Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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BoJ futility continues, ECB seen as dovish
John J. Hardy
Global Head of Macro Strategy
Summary: Soft risk sentiment continues to weigh on Asian bourses, with JPY serving as a proxy for risk appetite as markets retreat from their post-December 26 local highs.
Risk sentiment remains rather weak after an ugly session for US equities yesterday. US-China trade talks are going nowhere fast as the Trump administration cancelled lower-level talks with two Chinese officials scheduled to come to Washington ahead of next week’s visit of Liu He, the Chinese Vice Premier, purportedly due to disagreements over intellectual property rules.
This was justly taken as a sign that the promise of a trade deal has stalled at best, and the contentious issue of the Huawei CFO and whether Canada will extradite her to the US for trial is a dangerous factor at play as well. Overnight, the People's Bank of China injected a massive CNY 257.5 billion in one-year liquidity with the first use of the “TMLF” (Targeted Medium-term Lending Facility), a tool announced in December. Meanwhile, USDCNY was pushed back lower below 6.79 overnight after four days of higher closes.
Overnight, the Bank of Japan drastically cut its fiscal year 2019 inflation forecast (the year starting from April 1) to a paltry 0.9% from the prior 1.4% projection. This engineered a modest JPY sell-off overnight, though Kuroda’s rhetoric failed to show any dramatic change of stance despite the implications of BoJ futility with its current policy mix. From here, would still suspect that JPY crosses are an FX proxy for broader risk appetite – important if the world’s major equity markets have now topped out after the impressive comeback from the late December lows.
Little on the agenda today save for watching whether new highs in many GBP pairs can hold (important 1.3000 level in GBPUSD not far away, EURGBP, GBPCHF and GBPJPY all breaking here) and watching headlines and animal spirits ahead of tomorrow’s European Central Bank meeting.
Chart: EURJPY
An important test within the G3 awaits as we watch whether EURUSD breaks down through 1.1300 post-ECB (extensive coverage on this already in recent days). But the relative JPY strength is another interesting point as EURJPY has recently found resistance at the pivotal 125.00 area and could head lower here if the ECB sufficiently impresses with a dovish tilt tomorrow.
This was justly taken as a sign that the promise of a trade deal has stalled at best, and the contentious issue of the Huawei CFO and whether Canada will extradite her to the US for trial is a dangerous factor at play as well. Overnight, the People's Bank of China injected a massive CNY 257.5 billion in one-year liquidity with the first use of the “TMLF” (Targeted Medium-term Lending Facility), a tool announced in December. Meanwhile, USDCNY was pushed back lower below 6.79 overnight after four days of higher closes.
Overnight, the Bank of Japan drastically cut its fiscal year 2019 inflation forecast (the year starting from April 1) to a paltry 0.9% from the prior 1.4% projection. This engineered a modest JPY sell-off overnight, though Kuroda’s rhetoric failed to show any dramatic change of stance despite the implications of BoJ futility with its current policy mix. From here, would still suspect that JPY crosses are an FX proxy for broader risk appetite – important if the world’s major equity markets have now topped out after the impressive comeback from the late December lows.
Little on the agenda today save for watching whether new highs in many GBP pairs can hold (important 1.3000 level in GBPUSD not far away, EURGBP, GBPCHF and GBPJPY all breaking here) and watching headlines and animal spirits ahead of tomorrow’s European Central Bank meeting.
Chart: EURJPY
An important test within the G3 awaits as we watch whether EURUSD breaks down through 1.1300 post-ECB (extensive coverage on this already in recent days). But the relative JPY strength is another interesting point as EURJPY has recently found resistance at the pivotal 125.00 area and could head lower here if the ECB sufficiently impresses with a dovish tilt tomorrow.
The G-10 rundown
USD – an important test of USD resilience over the ECB and whether ECB shift to a more cautious outlook engineers a EURUSD sell-off or if this is largely priced in. Otherwise, watching for USD responsiveness to possible weaker risk sentiment.
EUR – the ECB is the near term event risk – with a bit of interest over the Euro Zone flash Jan. PMI’s tomorrow morning as well. The ECB’s rate hike guidance surely in for a revision, and the market will look for whether this meeting looks like a setup meeting for new easing – Bloomberg and others are discussing the potential for a new TLTRO – as early as March, should the incoming data support this notion. The German ZEW survey of current conditions cratered to 27.6 for January, its lowest since January 2015.
JPY – the yen eases lower again overnight on the BoJ inflation forecast adjustment, but if weak risk appetite continues and US yields head lower again, JPY crosses may trade heavily again – still, JPY implied volatility continues to get crushed after the huge December-early January spike. USDJPY one-month implied went from below 6% in mid-December to spike above 10% over the JPY flash crash and is now back below 7%.
