Forex 5 minutes to read

Time for the narrative to shift

John Hardy

Head of FX Strategy

Summary:  Today is the kind of day where the market narrative may shift, especially if we get solid or better US jobs numbers and bonds sell off and equity markets continue to rally. Full bore strength in risk appetite suggests a fearless market.


Today’s US jobs report arrives at an interesting inflection point for markets, with US yields having backed up to key levels at multiple points on the curve (prior yield lows before the recent run lower) and with USDJPY near the 112.00 level, crude oil at 200-day moving average and major US stock indices a mere couple of percent from all-time highs.

I spoke yesterday of the “circular logic” problem that the prior narrative offered – i.e., that it is hard for risk sentiment to rally further if the market continues to sharply reverse expectations of further accommodation in the pipeline from the Fed and the long end of the yield curve starts to head higher again, given an underlying assumption is that  the  economy is weak and  set to weaken further.

The last bit of the narrative above is the key: if the economy is set to weaken further, then the central banks may find that they are already behind the curve and risk sentiment may roll over anyway again – somewhat like a 2007 scenario. 

But what if instead the major economies bounce back for a time from their soft patch and push back against concerns that a recession is imminent, led by stimulus out of China and the relief from the Fed’s policy about-face? In this scenario, the market decides to celebrate the better economic outlook and the idea that the Fed is set to ease QT nonetheless and might even chop rates if no inflation is in evidence – but certainly won’t raise rates, preferring to let the economy run hot? This is the 1998 scenario we discussed last week in response to a post at themacrotourist.com.

Either way, today is a day that can set the ball of a new narrative in motion – particularly if we get a strong jobs report and US long yields are able to pull higher (steepening yield curve) with no ill effects on risk sentiment. Some support for this scenario is already in evidence if we have a look over at high yield corporate credit spreads and emerging market credit spreads, which are showing absolutely no fear at the moment. In FX, this scenario would likely encourage JPY weakness, perhaps joined in tardy fashion by CHF weakness. On the strong side we would likely find AUD, CAD and especially EM currencies.

Already, the market has reversed odds for a cut by the September Federal Open Market Committee meeting to about 38% from 67% just. The pain trade is a flat FOMC.

Trading interest

Long AUDNZD on dips for 1.0700+, stops below 1.0400
Long USDCHF 2-month calls, strike 1.0100 – cost (with spot at parity this morning): 29 pips!
Otherwise, mostly want to get a feel for market into today’s close for positioning next week.

The latest twists in the Brexit saga are too numerous to cover here, but cross-party talks continue today ahead of a last-ditch summit next Wednesday. The EU side has taken a friendly posture as EU Council president Tusk is reportedly set to offer a 12-month “flextension” that will give the UK up to a year to exit, but the ability to exit much sooner if a deal can be concluded in the interim. The key uncertainty hanging in the ether is whether whatever deal is agreed by May and the Labour opposition is put to a popular vote, a scenario that  risks aggravating uncertainty, given increasing popular support for No Deal (majority in all Welsh and English areas outside of London prefer a No Deal versus Remain, according to a YouGov poll.

Chart: AUDJPY

The AUDJPY pair looks one of the highest beta currency pairs to the theme shift we discuss above – i.e., if the market continues to wax rosy on the global outlook and yields rise. AUDJPY certainly poised at key resistance and ready for an extension higher if this theme prevails.
Source: Saxo Bank
The G10 rundown

USD – global growth optimism is likely not the US dollar’s best friend as the Fed would be seen as slow to react to any fresh pick-up in inflation, but if US growth is seen as outperforming, the greenback might remain firm or better against JPY, CHF, EUR and even GBP, depending on the Brexit process from here.

EUR – strong bounce in German Industrial Production in March, reported this morning, provides a modest sentiment boost. The euro may prove weak in the crosses on a further boost in the global growth outlook and even popular as a funding currency for EM carry trades, if the risk sentiment trend continues to improve.

JPY – the yen looks the high beta currency to any possible pivot in sentiment as outlined above – i.e., US treasuries taking a dive lower, for example, on an ugly US jobs report tomorrow and/or weakening confidence in the state of the global economy.

GBP – raise your hand if you are tired of Brexit. Endgame may not even be nearing despite next Friday’s Article 50 deadline if this all leads to a Soft Brexit agreement that must be put to a popular vote down the road. That second referendum scenario appears only possible rout to No Deal Brexit. 

CHF – surprised to see the price action so persistently close to 1.1200 given the inter-market backdrop. 

AUD – maximum support from the commodity complex and China stimulus hopes seeing AUD strong across the board – and likely to offer high beta to a continued shift toward global growth revival hopes. Note AUDJPY especially as a proxy. 

CAD – USDCAD likely to correlate negatively with the hopes for a global growth revival, and a break blow 1.3250 bearish, while risk off and a stark change of the narrative needed to see a move above 1.3500 again.

NZD – AUDNZD extending higher as AUD gets massive support from commodity complex – latest price action suggests a low is in, looking for at least 1.07-1.08 in coming weeks, especially if global growth hopes are revived.

SEK – backdrop of strong sentiment and hopes that growth slowdown may have bottomed (revived China expectations may boost EU’s export outlook) supportive of a further breakdown in EURSEK.

NOK – oil rally, Norway’s strong rate rises at front end of curve are NOK-supportive and not entirely sure what market is waiting for hereto take EURNOK to lower support.

Upcoming Economic Calendar Highlights (all times GMT)

1230 – Canada Mar. Unemployment Rate
1230 – Canada Mar. Net Change in Employment
1230 – US Mar. Change in Nonfarm Payrolls
1230 – US Mar. Average Hourly Earnings
1230 – US Mar. Unemployment Rate
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