Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief Macro Strategist
Summary: The Japanese yen remains firm and could rise further as long as global yields continue to head lower. The trend could even accelerate on any fresh volatility in risk assets.
Trading interest
A Bloomberg article out this morning highlights tight conditions for USD liquidity with a look at the currency swaps market, where there are signs of strain as basis swaps make lending in USD expensive. The article offers examples that illuminate the difficulties for foreign bond investors – particularly Japanese investors, to realize attractive returns or any returns at all on a hedged basis. Aggravated USD liquidity shortages are a wrecking ball for global assets - particularly in emerging markets.
The leader of Italy’s Lega party, Matteo Salvini faces a tough path to snap elections due to the need to pass a budget this fall – according to an FT article (paywall), “No election has been held in the early autumn since 1919.” Parliament is out of session but returns inside of two weeks, when it will hold a no-confidence vote. Italy’s yields spiked versus core EU yields (10-year Germany-Italy spread rose about 30 bps) on Salvini announcing he would like new elections as the market anticipates existential EU strain linked to Salvini demands for more generous fiscal outlays. While the timing of an election is uncertain, Lega’s popularity has risen in the polls sufficiently to indicate that a centre-right majority coalition might be possible with Berlusconi’s Forza Italia and the Brothers of Italy party.
Late last week we suggested markets are at pivotal levels after the partial recovery from last week’s latest US-China trade tension escalation. Within G-10 currencies, AUDUSD is our basic proxy, where the focus remains lower as long as we remain below the 0.6825-50 area. Remarkably, the Japanese yen continues to grind higher and didn’t need much support from bond markets as USDJPY scrapes new lows. With Trump threatening sanctions and intervention on any major trade partner moving to ease monetary policy, the BoJ policy mix looks unmovable for now. A continued run lower in USDJPY toward at least 100.00 looks possible. Concerns that the EU will remain slow to respond to the growth slowdown and the risks to the economy from Brexit could keep EURJPY on a downward trajectory to the 110.00 area.
The economic calendar for the week ahead is rather light, but a few interesting points, including tomorrow’s German ZEW survey for August – after July saw the worst Current Situation component since 2010. Also tomorrow we have the US July CPI data. Wednesday sees Germany’s Q2 GDP estimate (expected negative) as well as the EU GDP estimate. Thursday’s Norges Bank meeting is the central bank highlight of the week in G10. More discussion of individual calendar highlights in the G10 rundown below.
Chart: EURJPY
EURJPY saw its lowest weekly close since early 2017 last week and could continue to grind lower as the BoJ look set to maintain course while the rest of the world eases and the EU is in a world of hurt with the risk of a recession that could risks further aggravation from a hard Brexit. Not much in the way of support in the longer term chart here until down towards 110.00.
The G-10 rundown
USD – firm outside of the G3 and versus the CHF, but could fall versus the hard charging JPY. US CPI up tomorrow and Retail Sales on Thursday, but economic data is not in the driver’s seat for the USD outlook – liquidity and trade issues are paramount.
EUR – the euro not much of a safe haven currency – interesting data points through tomorrow’s German ZEW and interesting to watch how the market treats Italian debt as a new election looms eventually.
JPY – remains firm and if risk appetite, at key levels entering this week, fades again, the currency could continue to drive higher, driven by strong bond markets/falling yields.
GBP – EURGBP cleared new highs above 0.9300 this morning and GBPUSD staring down 1.2000 as no relief in sight for hard Brexit risks, with the EU side showing no signs of backing down.
CHF – playing copycat to JPY moves and hard Brexit risks are adding a bit of extra fuel to the CHF strength. EURCHF looks heavy as long as it stays below 1.10.
AUD – heavy below 0.6800 again in AUDUSD as the ongoing collapse in iron prices has added a new negative angle on the Aussie over the last week on top of the US-China trade tensions. Key employment data release on Thursday sets the tone further.
CAD – Canada was overdue a weak employment report after an absurdly positive April data point of +106.5k and that’s what we got at -24.2k for July – hard to use the data series for much. More supportive was the hourly wage figure, which rose to a robust +4.5% year-on-year in July – the highest since the financial crisis. But can CAD stay ahead of a firm US dollar? 1.3300-25 is the decisive area in USDCAD.
NZD – surprisingly little follow-on weakness in NZD after Adrian Orr’s dovish broadside. Still looking for downside risks via AUDNZD and NZDUSD/NZDJPY, etc.
SEK – Swedish CPI up on Wednesday as the focus this week on EURSEK cyclical top above 10.80 if risk appetite worsens.
NOK – market suspects the Norges Bank could see its determination to maintain a hiking bias softened at this Thursday’s Norges Bank meeting and weaker oil prices are providing pressure as well as EURNOK last week the highs since the global financial crisis above 10.00.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)