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Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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USD breaks higher, pressuring USDCNY
John J. Hardy
Global Head of Macro Strategy
Summary: The USD is on the move again in early European hours as EURUSD stops give way below 1.1300 and USDJPY pulls back above 114.00. The move will only further pressurise USDCNY as we assess the temperature of US-China relations through the G20 meeting at the end of the month.
The US dollar is breaking higher, led by a EURUSD move below the obvious 1.1300 range support that triggered a way of stop-inspired flow in very early London/late Asia trading this morning. There has been no immediate news flow that one can point as the trigger for the move, which often indicates that the move is of “high quality” i.e., driven by significant flow and conviction.
One of the factors driving USD strength is the inability of the USDCNY rate to hold lower after the recent apparent attempt to engineer confidence that the Peoples Bank of China will maintain the floor. On that front, developments late Friday in the US are contributing to fresh worries that the US and China are not heading toward détente on trade policy as US Trade Adviser Navarro was out issuing a broadside against Wall Street banks attempt to lobby the White House to cut a deal with China. “If and when there is a deal, it will be on President Donald J. Trump's terms -- not Wall Street terms.” And just in case the message wasn’t clear: “If Wall Street is involved and continues to insinuate itself into these negotiations, there will be a stench around any deal that's consummated because it will have the imprimatur of Goldman Sachs and Wall Street.”
In other news over the weekend, the attempt at cobbling together a Brexit deal may be faltering as May’s own party is in revolt over the current negotiating position and she may not have the votes in parliament even if the EU can be brought round to the current terms. The week ahead looks critical for whether a Brexit summit can be squeezed in before the end of the month. The December EU summit focus is apparently earmarked for discussing Italy, so the pressure is on. Sterling is offered, but more against the hard charging USD than in EURGBP terms.
Chart: EURUSD - weekly
EURUSD support giving way with a bang in late Asia / early Europe today, jump starting the energy level for the week ahead as we first focus on whether the move holds for a daily close and then where we proceed next. We have discussed the 61.8% Fibo level of the entire early 2015 to early 2018 rally at 1.1186, but on aggressive move today, the sell-off may have more aggressive ambitions, at least into the 1.1000 area.
One of the factors driving USD strength is the inability of the USDCNY rate to hold lower after the recent apparent attempt to engineer confidence that the Peoples Bank of China will maintain the floor. On that front, developments late Friday in the US are contributing to fresh worries that the US and China are not heading toward détente on trade policy as US Trade Adviser Navarro was out issuing a broadside against Wall Street banks attempt to lobby the White House to cut a deal with China. “If and when there is a deal, it will be on President Donald J. Trump's terms -- not Wall Street terms.” And just in case the message wasn’t clear: “If Wall Street is involved and continues to insinuate itself into these negotiations, there will be a stench around any deal that's consummated because it will have the imprimatur of Goldman Sachs and Wall Street.”
In other news over the weekend, the attempt at cobbling together a Brexit deal may be faltering as May’s own party is in revolt over the current negotiating position and she may not have the votes in parliament even if the EU can be brought round to the current terms. The week ahead looks critical for whether a Brexit summit can be squeezed in before the end of the month. The December EU summit focus is apparently earmarked for discussing Italy, so the pressure is on. Sterling is offered, but more against the hard charging USD than in EURGBP terms.
Chart: EURUSD - weekly
EURUSD support giving way with a bang in late Asia / early Europe today, jump starting the energy level for the week ahead as we first focus on whether the move holds for a daily close and then where we proceed next. We have discussed the 61.8% Fibo level of the entire early 2015 to early 2018 rally at 1.1186, but on aggressive move today, the sell-off may have more aggressive ambitions, at least into the 1.1000 area.
The G-10 rundown
USD – this USD move pressurizing the USDCNY situation, even if the immediate technical focus is on the big EURUSD level giving way this morning as Asian FX is still held back by the gravity of CNY’s low volatility.
EUR – the euro bearing the brunt of the USD strength on the big technical break this morning – and we haven’t even seen a notable re-aggravation of the Italian yield spreads. Broad based EU uncertainty is a critical factor as 2019 looks like a very challenging year ahead for Europe with Italian populists still on the rampage, EU parliamentary elections in May, Macron’s popularity collapsing and political uncertainty as Merkel’s replacement will be found in December and may lead to new elections.
JPY – the JPY weaker versus the rising USD, but less so than the other majors and this resilience in the crosses could become more pronounced given the bid in US treasuries and especially if risk appetite rolls over for the worse.
GBP – sterling weaker than a very weak euro on fresh Brexit concerns, administering GBPUSD traders an ugly case of whiplash. Headline risk for sterling this week prominent.
CHF – EURCHF at risk of breaking down even as the news flow on Italy has not picked up pace – watching the sub-1.1350 lows. USDCHF, meanwhile, has cleared new highs for the year as of this writing, with a hold higher opening up the range to 1.03+
AUD – AUD under pressure against the USD along with nearly every other currency, though it isn’t getting the worst of it, which could change suddenly on any sign that China will allow the CNY floor to go.
CAD – If USDCAD can stay clear of the 1.3200 area, the next focus is the range high ahead of 1.3400. Some of the jolt weaker in CAD may be related to the restating of GDP for 2015 and 2016 announced late last week, which were linked to the collapse in energy prices at the time.
NZD – the kiwi maintaining the upper hand versus the AUD as the jolt higher in NZ yields on recent earnings data and the Reserve Bank of New Zealand meeting has held up.
SEK – Swedish CPI up on Wednesday and will be the arbiter of whether the move below the range support in EURSEK will hold. We’re not hopeful for the bullish SEK case if risk appetite begins to sour broadly on this USD move higher.
NOK – the krone bouncing back slightly on the attempt by Saudi and Russia clearly getting uncomfortable with the slide in oil prices and have tried to jawbone the market back higher over the weekend. EURNOK remains uninspiring until it clears the range lows and USDNOK actually at risk of breaking up if it can pull clear of 8.50.
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