Head of FX Strategy
Summary: The Fed’s almost entirely recycled new monetary policy statement last night kept US yields at the highs of the recent range and keep odds high for a December hike. Meanwhile, long US bonds have bounced back and risk appetite has soured a bit, which has seen the USD and JPY both firming today.
The latest Federal Open Market Committee statement provided no fresh angle on the Fed’s policy intentions, which sends its own message by supporting the market’s assumption that the odds are as good as ever (still curiously only about 75% according to Bloomberg’s assessment) for a December rate hike. The only real change was a tweak to the language describing the current state of fixed business investment, which is now seen as having “moderated from its rapid pace earlier in the year”.
We take the reaction at face value, i.e., that this is USD supportive at the margin. There are a few USD pairs that are now nearing pivotal levels, including EURUSD, which we discuss below, and USDCHF and USDJPY. The yen is clearly marching to the beat of a different drummer than the rest of the non-USD as the yen bid outpaced a strong USD bid this morning as US treasuries bounced and risk appetite soured again.
The Swedish krona finally caught a solid bid yesterday and took EURSEK down through the range lows and the 200-day moving average. The trigger was the Riksbank Governor Ingves telling the Swedish parliament that if the economy continues on the expected course, “it is appropriate to start increasing the interest rate at some point over the next few months, in either December or February.” This isn’t exactly new information, but the market is taking it as raising the odds of a December move.
Not so great timing for these comments, by the way, as Swedish average home prices are starting to show consistent year-on-year declines and the latest in the data series was printed yesterday morning around the time of these comments. It is likely that the Swedish economy will be slowing down or even moving into a recession before the Riksbank ever gets appreciably above zero. If this EURSEK move lower doesn’t hold, expect an ugly squeeze risk.
CAD relative weakness late yesterday to the FOMC really stood out, and may be partially related to story earlier in the day yesterday that 2015 and 2016 Canadian GDP data have been revised sharply lower, even if growth is strong at present (the spin is the collapse in oil prices in 2015 and into early 2016 was a larger negative drag than previously thought – somewhat magnifying the import, perhaps, of the recent large slide in oil prices). Overnight, a headline that the Keystone XL pipeline project has been halted by a US federal judge in Montana pending environmental investigations didn’t exactly help CAD’s cause. Further delays in this project are CAD negative as the inability to get oil efficiently out of Alberta means that many Canadian crude grades are priced with massive discounts.
Charts: EURUSD – Weekly
We’re back to the “how low can it go” question here for EURUSD and would suggest that new uncomfortable headlines on Italy’s budget issue or even just bad EU data (notable deceleration has been consistent, with increasingly widespread awareness that the EU, and Germany in particular, is poorly positioned for a global trade war or even just a global slowdown, given its large current account surplus. First objective lower if 1.1300 is taken out early next week, as we have argued before, would be the 1.1186 Fibonacci level for the entire rally sequence from the early 2015 lows to the highs early this year, and then the round 1.1000 level.
The G10 rundown
USD – the greenback is back higher across the board outside of versus the JPY – reaching interesting levels in many pairs soon.
EUR – hard to believe that the 1.1300 level can hold for a third time next week.
JPY – the yen is more attuned to bonds and risk appetite and both are supporting the JPY this morning – also the recent slide in the yen has been downright brutal, so some consolidation warranted with the market switching gears here a bit away from riskier currencies.
GBP – the 0.8700 area is a big range low in the EURGBP battleground of the moment – the chief speculation from here is whether the UK parliamentary votes can be found more than whether the May government and the EU can agree an exit deal.
CHF – Italy BTP spreads seem to have found a floor and are nudging back the wrong way. As well, the risk-off tone is offering CHF a mild big versus the euro, while USDCHF is staring down those highs since early 2017.
AUD – the Aussie is very stubborn in holding out against this broadside in USD and JPY strength this morning – don’t see how this can last if conditions (risk off, higher USD and JPY) continue to sour. Technically, AUDUSD doesn’t go into full reversal move until well back below perhaps 0.7150.
CAD – USDCAD is more persistently on the move with the oil slide and USD rally – a hold above 1.3200 starts to open up the highs for the cycle . CAD looks unfairly lo versus AUD and NZD.
NZD – for NZDUSD, the key pivot area is 0.6800-50 for a structural reassessment. Probably the latest excitement in Reserve Bank of New Zealand projections after the earnings data this week to fade before we can see NZD underperformance versus peers.
SEK – the SEK strength triggered by Riksbank comments and a new pull higher in Swedish yields at the short end of the curve. The backdrop this morning showing risk off and favouring the JPY is not SEK-supportive, however, so it's important to watch if the shift below 10.30 in EURSEK can hold over the next couple of sessions. A bit of collateral damage from the Norway CPI print as well.
NOK – an ugly turnaround here as a weaker than expected Norway CPI print (+1.6% yoy vs. +1.8% expected), risk off and weak oil prices weigh again – USDNOK pressing on the highs for the cycle again and EURNOK looking to squeeze above 200-day moving average. Tactical risk points to more NOK downside if general mood sours.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Sep. Manufacturing Production
0930 – UK Q3 GDP Estimate
1330 – US Fed’s Williams (Voter) and Harker to speak
1330 – US Oct. PPI
1405 – US Fed’s Quarles (Voter) to speak
1500 – US Nov. Preliminary University of Michigan Sentiment
1830 – UK BoE’s Haldane to speak
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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