Head of FX Strategy
Summary: The complacency melt-up continues in equity markets and continues to see muted volatility in FX, though the USD has edged to resistance in many places and will have a hard time not reacting to incoming data if it surprises today, especially any notable upside surprise in jobless claims.
Extreme low volatility continues to plague the currency market as complacency reigns and we all wonder whether it is worth taking a position ahead of next week’s more important US data cycle, where we get updates on the ISM surveys and the Friday jobs report. There is a rather large flurry of data up today that may be worth reacting to, and given that the USD is so close to key resistance levels in a number of pairs, the action could spill-over already today on positive or negative data, depending on the spin.
The AUD was weak overnight after Australia’s big lender Westpac predicted two more rate cuts that would take the rate to 0.25%, beyond which the RBA said as recently as yesterday that QE is the policy option as negative rates are not seen as viable. The market is pricing low odds of a December RBA rate cut, but greater than 50/50 for a February cut. By mid-2020, probabilities are only slightly above 35% for that second rate cut, so there is a bit more to wring out of the short end of the yield curve. And any notable weakness in the jobs data will quickly see the two cut scenario fully priced and the market mulling the timing and magnitude of RBA QE.
Data-wise, I will focus most on the weekly initial jobless claims up a day early today because of the US holiday. As mentioned yesterday, a third bad print in a row could prove a warm up for an ugly miss in next week’s November jobs report. We discussed some of the other evidence of a weakening US labor market in this morning’s Market Call podcast.
There’s quite a load of data today from the US, besides the weekly claims number we have two more interesting data points – the PCE inflation numbers and the US Durable Goods Orders numbers. Core durable goods orders are in a bad state in recent months, but another weak reading may be largely ignored over by this market if hopes of a US-China trade deal remain high. Late in the day, the Fed Beige Book will be released.
Chart: USDJPY weekly Ichimoku
USDJPY has turned back higher again as it is tough for the yen to catch any kind of bid in a massive global equity market melt-up. The move has the pair joining EURUSD and AUDUSD in trading near a key USD resistance point. It’s tough to know how much this very quiet market will hang its hat on data points today ahead of the big US holiday weekend (yes markets are open half a day on Friday in the US, but most have the rest of the week off starting today.) but USDJPY is historically quite reactive to US data. Note that the 109.35 area is the 61.8% retracement of the prior sell-off wave and the bottom of the Ichimoku cloud. Strong US data surprises could bring upside pressure and weak ones could keep a lid on the pair for now.
The G-10 rundown
USD – the US dollar is firm and looking to rally farther if nothing upsets the boat – though not sure that the USD falters even on weaker data outside of pairs like USDJPY.
EUR – waiting for that policy review from Lagarde, until then, the technical focus on 1.1000 in EURUSD, though we’re not expecting fireworks on a break – nor is the options market as 3-month implied volatility for EURUSD options has reached an historic low below 4.5% over the last couple of sessions.
JPY – the yen bowing under the onslaught of strong risk appetite and reach for carry even as long US treasuries remain near recent lows in the yields – could be the most reactive currency to negative US data surprises.
GBP – sterling facing modest headwinds on some of the recent polling data suggesting a tighter race than previously – but a big, widely anticipated MRP poll that generates a bottom-up picture of election outcomes is up tonight at 10 p.m. UK time and could generate GBP volatility.
CHF – the franc remains largely inert, but interesting to see if USDCHF breaking above parity as EURUSD breaks down through 1.1000 generates flow. View on CHF is flat until we drift outside of 1.0850-1.1050 range in EURCHF.
AUD – the Aussie lower still overnight, though still within the microscopic range in AUDUSD after Westpac announced a forecast for two rate cuts from the RBA. The pronounced AUD weakness challenges the narrative that prospects for a US-China trade deal are holding up the market in general
CAD – the USDCAD rally signal has weakened as we await fresh impulses from US and Canadian data surprises. US data weakness could see a softer CAD in the crosses, though that will have to be weighed against China-linked weakness in other FX.
NZD –The RBNZ financial stability report focuses on macroprudential policy to prevent lower rates triggering bubbles. AUDNZD has now dipped more firmly below the 200-day moving average around 1.0570.
SEK – The Sweden Household Lending survey posted a 4.8% year-on-year reading in October, matching the original reading for September, though that one was revised higher to 5.0%, so still the weakest data point of the cycle. SEK not noticing and look firm as EURSEK continues to sustain the recent range break below 10.62.
NOK – very supportive backdrop for NOK needs to be weighed against seasonality, which is challenging for the krone into year end. Looking for that close below 10.05-00 before we have the technical trigger for a NOK rally.
Today’s Economic Calendar Highlights (all times GMT)
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
