Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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USDJPY eyes new highs
John J. Hardy
Chief Macro Strategist
Summary: USDJPY has pulled to the top of the range and could look higher still if US long yields follow through on yesterday’s rise, as the key yield benchmark trades in pivotal area. Elsewhere, we see downside risk for sterling and frustration for Scandie bulls.
Yesterday saw the USD turning generally higher across the board before odd volatility overnight. The most persistent move yesterday was in the USDJPY, which has marched back to the top of the range and could be ready for more if the market continues to drive US yields higher – certainly the technical setup looks pivotal as we discuss below, and so too does the US yield outlook as we have discussed recently. Higher long US yields are the most likely coincident driver of more volatility in currencies and shaking the action out of its utter torpor.
Overnight, EURUSD jumped inexplicably (odd time of night and no identifiable catalyst). The only culprit I can identify might be EURJPY slipping above the recent range highs and triggering flow via stops. If so, it would suggest very thin market liquidity. (Remember the avalanche of JPY buying that was triggered in late US/early Asian hours at the beginning of the year that set in motion the JPY cross flash cross with collateral damage in AUD pairs.) and given the abject lack of intraday volatility, we may have prominent risk that a sudden news item and/or large flows could lead to a very sudden shift in the market environment.
In other words, the market may be far more dangerous of a phase shift into a gap-wise volatility than traders realize and we should respect this potential. Stops and modest positioning size highly recommended despite the recent tiny trading ranges.
Chart: USDJPY
USDJPY has pulled back up to the key range highs – a move that could be set to continue on a close above the range highs. Notable breaks in USD pairs have been hard to come by recently, but something could be afoot here if, for example, the US 10-year treasury benchmark yield rises above the 2.50-60% range next week. Note that the next level higher at 114.50 is one with significance all the way back to early 2017.
Overnight, EURUSD jumped inexplicably (odd time of night and no identifiable catalyst). The only culprit I can identify might be EURJPY slipping above the recent range highs and triggering flow via stops. If so, it would suggest very thin market liquidity. (Remember the avalanche of JPY buying that was triggered in late US/early Asian hours at the beginning of the year that set in motion the JPY cross flash cross with collateral damage in AUD pairs.) and given the abject lack of intraday volatility, we may have prominent risk that a sudden news item and/or large flows could lead to a very sudden shift in the market environment.
In other words, the market may be far more dangerous of a phase shift into a gap-wise volatility than traders realize and we should respect this potential. Stops and modest positioning size highly recommended despite the recent tiny trading ranges.
Chart: USDJPY
USDJPY has pulled back up to the key range highs – a move that could be set to continue on a close above the range highs. Notable breaks in USD pairs have been hard to come by recently, but something could be afoot here if, for example, the US 10-year treasury benchmark yield rises above the 2.50-60% range next week. Note that the next level higher at 114.50 is one with significance all the way back to early 2017.
Next week is Easter holiday week here in Denmark and we will have spotty coverage until Tuesday, April 23, though I should pen one or two updates next week. I publish next week’s calendar highlights below in addition to today’s calendar highlights below the G10 rundown.
The G10 rundown
USD – the greenback looking mostly firm with the odd exception of the EURUSD, but volatility has been so constrained of late that we need to see the energy level picking up here to believe a move is afoot – perhaps USD strength driven by higher long yields.
EUR – the single currency firm against the JPY, where it likely performs in a rising yield environment. EURGBP also poking at the top of the range. Doesn’t appear that EURUSD will show high beta to any USD strength.
JPY – weak as we note above, with the key USDJPY at major resistance. US-Japan trade talks set for early next week – for now, markets not seeing these as a risk for JPY strength, but let’s watch how the tweets develop.
GBP – we consider the long Brexit delay generally brings negative risks – watching whether this means merely additional range trading or brings down animal spirits sufficiently to engineer a move out of recent trading ranges in EURGBP (above 0.8650-0.8700) and GBPUSD (below pivotal 1.3000).
CHF – EURCHF has almost fully reversed the move toward the 1.1200 level – perhaps driven by the final confirmation that we avoid a cliff-edge Brexit scenario. We suspect that CHF direction will track JPY direction and USDCHF looks technically pivotal if it works up above 1.0100 again.
AUD – yesterday’s sell-off spoiling the very half-hearted attempt at a break higher – keeps the outlook uncertain.
CAD – we would like to buy USDCAD if oil shows a more forceful turn back lower and if risk appetite heads for consolidation lower. But a break above 1.3450 area is the technical trigger.
