Head of FX Strategy
Summary: Risk sentiment is well on its way to erasing the reaction to the news of the omicron variant of covid, with most reactions across FX adjusting as one would expect on an improved outlook, with commodity currencies performing best, while safe haven JPY and CHF trade weaker and the euro is unable to figure out what it wants to do. Adding to a more hopeful stance and a weaker US dollar overnight was China allowing its currency to push to new highs for the year, beyond the highs established back in May.
FX Trading focus: CNY new highs for the year, strong resurgence in risk sentiment
The US dollar has pushed lower this week on a resurgence in risk sentiment, led by fading omicron fears – particularly yesterday – but also on hopes that China is set to support the global growth outlook and signaling confidence by allowing the renminbi to push to new highs for the year versus the US dollar. The weaker US dollar elsewhere this week explains the timing of the large move to new lows in USDCNH, as the CNH has actually underperformed resurgent commodity FX and some EM FX this week even while it outperformed the strong US dollar this year on balance. If the USD is to weaken further from here, it would be no surprise to see CNH continuing higher versus the US dollar – perhaps even beyond the 2018 lows in USDCNH – while keeping it somewhat weaker versus other currencies against which it has appreciated so aggressively this year. China is clearly interested in defending the stability and purchasing power of the CNH versus the USD and its basket, but the extent of the revaluation is getting stretched if we look at the official CNY basket.
In G10 FX, the resurgence in risk sentiment has boosted the usual suspects and weighed against the other usual suspects, although a couple of unusual situations stick out: GBP and SEK:
Sterling is in danger of breaking down versus the euro here after testing new lows for the year this morning in GBPUSD despite sterling’s former correlation with risk appetite, perhaps as a lot of air has been taken out of Bank of England expectations as the market has shifted the expected lift-off meeting to February of next year after pricing as early as November a couple of months ago. Late last week, the BoE’s normally hawkish Saunders sounded cautious on lifting off next week, while the day before yesterday Deputy Governor Broadbent advised looking “a couple of years ahead” in predicting that “these pressures on traded goods prices are more likely to subside than intensify”, although he did say wages could be an inflation driver.
Chart: EURGBP
EURGBP is poking at the 200-day moving average from the downside for the third time in recent months, and the less hawkish BoE may help trigger a further squeeze higher, especially if the 0.8600 prior pivot high falls. Next focus higher still comes in at the range highs from April-May near 0.8720.
SEK has traded sideways today rather than rallying, as one would expect, on the strong comeback in risk sentiment. The krona is historically one of the most highly risk sensitive currencies. Sure, the euro is largely stuck in the water here and the EU growth outlook has plenty of clouds over it with covid shut-downs etc, but EURSEK looks “wrong” relative to other reaction to the improved mood across markets, and should be lower. A statement today by Riksbank dove Jansson that it is hard to justify rate hikes and that a more active fiscal policy is the way forward likely held back SEK, as perhaps NOKSEK buying, judging from the last couple of session in that cross.
In other developments, AUDNZD has cleared the important 1.0500 level, EURCHF is trying to pull higher but is still some way from challenging the important 1.0500 level. The CHF has not behaved anything like the JPY in recent months, failing to show sensitive in EURCHF, at least, to large shifts in safe haven years. Likely, to get EURCHF off the mat, we’ll need to see a broader EUR rally that includes EURUSD on a brightening outlook for EU growth. Hard to see how it gets much worse, on a relative basis, at present (covid shutdowns, energy crunch, etc…)
The Bank of Canada is out just after pixel time for this article. The market is leaning for hawkish guidance for a sure rate hike at the January meeting, which is very likely what it will get. The degree to which CAD can continue to rally will also depend on whether the now suddenly very CAD-supportive backdrop extends. USDCAD needs to bash back below 1.2500 to suggest a full reversal of the rally move off the sub-1.2300 lows in October is in the cards.
Looking ahead, the next critical event risks are the Friday US November CPI print, and then the exercise next week in seeing how the market reacts to the crystallization of the now hawkish Fed’s adjustments to its new monetary policy statement and to the “dot plot” of its policy forecasts.
Table: FX Board of G10 and CNH trend evolution and strength
Still mean reverting from the prior trends in most currencies, but far more upside needed from commodity currencies to fully reverse the prior trends.
Table: FX Board Trend Scoreboard for individual pairs.
A strong move higher in EU yields taking EURJPY back well above the important 128.00 level of contention lately – watching whether the trend can flip positive in the week ahead. Elsewhere, note again that AUDNZD has pulled above the important 1.0500, that USDCHF flipped positive (even if it is mid-range after surviving another test of the 200-day moving average), and that NOKSEK is trying flipping positive after a very sharp rebound from recent lows.
Upcoming Economic Calendar Highlights (all times GMT)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