GBP – sterling continues to find resilience as May’s own cabinet is at war over whether to use the threat of a No Deal as a leverage in negotiations with EU counterparts. Consensus increasingly swinging to avoidance of a No Deal, which could at least support GBP toward the bottom of the EURGBP range if the ECB sufficiently dovish.
CHF – GBPCHF poking at the 200-day moving average again – this has been a key indicator for that pair stretching back to a year or more, so stay tuned.
AUD – the Aussie in for a weak session yesterday, but plenty of headline risk and the low volatility in USDCNY likely an obstacle in interest to trade AUD until we get a sense of the US-China trade negotiation outcome.
CAD – USDCAD doesn’t look to be the highest beta play on USD direction. Canada Retail Sales up today. The downside break level in USDCAD (sub-1.3200 lows) will soon converge with the 200-day moving average.
NZD – massive NZD rally versus AUD on the CPI print – far in excess of the implications from the modest upside surprise on that inflation gauge (2-year NZ yields up less than two basis points from two days ago). As important was likely a recent shift in positioning on technical considerations and hopes for a US-China trade deal that were partially dashed yesterday. Australia’s economy is far more leverage to exports to China than New Zealand’s.
SEK – SEK not moving here as we await a catalyst – not helpful at the margin for SEK bulls if risk sentiment suffers further.
NOK – a weakening of risk sentiment and oil prices – which have often been correlated of late – could set in motion a minor NOK long squeeze – certainly frustrating for EURNOK bears that the 9.75 pivot area wasn’t taken out quickly on the recent attempt – risking a further tactical consolidation. Norges Bank up tomorrow – no drama expected.
Upcoming Economic Calendar Highlights Today (all times GMT)
• 1330 – Canada Nov. Retail Sales
• 1500 – US Jan. Richmond Fed Manufacturing
• 1500 – Euro Zone Jan. Consumer Confidence
• 0030 – Australia Dec. Employment Change / Unemployment Rate
USD – an important test of USD resilience over the ECB and whether ECB shift to a more cautious outlook engineers a EURUSD sell-off or if this is largely priced in. Otherwise, watching for USD responsiveness to possible weaker risk sentiment.
EUR – the ECB is the near term event risk – with a bit of interest over the Euro Zone flash Jan. PMI’s tomorrow morning as well. The ECB’s rate hike guidance surely in for a revision, and the market will look for whether this meeting looks like a setup meeting for new easing – Bloomberg and others are discussing the potential for a new TLTRO – as early as March, should the incoming data support this notion. The German ZEW survey of current conditions cratered to 27.6 for January, its lowest since January 2015.
JPY – the yen eases lower again overnight on the BoJ inflation forecast adjustment, but if weak risk appetite continues and US yields head lower again, JPY crosses may trade heavily again – still, JPY implied volatility continues to get crushed after the huge December-early January spike. USDJPY one-month implied went from below 6% in mid-December to spike above 10% over the JPY flash crash and is now back below 7%.
GBP – sterling continues to find resilience as May’s own cabinet is at war over whether to use the threat of a No Deal as a leverage in negotiations with EU counterparts. Consensus increasingly swinging to avoidance of a No Deal, which could at least support GBP toward the bottom of the EURGBP range if the ECB sufficiently dovish.
CHF – GBPCHF poking at the 200-day moving average again – this has been a key indicator for that pair stretching back to a year or more, so stay tuned.
AUD – the Aussie in for a weak session yesterday, but plenty of headline risk and the low volatility in USDCNY likely an obstacle in interest to trade AUD until we get a sense of the US-China trade negotiation outcome.
CAD – USDCAD doesn’t look to be the highest beta play on USD direction. Canada Retail Sales up today. The downside break level in USDCAD (sub-1.3200 lows) will soon converge with the 200-day moving average.
NZD – massive NZD rally versus AUD on the CPI print – far in excess of the implications from the modest upside surprise on that inflation gauge (2-year NZ yields up less than two basis points from two days ago). As important was likely a recent shift in positioning on technical considerations and hopes for a US-China trade deal that were partially dashed yesterday. Australia’s economy is far more leverage to exports to China than New Zealand’s.
SEK – SEK not moving here as we await a catalyst – not helpful at the margin for SEK bulls if risk sentiment suffers further.
NOK – a weakening of risk sentiment and oil prices – which have often been correlated of late – could set in motion a minor NOK long squeeze – certainly frustrating for EURNOK bears that the 9.75 pivot area wasn’t taken out quickly on the recent attempt – risking a further tactical consolidation. Norges Bank up tomorrow – no drama expected.
Upcoming Economic Calendar Highlights Today (all times GMT)
• 1330 – Canada Nov. Retail Sales
• 1500 – US Jan. Richmond Fed Manufacturing
• 1500 – Euro Zone Jan. Consumer Confidence
• 0030 – Australia Dec. Employment Change / Unemployment Rate
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