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
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