NZD – NZDUSD perched right at break-down levels and deserves focus next week as we watch for USD direction.
SEK – small beat on the core CPI yesterday and reassuring house price data couldn’t engineer any interest in SEK buying. We’ll sit on our hands and would suggest a risk of a squeeze if the price action rises above 10.50.
NOK - the break lower in EURNOK getting no further traction, and raises the risk that NOK bulls (supported in their thinking by a vicious widening in the NOK’s yield advantage) will run into trouble if we continue to stall and oil prices retreat.
Economic Calendar Highlights Today (all times GMT)
0900 - Euro Zone Feb. Industrial Production
1230 – Canada Mar. Teranet/National Bank HPI
1400 – US Apr. Preliminary University of Michigan Sentiment
1630 – UK BoE’s Carney to Appear on IMF Panel
Selected Calendar Highlights for Next Week
Mon: US Apr. Empire Manufacturing, US Fed’s Evans (Voter) to speak
Tue: Australia RBA Minutes, US Feb. Earnings / Unemployment, Germany Apr. ZEW Survey, US Mar. Industrial Production
Wed: China Mar. Industrial Production / Retail Sales / Q1 GDP, UK Mar. CPI, Canada Mar. CPI, US Fed Beige Book
Thu: Australia Mar. Employment Data, Euro Zone Apr. Flash PMI’s, UK Mar. Retail Sales, Canada Feb. Retail Sales, US Mar. Retail Sales
Fri: Japan Mar. CPI, US Mar. Housing Starts / Building Permits
The G10 rundown
USD – the greenback looking mostly firm with the odd exception of the EURUSD, but volatility has been so constrained of late that we need to see the energy level picking up here to believe a move is afoot – perhaps USD strength driven by higher long yields.
EUR – the single currency firm against the JPY, where it likely performs in a rising yield environment. EURGBP also poking at the top of the range. Doesn’t appear that EURUSD will show high beta to any USD strength.
JPY – weak as we note above, with the key USDJPY at major resistance. US-Japan trade talks set for early next week – for now, markets not seeing these as a risk for JPY strength, but let’s watch how the tweets develop.
GBP – we consider the long Brexit delay generally brings negative risks – watching whether this means merely additional range trading or brings down animal spirits sufficiently to engineer a move out of recent trading ranges in EURGBP (above 0.8650-0.8700) and GBPUSD (below pivotal 1.3000).
CHF – EURCHF has almost fully reversed the move toward the 1.1200 level – perhaps driven by the final confirmation that we avoid a cliff-edge Brexit scenario. We suspect that CHF direction will track JPY direction and USDCHF looks technically pivotal if it works up above 1.0100 again.
AUD – yesterday’s sell-off spoiling the very half-hearted attempt at a break higher – keeps the outlook uncertain.
CAD – we would like to buy USDCAD if oil shows a more forceful turn back lower and if risk appetite heads for consolidation lower. But a break above 1.3450 area is the technical trigger.
NZD – NZDUSD perched right at break-down levels and deserves focus next week as we watch for USD direction.
SEK – small beat on the core CPI yesterday and reassuring house price data couldn’t engineer any interest in SEK buying. We’ll sit on our hands and would suggest a risk of a squeeze if the price action rises above 10.50.
NOK - the break lower in EURNOK getting no further traction, and raises the risk that NOK bulls (supported in their thinking by a vicious widening in the NOK’s yield advantage) will run into trouble if we continue to stall and oil prices retreat.
Economic Calendar Highlights Today (all times GMT)
0900 - Euro Zone Feb. Industrial Production
1230 – Canada Mar. Teranet/National Bank HPI
1400 – US Apr. Preliminary University of Michigan Sentiment
1630 – UK BoE’s Carney to Appear on IMF Panel
Selected Calendar Highlights for Next Week
Mon: US Apr. Empire Manufacturing, US Fed’s Evans (Voter) to speak
Tue: Australia RBA Minutes, US Feb. Earnings / Unemployment, Germany Apr. ZEW Survey, US Mar. Industrial Production
Wed: China Mar. Industrial Production / Retail Sales / Q1 GDP, UK Mar. CPI, Canada Mar. CPI, US Fed Beige Book
Thu: Australia Mar. Employment Data, Euro Zone Apr. Flash PMI’s, UK Mar. Retail Sales, Canada Feb. Retail Sales, US Mar. Retail Sales
Fri: Japan Mar. CPI, US Mar. Housing Starts / Building Permits
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