Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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All eyes on Asian FX as renminbi firms
John J. Hardy
Global Head of Macro Strategy
Summary: The first indications that China is allowing its currency to strengthen set Asian currencies on edge. Elsewhere, the FOMC this week is expected to bring little to the table.
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Friday offered plenty of crosscurrents in FX as a strong US jobs report confusingly saw the US dollar retreating even as US treasury yields squeezed back higher, Later in the session, the greenback did rally a bit into the close of trade for the week. Some of that odd action in the dollar was down to a pointed move lower in the USD/CNH exchange rate, which pushed to a multi-month low of 7.2200 on Friday and was taken out in overnight trade today. This is the first sign in a long time that that China is allowing its currency to strengthen notably versus the US dollar, and the aftershocks are appearing across much of Asian, the Japanese yen a notable exception (remember the big dovish BoJ surprise last week). The epicenter of the impact was in the Taiwanese dollar, which is thinly traded and couldn’t absorb a sudden avalanche of new flows. It rose 6% on Friday and another few percent overnight before stabilizing a bit. This kind of move in the Taiwan dollar is unprecedented in modern history. Elsewhere, the action was less dramatic but still considerable, as the Malaysian ringgit powered sharply higher and the Singapore dollar is not far from its multi-year low versus the greenback. Clearly, the Trump tariff threat has Asian reassessing its mercantilist policies and considering the impact this will continue to have on their currencies, with the more freely tradeable currencies absorbing the implications the quickest, while China is moving very slowly thus far.
Chart: USDCNH
USDCNH is suddenly the currency pair to watch as the action late last week was the first time in a long time that China allowed such a pronounced move against the US dollar when the latter was not under significant pressure elsewhere. It could be a kind of delayed recognition that the US dollar has weakened considerably since the beginning of the year, a move that the USDCNH exchange rate has not really absorbed yet. For example, the powerful EUR rally in March and April meant that the EUR/CNH rate rose above 8.33 in April, it’s highest level since 2014. From here, the pace of any further CNH strengthening in USD/CNH terms as well as its breadth and whether it remains independent from the broader USD direction are the most interesting aspects to watch. The 7.00 level is the next obvious psychological and technical focus.
The week ahead Today: Wednesday: Thursday: Bank of England. It’s time for another rate cut from the Bank of England, which the market has fully priced in. Guidance will be pivotal here as the June BoE meeting is priced about 50-50 for a further cut. (Also critical for sterling is the direction of risk sentiment – sterling got pummeled on the risk-off downdraft into Liberation Day and will likely remain sensitive to any fresh ugly market volatility bouts.) US Weekly Initial Jobless claims – the high frequency labor market indicator that needs to flash red if we are headed into recession in the US. Last week’s spike was interesting, but apparently chiefly driven by a one-off spike in New York schoolteachers, who can oddly file for benefits during the Easter break. Friday: FX Board of G10 and CNH trend evolution and strength. The CNH momentum shift is the most notable development here – will this persist? AUD clearly picking up some interest (note 2-day and 5-day positive momentum shifts) from the firmer CNH and the key AUDUSD rate is trying at new multi-month highs in the Asian session.
US April ISM Services – this survey has been frustratingly erratic, but still worth watching the employment sub-index for any counterpoint to the strong US jobs report Friday as well as the overall level of the headline index after March’s steep decline to 50.8. Some of that was driven by the March employment sub-index cratering to 46.2 from 53.9 in February.
FOMC: Looking for minimal drama from the FOMC this week, with expectations at nil for a rate cut at this meeting and the June expectations sharply lowered after the strong jobs report. June is only in play if we get clear labor market data weakening before that meeting - Fed will see itself as data dependent with so little clarity on how the trade deals will shape up. Trump can’t help himself in further criticizing Fed Chair Powell as a “total stiff” and calling for rate cuts, though he reiterated he has no plans to fire Powell.
Norway’s Norges Bank and Sweden’s Riksbank. Gathering clouds for the Norwegian economy on the weak oil prices, but Norges Bank may keep cautious on lowering the rate outlook if it wants to keep NOK from fresh weakness. EURSEK has found new equilibrium around 11.00 with Riksbank not likely to add anything new to the equation as their rate cut cycle may be done (at the margin, some pricing of one last reduction to get the policy rate to an even 2.0%).
Canada’s April employment numbers. While CAD has strengthened back below 1.4000 in USDCAD, there is little for the Canadian economy to celebrate as the economy looks set to enter a recession. The jobs data never moves in a straight line, but could remind the market that Canada is not in a good place.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Table: NEW FX Board Trend Scoreboard for individual pairs.
Note the highlighted AUD pairs are set to switch to AUD-uptrends today if the AUD strength holds – driven clearly by the CNH firmness. Elsewhere, I am having a hard time getting behind the JPY crosses that have switched into uptrends – let’s see how these shape up in the coming couple of sessions.
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