Head of FX Strategy
Summary: Sterling got nothing from the budget statement yesterday, suggesting that any structural concerns for UK finances will be a slow burn issue, with risks possibly picking up in the next fiscal year, given the enormous issuance of gilts on the menu. Elsewhere, the USD is going nowhere in a hurry as it has consolidated for a full week now since the huge move last week. Identifiable catalysts are few and far between until beyond next week’s US Thanksgiving holiday.
FX Trading focus: Autumn budget statement does nothing to inspire sterling traders. USD sideways. Interesting signal from possible next BoJ governor.
The Chancellor Hunt Budget statement yesterday was a damp squib for sterling, sparking virtually no market reaction. Still, a couple of observations. First, there was apparently no major pent-up further “relief trade” of note, as EURGBP poked beyond the lows of this week without finding additional sellers, just as UK gilts seem to have come full circle in pricing the change of fiscal stance from the Treasury, as UK yields are moving passively with US treasury yields in recent days. So no immediate fall-out, meaning that forward structural concerns will possibly be a slow-burn issue, perhaps aggravated by the accumulation of incoming data and/or BoE missteps. Beyond this fiscal year, which lasts until April of next year, Gilt issuance is now forecast somewhat lower than previous estimates after the updates on the Treasury’s intentions yesterday. But for the 2023-24 fiscal year, gilt issuance is set to balloon, according to the UK’s Debt Management Office. An analyst cited in a Bloomberg article (could only find on internal platform) said that net gilt issuance next fiscal year could come in over £250 billion, almost twice the previous record in 2011. In another article, some suggest that Chancellor Hunt may have a hard time even delivering the spending cuts he outlined in the statement – with the spending tightening only set to begin, conveniently, after the next election (2024 or before) in 2025. In short – no immediate reaction, but the UK’s woeful structural twin deficit challenges remain far from addressed for the coming few years. GBPUSD looks rich without a Fed reversal (way too early there…).
The US dollar is biding its time in a range after the huge sell-off that was mostly on the back of the October CPI release. If we get another couple of days or so of waiting for follow through lower in the greenback, the momentum will really have begun to seep out of the move. Still, the move was extensive enough to require a considerable rally indeed to argue that the USD bull market is returning. As I have noted, the next heavy hitting data points aren’t up until the November 30th PCE inflation print, and then the jobs report on December 2 and November CPI on December 13th. Next week does have a bit of a data drop and FOMC minutes all crammed into Wednesday, the day before the Thanksgiving holiday, where traditionally little trading takes place, Friday inclusive.
Chart: EURUSD
A huge break higher through 1.0100 in EURUSD was sparked by the hot October US CPI print last Thursday and we have closed every day this week within half a figure of the Friday close. A few days of consolidation is one thing, but if the pair doesn’t follow through higher in the coming couple of days, the move will have lost considerable momentum. Note the 200-day moving average that was touched earlier this week for the first time since June of last year, a remarkable run. That 1.0100 area is an important pivot, with the 61.8% retracement of this large rally wave not coming into until close to parity. To the upside, the next important zone is perhaps 1.0611 (the 38.2% retracement of the sell-off wave from the multi-year high at 1.2349 to the 0.9536 low for the cycle) and then the 2020 pandemic outbreak a tad higher at 1.0636.
My colleague Redmond flagged a story in the Asian session overnight, as former BoJ Deputy Governor Haruhiko Nakaso – and a strong candidate to replace Kuroda next spring – was out arguing in a seminar that, in a general sense, central banks need to remove emergency support once the moment of actual financial crisis has passed. He has even written a book detailing how the Bank of Japan could unwind its monetary policy accommodation. Another prominent figure, former BoJ chief economist Seisaku Kameda said that he had no expectations for Kuroda to adjust policy before the end of his second 5-year April, but his leaving could open the path to tweaking BoJ policy. He said that most inflation in Japan is currently from companies raising prices as they pass on rising input prices, not from “demand pull” inflation. Last night, the October Japanese CPI coming in higher than anticipated, at 3.7% YoY for the headline vs. 3.6% expected and 3.0% in September, although the core ex Fresh Food & Energy number was 2.4% vs. 2.5% expected and +1.8% in September.
Table: FX Board of G10 and CNH trend evolution and strength.
CAD and NOK suffering a bit on the crude oil sell-off that turned a bit uglier still yesterday. Elsewhere, waiting for whether the USD follows through lower today or early next week to avoid the momentum from last week turning stale. NZD standing tall as the strongest of the G10 lot – is this on China’s overtures on cooperating on many measures as NZ PM Ardern met China’s Xi Jinping on the sidelines of the G20 meeting?
Table: FX Board Trend Scoreboard for individual pairs.
EURNOK rallied hard today after a big drop in crude oil, making the resistance above 10.65 the last resistance level of note. EURCHF is also making a bid for the cycle highs again on a bit more follow through after rejecting most of the recent impulsive sell-off.
Upcoming Economic Calendar Highlights
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
