Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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CNY strength tames the USD comeback attempt
John J. Hardy
Global Head of Macro Strategy
Summary: The reaction to the trade ceasefire started fizzling already yesterday as investors question some of Trump’s claims on what was agreed. Another strong session for the CNY, however, makes its own point and has dragged the USD down again with USDCNY overnight.
The market’s reaction to the trade cease-fire began fading already late yesterday as journalists were unable to corroborate some of Trump’s claims on what was agreed with other administration officials, where the garbled response made it clear that the president may be playing loose with the truth or have over-interpreted something that was said.
As well, neither Chinese state media nor Chinese officials have corroborated the entire discussion of a 90-day time frame, China’s promises to buy more US products, nor a reduction of tariffs on US cars that was trumpeted only in a Trump tweet. The only evidence from the Chinese side, indeed, are vague statements about a commitment to slowly reduce the trade imbalance and an obvious immediate commitment to strengthen CNY over the last couple of sessions, as USDCNY has pushed down to new two-month lows since the weekend summit.
The CNY strength overnight looks the chief driver of the weakening USD since yesterday’s bounce. And we’ll continue to second guess the importance of this deal for markets as long as the long end of the US yield curve remains subdued – a real sign of safe haven seeking and concern about the economic growth outlook.
Portions of the belly of the US yield curve are beginning to invert as the market suggests that the Fed is already getting too tight. The US 10-year yield benchmark yesterday closed south of the pivotal 3.00% level as well. With weaker risk appetite, questions on the trade deal and lower long US yields, it appears USDJPY may finally be waking up.
Below we discuss the risk of a profound reversal in AUDJPY if the market decides the US-China relationship is as shaky as ever and on the risks to Australia’s economy as China’s growth model changes, commodity prices remain subdued, and Australia’s credit cycle takes a turn for the worse. Overnight, the Reserve Bank of Australia’s Philip Lowe continues to put a positive spin on the state of the economy, but concerns look a bit more prominent as he stated that “one continuing source of uncertainty is the outlook for household consumption.
Growth in household income remains low, debt levels are high and some asset prices have declined.” Those assets are real estate assets and data points to Australia’s housing bubble in full reverse, with construction activity likewise beginning to crater. We are looking for ways to express AUD weakness – AUDCAD for now and potentially both AUDJPY and AUDUSD if the recent rally extension in those two pairs reverses.
Chart: AUDJPY
Australian short rates headed another couple of basis points lower overnight in the wake of the RBA meeting and AUD a bit more on the defensive in broad terms. The recent upside break in AUDJPY could prove a red herring here if risk appetite continues to sour on US-China relationship concerns and if long yields in the US continue to head lower, which tends to support the yen. The 83.00 area was the key level on the way up.
As well, neither Chinese state media nor Chinese officials have corroborated the entire discussion of a 90-day time frame, China’s promises to buy more US products, nor a reduction of tariffs on US cars that was trumpeted only in a Trump tweet. The only evidence from the Chinese side, indeed, are vague statements about a commitment to slowly reduce the trade imbalance and an obvious immediate commitment to strengthen CNY over the last couple of sessions, as USDCNY has pushed down to new two-month lows since the weekend summit.
The CNY strength overnight looks the chief driver of the weakening USD since yesterday’s bounce. And we’ll continue to second guess the importance of this deal for markets as long as the long end of the US yield curve remains subdued – a real sign of safe haven seeking and concern about the economic growth outlook.
Portions of the belly of the US yield curve are beginning to invert as the market suggests that the Fed is already getting too tight. The US 10-year yield benchmark yesterday closed south of the pivotal 3.00% level as well. With weaker risk appetite, questions on the trade deal and lower long US yields, it appears USDJPY may finally be waking up.
Below we discuss the risk of a profound reversal in AUDJPY if the market decides the US-China relationship is as shaky as ever and on the risks to Australia’s economy as China’s growth model changes, commodity prices remain subdued, and Australia’s credit cycle takes a turn for the worse. Overnight, the Reserve Bank of Australia’s Philip Lowe continues to put a positive spin on the state of the economy, but concerns look a bit more prominent as he stated that “one continuing source of uncertainty is the outlook for household consumption.
Growth in household income remains low, debt levels are high and some asset prices have declined.” Those assets are real estate assets and data points to Australia’s housing bubble in full reverse, with construction activity likewise beginning to crater. We are looking for ways to express AUD weakness – AUDCAD for now and potentially both AUDJPY and AUDUSD if the recent rally extension in those two pairs reverses.
Chart: AUDJPY
Australian short rates headed another couple of basis points lower overnight in the wake of the RBA meeting and AUD a bit more on the defensive in broad terms. The recent upside break in AUDJPY could prove a red herring here if risk appetite continues to sour on US-China relationship concerns and if long yields in the US continue to head lower, which tends to support the yen. The 83.00 area was the key level on the way up.
The G10 rundown
USD – the big dollar was mounting a comeback late yesterday until CNY rose overnight, as wait to see whether China has committed to steer its currency even farther away from the 7.00 breaking point in USDCNY as a show of good faith while further negotiations on trade are underway. Further CNY strength will muddle the market’s ability to price USD elsewhere – especially if risk appetite remains wobbly.
