Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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FX Update: Sterling droops further, Antipodeans struggle
John J. Hardy
Global Head of Macro Strategy
Summary: Sterling could eye 1.3000 again quickly in GBPUSD as the market realizes that uncertainty around the future trade deal with the EU remains an important point of uncertainty. Elsewhere, the Antipodean currencies have largely sat out the enthusiasm around the US-China trade deal and are trading soft ahead of important data.
We saw a minor hitch in the current melt-up in risk appetite, which we pointed out, in this morning’s Market Call, has taken risk sentiment to record levels relative to the past several years, to such a degree that we can argue we are inside a fat tail. Some interesting non-participation in currency-land, however, over the last couple of sessions, as EM currencies have gone a bit sideways and even sharply lower in the case of the Turkish lira.
And we have also noted the curious very weak participation, and even non-participation of the Antipodean currencies in the general enthusiasm after the US and China announced agreement on a trade deal late last week. In the Aussie’s case, the wildfires around Sydney may be so severe, with ongoing heat and strong winds forecast today, to be affecting the Australian growth outlook as the Sydney Morning Herald estimates the fires are costing A$50 million per day. This shock event and its implication for the climate change narrative could impact Australia’s long term policymaking focus, with the embarrassing fact that most of Australia’s key physical goods output (iron ore and coking coal) drive enormous CO2 emissions.
Sterling has dropped further as Boris Johnson insists that he will deliver a trade deal or No Deal at all if that is what it takes to ensure that the post-withdrawal agreement transition period limbo ends on December 31, 2020. Countering the weakness at some point, however, will be the anticipation of a boost to growth on cutting of national insurance contributions for lower wage earners, which should get injected straight into the UK economy.
Today is fairly short on market moving economic data, with the German IFO probably picking up on the expectations side as the ZEW survey often leads this one. The next US data points of note are not up until the first week of January, but we’ll continue to track the weekly jobless claims closely.
Chart: AUDJPY
AUDJPY has responded with weak beta to the ongoing melt-up in risk sentiment elsewhere, rather at odds with its historic status as a barometer of risk sentiment within the G10 currencies. It is interesting that the pair found resistance at the big 76.00 area recently and has now also rejected the poke above the prior major pivot high a bit lower. As with AUDUSD, the sell-off has not yet rejected the local rally wave, but a further dive below around 74.50 – especially if driven by a weak jobs report tonight in Australia – would begin to suggest that the pair is breaking down again. An interesting one to watch either way as we transition into 2020.
The G-10 rundown
USD – the US dollar maintaining an even keel as the market decides that the Fed is doing enough to keep liquidity risks at bay, but not so much as feed outright USD weakness – either that or significant market participants want to see the new calendar year rolling into view before testing the waters.
EUR – The euro is throwing off few signals, with minor collateral damage from sterling weakness in the crosses over the last session or two, perhaps, but generally waiting for policy impulse and/or the rising risk of a trade policy showdown with the US.
JPY – the yen getting a boost as the risk melt-up takes a breather and as the traditionally most risk-sensitive currencies have stumbled over the last couple of sessions. Yen volatility should pick up sharply if the narrative on the global growth outlook weakens.
GBP – the sterling level here more balanced and it is probably too early to expect major further weakness as that transition period end-date of Dec 31 next year is too far over the horizon to over-anticipate now and the market may get more hopeful news on the new government moving forward with stimulus plans.
CHF – EURCHF soft, perhaps on the slight change in tone since yesterday and GBP weakness (GBPCHF has been in for a rough ride)
AUD – again we note AUD weakness and another extension of that weakness would suggest the currency is actually beginning to break down again. Watching the employment data up tonight out of Australia.
CAD – the CPI release up today. I tweeted a link to a Wolfstreet.com article reminding why I have longer term concerns about the Canadian economy on the magnitude of private debt in Canada, where the private sector has leveraged up since the global financial crisis, the opposite of the US, where private sector indebtedness has fallen (as they finance the public sector profligacy, on the other hand…).
NZD – the kiwi a bit soft ahead of tardy Q3 GDP report tonight – and at risk of a sharp reaction if the surprise is negative there, given its recent runup in the crosses.
SEK – how does the Riksbank surprise the market tomorrow on the dovish side? Perhaps by underlining that policy can go either way as the situation develops as opposed to vowing that negative rates were a mistake and a thing of the past.
NOK – EURNOK so far unable to punch through 10.00 on the run lower despite maximum support from the backdrop – will need to see first couple of weeks of trading in the New Year to know whether it was seasonality at year-end restraining NOK’s potential.
Upcoming Economic Calendar Highlights (all times GMT)
- 0900 – Germany Dec. IFO Survey
- 0930 – UK Nov. CPI
- 1015 – US Fed’s Brainard (Voter) to Speak
- 1330 – Canada Nov. Home Price Index
- 1330 – Canada Nov. CPI
- 1530 – US DoE Crude Oil and Product Inventories
- 2145 – New Zealand Q3 GDP
- 2145 – New Zealand Nov. Trade Balance
- 0030 – Australia Nov. Employment Change /Unemployment Rate
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