Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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USD bear returns with a vengeance.
John J. Hardy
Global Head of Macro Strategy
Summary: USD bears are on the prowl again after the Fed’s Bowman waxed dovish and as crude oil prices swooned on the deflation of geopolitical uncertainty, which also works in the USD bears’ favour as global risk sentiment turns positive.
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Fed Vice Chair Michelle Bowman is joining her colleague Christopher Waller in vying for the next Fed Chair nomination as she indicated yesterday an openness to a July rate cut if inflation remains subdued or if the labor market weakens. EURUSD ripped well above 1.1500 on the comments and followed through above 1.1600 overnight. The USDJPY action was even more spectacular as discussed below in the USDJPY chart comments. The clearing, for now at least, of the geopolitical uncertainty premium after Iran’s theatric “retaliation” against an abandoned US base on Qatar and Trump’s declaration of a ceasefire has probably removed hurdles to decision making for market participants and could allow the USD bear to return in full force, allowing EURUSD to progress to as high as 1.2000+ in a relatively short time frame.
Chart: USDJPY
USDJPY spiked yesterday on the news of Japan’s finance ministry reducing the issuance schedule for 20-, 30- and 40-year JGB’s through March of next year to the tune of USD 22 billion on fears that the market would have a harder time absorbing the prior issuance rate. This was ahead of last night’s 20-year JGB auction, which went relatively smoothly with the bid-to-cover ratio only slightly below the average of the last year. Then USDJPY bears got a double whammy of support, mostly from the Fed’s Bowman comments on a rate cut, but as well because crude oil prices swooned, easing the glaring problem for the JPY and its very negative real rates as long as inflation remains highs. The recent run-up in JPY crosses looks unfair relative to pressure on global yields, which has been nonexistent, and the JPY may lead the field here for a bit if yields remain subdued. The massive Halley’s comet-esque shooting star candlestick yesterday on the chart provides a hook for bears to get involved again here, but some follow through price action that dives back into the lower end of the range to the low 142.00’s is needed to point to fresh momentum for an attack on the massive 140.00 area.
Elsewhere, it is interesting to note that risk sentiment is very strong again and how that is impacting the smaller G10 currencies. NZD has rebounded in spectacular fashion against the greenback, forming a pronounced hammer candlestick. EURSEK is showing signs of reversing after the big consolidation on recent risk aversion and the Riksbank dovishness. While NOK looks weak on the crude oil reversal, EURNOK may find resistance here on the good risk sentiment vibes.
Looking ahead
We are set for a spectacle today at Fed Chair Powell’s semi-annual testimony before a the House Financial Services Committee as Trump is out once again berating “too late” Chair Powell in very late US hours (this morning in Europe, in fact), claiming that rates should be “at least two or three points lower” and expressing the hope that Powell is in for a tough treatment in his testimony today.
A NATO summit up today could prove interesting for the euro, as Spain is injecting drama ahead of the two-day summit that kicks off today in refusing to raise defense spending targets to 5% of GDP as the rest of the European NATO members are willing to do. As well, French president Macron complained that the Israel and US attacks on Iran “lack a legal basis”. The weaker the solidarity vibe, the more euro supportive, as it encourages the idea of urgency in Europe to raise defense spending and invest domestically.
There is some noise as well in the press that Japan and the US are at odds on military spending promises, with Japan apparently reluctant to commit to fixed spending levels as a percent of GDP.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Quite clear that the FX Board does not pick up on intraday action as the JPY readings on momentum are flat – interesting to see the status on JPY in another session or two. Elsewhere, the euro has taken the lead in the plus column as NOK has lost the most steam on the reversal in crude oil prices, while the US dollar may be tilting back into broad bear mode.
Table: NEW FX Board Trend Scoreboard for individual pairs.
EURNOK at current levels will flip into a positive trend at the end of the day, but let’s give it another session or two to see if the backup reverses. Elsewhere, watching that USDJPY trend status like a hawk over the next couple of sessions, as well as whether EURCHF can finally break through the stubborn resistance into 0.9425.
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