Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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FX Update: USD pulls to new highs for 2020 as volatility still moribund
John J. Hardy
Global Head of Macro Strategy
Summary: The US dollar is posting new highs for the year, but energy levels look low and the next important fundamental catalyst for the US dollar is not until the FOMC meeting next Wednesday. For today, we await a Bank of Canada meeting and possible further signs of caution on the outlook from Poloz and company.
The market has recovered in rather quick fashion, to say the least, from the Chinese corona virus distraction, as market participants perhaps feel that the low fatality rate from this outbreak and the Chinese authorities’ rapid mobilization to get ahead of the problem will prevent further major disruption. It’s not an issue that it tradable, but we remain concerned that the market may have been too quick to discount this issue. A case of the virus was found in the US yesterday and in Hong Kong today.
The US dollar has poked to new highs for the year in places, but with such low volatility and on no readily identifiable catalyst, so we’re not convinced any momentum will build here as we need to get a further look at how US numbers are shaping up this year and how the FOMC plans to deal with further balance sheet growth from here – do we get hints of this already at next week’s FOMC meeting or have to wait longer for a better sense of this – possibly as late as this summer, when the Fed is set to release the outcome of its 18-month policy and communication review. Have to believe that there is risk at the margin we see Powell expressing concern on the aggressive rise in risk assets.
Chart: USDCAD
USDCAD has traded in an absurdly compressed range over the last couple of weeks after rejecting the prior 1.3000 downside break into what looks like end-of-year effects – today the pair looks for a signal from the Bank of Canada and whether its level of caution on the economy is increasing on a number of weaker than expected data surprises – including the latest GDP data running at sub-1.5% levels and West Canadian Select crude oil trading at more than 23 dollars discount to the US WTI crude. A close above 1.3100 together with USD firmness elsewhere could drive a more significant repricing higher on a more dovish BoC message today.
The G-10 rundown
USD – the US dollar poking at its highest levels for the year in several USD pairs – with such low volatility, tough to fully get behind this move – need to see more on FOMC’s plans for its balance sheet for more conviction.
EUR – yesterday’s German January ZEW survey showed expectations vaulting to new highs since 2015, but if the story behind that reading, as reported, is that confidence is rising on the US-China trade deal outcome, we’re skeptical on the medium term implications. Next step
JPY – firm safe haven bond markets (new local lows in German bund yields, and US 10-year benchmark pressing on the important 1.75% area) offering the yen some support.
GBP – a very strong November paryolls surge offering sterling a helping hand yesterday, as odd for a BoE cut next week are adjusted marginally lower – sterling still has some work to do to get out of the range versus the EUR and especially the USD – 0.8450 to start in EURGBP.
CHF – EURCHF easing well off the lows and USDCHF has posted a smart reversal in recent days from new lows below the lowest 2019 levels – odd gyrations this morning in a likely thin market. The franc seems to be trading free of SNB influence.
AUD – the latest Australian jobs report up tonight after two months of zany swings in this erratic data series – the RBA is sensitive to labor market data and the last bushfire disaster has upped the odds of a Feb 4 RBA rate cut to better than 50/50 odds.
CAD – as noted above, a pivotal day today for USDCAD, which will take its cue from the Bank of Canada meeting and Poloz press conference – the trigger area around 1.3100 to the upside and 1.3000-25 to the downside.
NZD – the kiwi nudging at the lows for the year against the US dollar, but still room for NZDUSD to consolidate without reversing the significant upswing – next level there is 0.6500-15, the current 200-day SMA. Elsewhere, watching AUDNZD for further signs of support ahead of AU jobs data tonight and NZ Q4 CPI data late tomorrow for us in Europe (early Friday in Asia).
SEK – the krona largely inert here – fairly weak performance given the supportive backdrop – no real technical pressure until we are testing 10.60-65 or below 10.42.
NOK – short Norwegian rates have been ratcheting steadily lower in recent days as oil prices droop and as the sitting government has now lost its majority – is the market fearing an eventual left leaning government with green/anti-fossil fuel policies come the September 2021 election?
Today’s Economic Calendar Highlights
- 1330 – Canada Dec. CPI
- 1500 – Canada Bank of Canada Meeting
- 1500 – US Dec. Existing Home Sales
- 1615 – Canada Bank of Canada Governor Poloz
- 0030 – Australia Dec. Employment Change/ Dec. Unemployment Rate
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