Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Chart Highlights: The USD is down, but not yet out
John J. Hardy
Chief Macro Strategist
Summary: Several USD pairs are at the precipice, but broader measures of the USD have yet to show a capitulation lower for the greenback after the key event risks of last week. USD bears need to maintain a head of steam here to keep the needle pointed lower, otherwise we risk the kind of sloppy back and fill we have seen for the past year and more.
The US dollar finished last week on a weak footing in the wake of last week’s important US event risks, including a semi-hawkish rate cut from the Powell Fed (a 25-bp cut, but insistence that they wanted to avoid signaling further easing now, with future policy decisions contingent on incoming data), a much stronger than expected payrolls figure for October on Friday (especially due to strong revisions to prior two month’s data of +95k) and a slightly weaker than expected October ISM Manufacturing survey the same day. But the price action is still relatively tepid at best and most USD pairs have yet to administer the knockout blow suggesting that a major USD down move is gearing up – below we take a look at a couple of examples and developments we will be watching for in the coming days and also have a follow-up look at EURSEK after our discussion of the same chart last week.
The US dollar index – more wood to chop beyond the pivot
The EURUSD-heavy USD index (58% of the index) shows that we have yet to see a full breakdown in the US dollar, which doesn’t really swing into gear until the index has properly taken out the local 97.00 pivot on a daily close and really quite a bit more when we zoom out. Note the jagged price action in the wide ascending channel which defines the bigger formation that USD bears need to disrupt before proving that some bigger move lower is afoot.
USDJPY – another follow up: bears have upper hand, but need follow on selling
In last week’s chart highlights post we had a look at the pivotal 109.00 area in USDJPY for signs that the pair was melting higher. After the FOMC, a smart rally in long bonds and perhaps concerns about the US-China trade deal combined to take the pair back lower, just after the kneejerk reaction to the FOMC meeting actually took the pair above the key 109.00 area break level briefly (arguably, the intraday break level never really fell, i.e., resistance held). Alas, the sell-off and rejection of that break higher has in turn yet to prove itself as long bonds have consolidated, and it wouldn’t take much of a reversal back higher to keep the upside break scenario in play – perhaps a close above the 109.00 level. Until then, bears still have their tactical case intact and would get further satisfaction from a close below 108.00.
NZDUSD – triple crunch-time?
It is an interesting session here for NZDUSD, as a very clearly etched upside-down head and shoulders formation with the sloping neckline around 0.6425 has been in play over the last couple of sessions, as has the old low from late 2018 and the attempt to break above the 38.2% Fibonacci level – a triple-significant line in the sand for this pair. At this point today, the pair is struggling to remain clear – today’s close looks pivotal on that account for whether the USD continues to stumble versus the smaller currencies or once again puts up a fight just after teasing over the edge. If the pair punches back down into the range, focus on the lower red dashed line around 0.6235 will quickly resume, as this is the major cycle low all the way back from 2015.
EURSEK – follow-up after throwback rally rejected
Last week, with EURSEK trading close to 10.80, we noted that it was time for the pair to find resistance and head back lower if the bearish implications of the prior large sell-off wave (symmetric rejection wave) were to find confirmation. EURSEK did indeed find that resistance just north of 10.80 and within just a few pips of the ideal 61.8% retracement level for this kind of market turning pattern near 10.8250. Now, the bears have to prove themselves further as key downside pivot zones near – the 10.60+ support area of the September lows and the 200-day moving average snaking around near the same level, but first up is the trendline that has already been under strain at the lows of today’s sessions.
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