Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Sterling surges on Brexit hopes, but risks remain
John J. Hardy
Chief Macro Strategist
Sterling remains rather bid after the EU Brexit negotiator Barnier said yesterday that a Brexit deal should be possible within an eight-week timeframe. The assumption is that the two negotiating sides will agree on some version of a Brexit deal along the lines of the Chequers proposal hammered out at a UK Conservative party leadership powwow over the summer. But as former foreign secretary William Hague points out in an op-ed in the Telegraph, there is a strong risk of a constitutional crisis if a sufficiently large Conservative party revolt of Brexit hardliners who believe a Chequers-like deal provides insufficient sovereignty for the UK requires a large number of Labour MP’s to vote in favour of the deal.
In other words, risks remain, and sterling may have a hard time sustaining directional momentum for any length of time until the situation clears... or not.
It seems the euro has caught some of the positive contagion from the apparently higher probability for a Brexit breakthrough and traders shouldn’t focus too much on EURUSD and GBPUSD for a general picture of the USD direction at the moment, as USDJPY trades to new strong three-day highs this morning.
Emerging market currencies are generally firmer despite the grind higher in USDCNY and weakness in EM equity markets, seemingly led by Chinese equities. But the Russian ruble was in for a rough ride yesterday as USDRUB extended above 70.00 for a time after a top economic aide in the Russian government spoke out against rate hikes after last week saw Russian central bank governor Nabiullina indicating a bias for a rate hike.
This is a classic no-no for EM investors smelling a rat in the political authorities meddling with the central bank’s independence. As well, the geopolitical risks linked to the possible coming conflict in Idlib and the potential additional US sanctions are weighing. Russian credit spreads on USD-denominated debt have not yet stretched to new highs for the cycle, it should be noted, unlike the case for South Africa foreign currency debt.
Chart: GBPCHF
Promising developments in Brexit negotiations and a delayed reaction to the recent steep retreat in Italy’s yields has inspired a sharp move higher in GBPCHF and there is considerable further room to run to the upside if a Brexit deal materializes after the brutal 10% move lower from the top earlier this year. Tactically, however, sterling could be in for a rough ride on further headline risk indicating the progress toward a deal is in doubt.
In other words, risks remain, and sterling may have a hard time sustaining directional momentum for any length of time until the situation clears... or not.
It seems the euro has caught some of the positive contagion from the apparently higher probability for a Brexit breakthrough and traders shouldn’t focus too much on EURUSD and GBPUSD for a general picture of the USD direction at the moment, as USDJPY trades to new strong three-day highs this morning.
Emerging market currencies are generally firmer despite the grind higher in USDCNY and weakness in EM equity markets, seemingly led by Chinese equities. But the Russian ruble was in for a rough ride yesterday as USDRUB extended above 70.00 for a time after a top economic aide in the Russian government spoke out against rate hikes after last week saw Russian central bank governor Nabiullina indicating a bias for a rate hike.
This is a classic no-no for EM investors smelling a rat in the political authorities meddling with the central bank’s independence. As well, the geopolitical risks linked to the possible coming conflict in Idlib and the potential additional US sanctions are weighing. Russian credit spreads on USD-denominated debt have not yet stretched to new highs for the cycle, it should be noted, unlike the case for South Africa foreign currency debt.
Chart: GBPCHF
Promising developments in Brexit negotiations and a delayed reaction to the recent steep retreat in Italy’s yields has inspired a sharp move higher in GBPCHF and there is considerable further room to run to the upside if a Brexit deal materializes after the brutal 10% move lower from the top earlier this year. Tactically, however, sterling could be in for a rough ride on further headline risk indicating the progress toward a deal is in doubt.
The G-10 rundown
USD – the US dollar lower versus the surging sterling and a firmer euro, but not broadly weak, as the recent boost in yields from the earnings data has kept a bid tone in USDJPY.
EUR – the euro getting a strong boost in the crosses from the continued push lower in Italian yields and sun poking through the Brexit clouds.
JPY – the yen weaker across the board as the general rise in sovereign bond yields and bounce in US and European risk appetite help at the margin.
GBP – sterling surging a bit further this morning, but the move faded quickly and there is plenty of tactical two-way risk for now until we know whether a Chequers-esque deal would be approved by the UK parliament if one is agreed as soon as at next week’s May-EU summit. (A key test will be the September 30-October 2 Conservative Party conference).
CHF – EURCHF has now firmly rejected the attempt at the 1.1200 level after yesterday’s developments, which suggest that the euro is also sensitive to the fate of Brexit.
AUD – the Aussie keeping a closer eye on China than risk appetite at the moment, it seems, as it has failed to find more upside on a very risk-friendly market this morning. Australia employment data up on Thursday.
CAD – USDCAD trying to find a new support level after the recent USD-strength inspired surge – first interesting level perhaps the 1.3100 area.
NZD – NZDUSD is in a fairly well defined descending channel – see little to like about the kiwi with dark clouds over China and a very dovish RBNZ chief Orr on watch.
SEK – EURSEK reluctant to follow up lower, but we prefer to look at the signal from Swedish yields, which are arguing for further strength.
NOK – NOK firming in fits and starts. Short Norwegian rates are climbing slowly back higher and the “mainland GDP” saw +0.2% quarter-on-quarter growth. A Regions Survey is up this morning that could offer further input, but we are constructive on the potential for additional NOK upside within the trading range in EURNOK.
USD – the US dollar lower versus the surging sterling and a firmer euro, but not broadly weak, as the recent boost in yields from the earnings data has kept a bid tone in USDJPY.
EUR – the euro getting a strong boost in the crosses from the continued push lower in Italian yields and sun poking through the Brexit clouds.
JPY – the yen weaker across the board as the general rise in sovereign bond yields and bounce in US and European risk appetite help at the margin.
GBP – sterling surging a bit further this morning, but the move faded quickly and there is plenty of tactical two-way risk for now until we know whether a Chequers-esque deal would be approved by the UK parliament if one is agreed as soon as at next week’s May-EU summit. (A key test will be the September 30-October 2 Conservative Party conference).
CHF – EURCHF has now firmly rejected the attempt at the 1.1200 level after yesterday’s developments, which suggest that the euro is also sensitive to the fate of Brexit.
AUD – the Aussie keeping a closer eye on China than risk appetite at the moment, it seems, as it has failed to find more upside on a very risk-friendly market this morning. Australia employment data up on Thursday.
CAD – USDCAD trying to find a new support level after the recent USD-strength inspired surge – first interesting level perhaps the 1.3100 area.
NZD – NZDUSD is in a fairly well defined descending channel – see little to like about the kiwi with dark clouds over China and a very dovish RBNZ chief Orr on watch.
SEK – EURSEK reluctant to follow up lower, but we prefer to look at the signal from Swedish yields, which are arguing for further strength.
NOK – NOK firming in fits and starts. Short Norwegian rates are climbing slowly back higher and the “mainland GDP” saw +0.2% quarter-on-quarter growth. A Regions Survey is up this morning that could offer further input, but we are constructive on the potential for additional NOK upside within the trading range in EURNOK.
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