Head of FX Strategy
Summary: The US October jobs report on Friday was somewhat mixed at best, despite the positive beat on payrolls, and US yields eased lower. More interestingly, the US dollar sold off steeply despite the modest volatility in rates. Was this a key day reversal of the USD rally action in the wake of the hawkish Fed Chair Powell presser, or just some noise ahead of the next, more important data point -this Thursday’s US October CPI?
FX Trading focus: USD punched lower despite only modest dip in yields. Signal or noise?
The US October jobs report wasn’t worth much of a reaction, as there was something for everyone: a solid beat on payrolls, a small beat to the upside on average hourly earnings, but an ugly household survey that dragged the unemployment rate sharply back higher despite a small fall in the participation rate. It made sense that US yields took a break on this mixed data after their aggravated rise on the back of the hawkish Powell FOMC presser on Wednesday, but the huge reaction in the US dollar to the downside suggests something else may be afoot. I am not entirely ready to commit to what that might be, but it could simply be so much noise from hefty hedging or pent-up flow around the US jobs data, or it could be a sign that we are reaching or have reached peak Fed tightness, at least for a spell. As the USD continues to trade with a range here even after the chunky sell-off Friday and into today, nothing technical has yet broken down. And we still have what has proven the most important macro data point of the last few months ahead this week: the October US CPI data point on Thursday. So: holding off judgement until after that data point this week, with the most interesting scenario a softer than expected core number and how the market treats that.
Elsewhere, and possibly more importantly, there is considerable noise on the potential for a Chinese policy pivot on zero Covid, even despite the latest official commitment to that policy at the weekend. The scale of the market reaction on Friday to further chatter on a Chinese Covid policy pivot (copper, AUDUSD, etc.) suggests what may unfold if we do get more confirmation of a lifting of this growth-stifling policy: namely higher commodity prices, especially for energy and metals. This in turn could of course also aggravate the risks of higher inflation globally – not at all what a stagflationary Europe can absorb well or that the ECB or BoE will have an easy time responding to, if possibly a positive for EU-based exporters.
Similarly for the US, the Fed is likely hoping that that a slowing economy will at least help to ease price pressures from weaker demand for commodity inputs as in prior cycles in recent memory. But if China is driving a new global inflation impulse (rather than the “helpful” disinflation that it has provided over the last 12 months of keeping its economy in some degree of lockdown) the Fed and other central banks will have a hard time easing up much as they could in previous easing cycles. Shortly put, Friday may have shown us that an eventual change in China’s policy stance on Covid may have far greater impact than further Fed guidance, as incoming US data may fail to drive Fed expectations materially higher from here.
Chart: AUDUSD
A pair like AUDUSD sits across multiple themes, from the overall comparative pace of tightening of the two central banks to the possible impact on commodity prices from a shift in China’s policy on Covid, as discussed above. Technically, while we saw a tremendous impulsive comeback on Friday in AUDUSD, we continue to trade within the range. To see a large bullish reversal, we’ll need to see the pair trading above the neckline-like area indicated for the upside-down head-and-shoulders formation, or simply the most recent pivot high just above 0.6500. Above there, the next major upside swing level is arguably the 61.8% retracement way up at 0.6768, and the structural level of note isn’t really until 0.7000.
Table: FX Board of G10 and CNH trend evolution and strength.
If we are set for a further yield drop and a grinding worry that global growth is set to slow further (with no change in China’s Covid policy), the JPY might enjoy a rally, but if the pivot is toward more Chinese stimulus that pumps inflation higher and eventually policy rates higher as well, the more likely winner will be the commodity currencies and select EM currencies. Watching the moving parts on that front in coming days, as well as the next critical test of the USD trend in the form of this Thursday’s US CPI release.
Table: FX Board Trend Scoreboard for individual pairs.
Some USD pairs trying to edge back into an uptrend, but the key breakdown levels for the USD more broadly are lower than what we have seen thus far: 145.00 area in USDJPY, the 1.0089 pivot higher in EURUSD, 1.1645 for GBPUSD – let’s have a status check after the Thursday US CPI release.
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
