Macro: Sandcastle economics
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FX Update: Our 2019 Swan Song as vols remain suppressed
John Hardy
Chief Macro Strategist
Summary: Norges bank surprises and keeps NOK as the most interesting currency as 2019 closes with a volatility whimper. What to do with SEK when zero rates forever are the guidance? And we do note that the yen is looking a bit perky, especially relative to risk appetite at maximum complacency.
This is our swan song update for 2019 – look for the FX Update to return on January 2 or 3. IF you haven’t had a chance, please head over to yesterday’s longer form podcast in which the Saxo strategy offers a round up of 2019 and a look at what 2020 may offer global markets.
The Swedish Riksbank’s hike back to zero rates was so well flagged that the market reaction was virtually nonexistent and 2020 will show whether the bank’s policy of maintaining QE rather than driving rates back into negative territory will be the policy if the stumbling Swedish economy stumbles further. As we have noted before, Sweden is the world’s number one case of a country that can and should consider a fiscal response to what ails its economy, given the heavy social costs of absorbing a huge wave of immigrants in recent years and its running of a budget surplus. SEK saw little reaction to the move, which was priced in advance and the Riksbank’s guidance of a zero rate policy for “the coming years” hardly inspires carry traders, so SEK may have achieved m0061. To kick a more secular SEK upswing into gear, a boost to the EU growth outlook and fiscal stimulus there and in Sweden are needed to get a kick a more secular SEK upswing into gear.
The Norges Bank, on the other hand, surprised the market with guidance indicating it would like to maintain the option to hike rate, indicating a 40% probability of a rate hike In 2020 (later in the year) and noting NOK weakness as a factor that raised that probability – a cautious but clear signal. EURNOK has managed to shift below 10.00 and the key question here is whether NOK can bolt higher out of the gates in early trading in 2020 as the end-of-year seasonal headwinds lift.
The Bank of England kept a hopefully cautious stance on a 7-2 vote to keep rates unchanged (two dissenters calling for a cut to 0.50%) and sterling dropped further on the news, but investors are a bit handcuffed in reacting to anything at the moment as we are all operating on general expectations for a revival in the UK economic outlook and how these shape up in coming months and the overhanging uncertainty of the eventual trade deal to be struck after the Brexit transition period ends on December 31 of next year – not to mention we don’t know who will replace Carney at the Bank of England.
We’re not looking for major fireworks for the balance of this year, but are particularly curious how the market action takes shape in the first days and weeks of 2020, given the focus on USD liquidity issue that were such a focus into year-end and the historically quiet volatility levels.
Chart: EURNOK
EURNOK broke down below 10.00 yesterday on the Norges Bank guidance, a key technical and psychological milestone. A continued hope that global growth is on the mend and new highs in oil prices early next year would likely cement this move and take EURNOK back down to the more reasonable levels into 9.60 or even lower in 2020.
The G-10 rundown
USD – the US dollar is relatively inert as it has only fallen more materially against the hardest charging Scandies within the G10 and against EM currencies after the US-China trade deal was announced as the world goes gaga in reaching for yield and risk. We look for a weaker USD in 2020 but the path to that end looks very murky in the near term, and if the 2020 election appears a close call all year, this could make for a treacherous year ahead for USD traders.
EUR – the euro not able to find a pulse as we await the ECB’s policy overhaul outcomes and for the slow-moving EU to come up with its plans for fiscal stimulus. A major boost to the single currency would be an ECB decision to abandon negative rates and choose fiscal (climate policy – already well flagged), in part covered by ECB buying and perhaps new EUR climate bonds. Risks of a trade spat with the US are high.
JPY – the yen interesting here as it perks up despite the backdrop, perhaps to a degree on the more generous fiscal outlays in the coming year. We noted yesterday that this year has seen the most compressed volatility in the USDJPY pair in modern history stretching back decades – something has to give in the New Year?
GBP – sterling reaching a major support level in GBPUSD by retreating to 1.3000 – is there really enough uncertainty at the moment to drive it notably through that level? Perhaps, with 1.2800 the next level, but suspect that hedgers and optimist may be getting active soon on the long side.
CHF – the franc continues to surprise with relative strength in a world that can’t take on enough risk.
AUD – the Aussie has been a real disappointment in the wake of the US-China trade deal, assuming it stays on the rails here. To get AUD in a more secular rally stance in 2020, a further strong revival in Australia’s key commodity exports like iron ore and coking coal are likely necessary, but we wonder, in the longer term, how Australia squares its climate policy with the CO2-emitting underpinnings of its economy.
CAD – USDCAD is setting its own modern record in low volatility, with the smallest trading range of the last 24 years in 2019 and the current price is the mid-point of the three-year range. Risks are heavy for the Canadian economy and CAD if the market’s rosy expectations on the outlook for the US and globally prove too optimistic.
NZD – the kiwi edging to the upper end of its valuation potential versus the AUD, but we don’t have any catalysts in view to take the AUDNZD pair out of the range for the moment.
SEK – most of our thoughts on SEK above – EURSEK looks a bit stalled higher and may not make a statement until the New Year gets underway.
NOK – the NOK on the move here and potentially out of the gates in the first days and week or two of 2020 on the end of the well-known seasonality factor, where we discover if there is more fuel in the tank below 10.00 in EURNOK.
Economic Calendar Highlights (all times GMT)
- 0830 – Sweden Nov. Retail Sales
- 0900 – Norway Dec. Unemployment Rate
- 1330 – Canada Oct. Retail Sales
- 1330 – Canada Nov. New Housing Price Index
- 1330 – US final Q3 GDP revision
- 1500 – US Nov. PCE Inflation
- 1500 – US Final Dec. University of Michigan Sentiment
- 1600 – US Dec. Kansas City Fed Survey
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