EUR – the yellow vest movement in France difficult for the market to price so it isn’t pricing it all even if we feel it is a risk. Italian yields are benign here – but this isn’t euro supportive when European Central Bank policy expectations are nil and German bund yields are scraping bottom on a parlous growth outlook.
JPY – the yen finally getting a jolt as the drop in longer US yields has become more profound and is threatening pivotal levels (10-year benchmark and the 3.00% line in the sand – yesterday closed at ). A fresh dose of JPY volatility may return if the market risk appetite sours rather than rally into year-end, as the strong consensus seemed to expect in the immediate wake of the G20 meeting.
GBP – sterling drooping again as parliamentary opposition forces threaten to find May’s government in contempt for not revealing legal advice linked to the Brexit deal. EURGBP is trading at the high end of the range since late September.
AUD – the only development propping up the AUD in this environment is the CNY strength – but our outlook for the Australia economy is weak, major export commodity prices are weak and the large Australian mining stock. The only thing lacking is a technical reversal for AUD bears to get involved and the speculative short has been very slow to clear as well. Australia Q3 GDP up overnight in Asia.
CAD – the loonie can’t seem to get much going here and likely won’t unless oil prices and risk sentiment improve in tandem. And Alberta’s threat to cut oil production speaks volume on how little Canada has been able to leverage higher oil prices earlier this year as it can’t get its oil to market amidst a glut of US production.
NZD – AUDNZD testing the multi-touch rising trendline – could open up for the remainder of the multi-year range all the way below 1.0300 though we see nothing fundamental to drive such a move without further catalysts. But broad NZD strength beginning to look more than a touch overdone. Stay tuned.
SEK – EURSEK drops sharply after a strong manufacturing PMI yesterday – and this suddenly helps the downside case on fresh momentum – can the stubborn pair finally clear the 10.20 area and progress on toward 10.00?
NOK – no fresh spin here – watching Norges Bank’s regions survey today and NOKSEK for whether the downtrend is set to continue after a strong performance put in by SEK yesterday. Norway’s latest CPI and a Norges Bank meeting up next week.
Upcoming Economic Calendar Highlights (all times GMT)
0815 – Switzerland Nov. CPI
0900 – Norway Nov. Region Survey
0930 – South Africa Q3 GDP
1230 – Sweden Financial Stability Council Press Conference
1500 – US Fed’s Williams to speak
1600 – New Zealand Nov. QV House Prices
0030 – Australia Q3 GDP
USD – the big dollar was mounting a comeback late yesterday until CNY rose overnight, as wait to see whether China has committed to steer its currency even farther away from the 7.00 breaking point in USDCNY as a show of good faith while further negotiations on trade are underway. Further CNY strength will muddle the market’s ability to price USD elsewhere – especially if risk appetite remains wobbly.
EUR – the yellow vest movement in France difficult for the market to price so it isn’t pricing it all even if we feel it is a risk. Italian yields are benign here – but this isn’t euro supportive when European Central Bank policy expectations are nil and German bund yields are scraping bottom on a parlous growth outlook.
JPY – the yen finally getting a jolt as the drop in longer US yields has become more profound and is threatening pivotal levels (10-year benchmark and the 3.00% line in the sand – yesterday closed at ). A fresh dose of JPY volatility may return if the market risk appetite sours rather than rally into year-end, as the strong consensus seemed to expect in the immediate wake of the G20 meeting.
GBP – sterling drooping again as parliamentary opposition forces threaten to find May’s government in contempt for not revealing legal advice linked to the Brexit deal. EURGBP is trading at the high end of the range since late September.
AUD – the only development propping up the AUD in this environment is the CNY strength – but our outlook for the Australia economy is weak, major export commodity prices are weak and the large Australian mining stock. The only thing lacking is a technical reversal for AUD bears to get involved and the speculative short has been very slow to clear as well. Australia Q3 GDP up overnight in Asia.
CAD – the loonie can’t seem to get much going here and likely won’t unless oil prices and risk sentiment improve in tandem. And Alberta’s threat to cut oil production speaks volume on how little Canada has been able to leverage higher oil prices earlier this year as it can’t get its oil to market amidst a glut of US production.
NZD – AUDNZD testing the multi-touch rising trendline – could open up for the remainder of the multi-year range all the way below 1.0300 though we see nothing fundamental to drive such a move without further catalysts. But broad NZD strength beginning to look more than a touch overdone. Stay tuned.
SEK – EURSEK drops sharply after a strong manufacturing PMI yesterday – and this suddenly helps the downside case on fresh momentum – can the stubborn pair finally clear the 10.20 area and progress on toward 10.00?
NOK – no fresh spin here – watching Norges Bank’s regions survey today and NOKSEK for whether the downtrend is set to continue after a strong performance put in by SEK yesterday. Norway’s latest CPI and a Norges Bank meeting up next week.
Upcoming Economic Calendar Highlights (all times GMT)
0815 – Switzerland Nov. CPI
0900 – Norway Nov. Region Survey
0930 – South Africa Q3 GDP
1230 – Sweden Financial Stability Council Press Conference
1500 – US Fed’s Williams to speak
1600 – New Zealand Nov. QV House Prices
0030 – Australia Q3 GDP
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