’ reactions.
EUR – EURUSD makes a half-hearted effort at 1.1400, but there is plenty of heavy lifting to do in clearing away the dark clouds over Europe to get the pair above the technically important 1.1500 again. Set and forget longer term options strategies for a directional view and still see risk of downside resolution.
JPY – the yen is nudging higher as risk appetite a bit more defensive and sovereign bonds well bid – we like JPY cross shorts and USDJPY tactical as a play on further consolidation in risk appetite after the miracle rally of the last couple of months.
GBP – resurgence here is built on fairly solid foundation of confidence that No Deal is off the table and we could finally get some directional persistence and repricing of sterling.
CHF – surprised we haven’t seen a bit more pointed weakness in the franc on the latest Brexit developments and sterling surge. Watching GBPCHF as well as EURCHF on this.
AUD – the Aussie stuck in neutral, getting some support from CNY staying near the top of the range versus the USD, but iron ore prices have eased significantly and housing bubble unwind concerns remain the chief concern. The big banks stocks in Australia aren’t under immediate pressure, but are a good proxy for the risk that something more systemic may be afoot.
CAD – has pulled back higher versus the USD and that USDCAD chart is a churning mess. Zooming out a bit, important for an upside view there that the 1.3000 area provides support, and more helpful still if recent lows remain intact. Canada’s latest CPI data up this afternoon.
NZD – the kiwi pushing on resistance versus the USD while AUDNZD is bogged down after teasing support as NZ dipped into a much larger trade deficit in January than expected. In the background, the risk of Reserve Bank of New Zealand cuts on new bank capital requirements in New Zealand has further curtailed the NZD upside potential.
SEK – watching this morning’s January household lending survey with interest as it has been sliding aggressively and Sweden may be headed for recession in line with the EU. The Q4 GDP estimate is up tomorrow.
NOK – the EURNOK chart structure argues for downside focus, but we’ve been bottled up in a narrow range for over two weeks. A close below 9.71 could start to break the logjam, although 9.65 the bigger level.
Upcoming Economic Calendar Highlights (all times GMT)
0800 – Sweden Feb. Confidence Surveys
0830 – Sweden Jan. Household Lending
0830 – ECB’s Coeure to speak
1000 – Euro Zone Feb. Confidence Surveys
1330 – Canada Jan. CPI
1500 – US Dec. Factory Orders
1500 – US Jan. Pending Home Sales
USD – the greenback is largely back on the defensive, but there is no pulse at the moment as we await the US-China trade deal outcome and the next rounds of incoming data that will excite interest in policymakers’ reactions.
EUR – EURUSD makes a half-hearted effort at 1.1400, but there is plenty of heavy lifting to do in clearing away the dark clouds over Europe to get the pair above the technically important 1.1500 again. Set and forget longer term options strategies for a directional view and still see risk of downside resolution.
JPY – the yen is nudging higher as risk appetite a bit more defensive and sovereign bonds well bid – we like JPY cross shorts and USDJPY tactical as a play on further consolidation in risk appetite after the miracle rally of the last couple of months.
GBP – resurgence here is built on fairly solid foundation of confidence that No Deal is off the table and we could finally get some directional persistence and repricing of sterling.
CHF – surprised we haven’t seen a bit more pointed weakness in the franc on the latest Brexit developments and sterling surge. Watching GBPCHF as well as EURCHF on this.
AUD – the Aussie stuck in neutral, getting some support from CNY staying near the top of the range versus the USD, but iron ore prices have eased significantly and housing bubble unwind concerns remain the chief concern. The big banks stocks in Australia aren’t under immediate pressure, but are a good proxy for the risk that something more systemic may be afoot.
CAD – has pulled back higher versus the USD and that USDCAD chart is a churning mess. Zooming out a bit, important for an upside view there that the 1.3000 area provides support, and more helpful still if recent lows remain intact. Canada’s latest CPI data up this afternoon.
NZD – the kiwi pushing on resistance versus the USD while AUDNZD is bogged down after teasing support as NZ dipped into a much larger trade deficit in January than expected. In the background, the risk of Reserve Bank of New Zealand cuts on new bank capital requirements in New Zealand has further curtailed the NZD upside potential.
SEK – watching this morning’s January household lending survey with interest as it has been sliding aggressively and Sweden may be headed for recession in line with the EU. The Q4 GDP estimate is up tomorrow.
NOK – the EURNOK chart structure argues for downside focus, but we’ve been bottled up in a narrow range for over two weeks. A close below 9.71 could start to break the logjam, although 9.65 the bigger level.
Upcoming Economic Calendar Highlights (all times GMT)
0800 – Sweden Feb. Confidence Surveys
0830 – Sweden Jan. Household Lending
0830 – ECB’s Coeure to speak
1000 – Euro Zone Feb. Confidence Surveys
1330 – Canada Jan. CPI
1500 – US Dec. Factory Orders
1500 – US Jan. Pending Home Sales
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