Bond. Long Bond(s)
Chief Investment Officer
Summary: A fresh bout of broad-based dollar strength brought multi-month lows for most other currencies. Yen and yuan were jolted and that sparked a reaction from authorities. Focus now on US ISM services to gauge if US economic momentum can continue to outweigh the slowdown in China and Europe. Meanwhile, BOJ tweak speculation sees more weight than intervention risks and CAD prone to volatility as BOC meets.
The US dollar saw an impressive move to 104.90 overnight, taking out the August peak and printing a fresh near 6-month high. Gains came on the back of higher Treasury yields due to a rush of corporate supply, while inflation fears also made a comeback as Brent crude oil broke above the key $90-mark. A broader risk-off sentiment, driven by weakness in China Caixin services PMI and downward revisions in Eurozone PMI putting the limelight back on the growth outperformance of the US economy, also underpinned the resounding gains in the US dollar, with the DXY index now staring at 105.80 strong resistance. Surprisingly, Fed Governor Waller, who is typically a hawk, hinted at a pause for the September meeting, but his comments did not provide any hinderance to the US dollar uptrend.
Focus today will be on the Fed’s Beige book and ISM non-manufacturing. The beige book may shed some light on one-off items driving consumer spending in the third quarter, such as entertainment events. If risks to Q4 spending are highlighted due to the rise in credit card delinquencies or pandemic savings starting to run dry, market focus could shift back towards growth concerns. The ISM services gauge is expected to have weakened only slightly from July’s 52.7, given the support from entertainment spending. However, if the print moves closer to the 50-mark, risks of a contraction in the services sector into Q4 could be elevated and this could bring some consolidation or reversal of the USD upmove. An upside surprise may add more fuel to the USD fire, especially after the weaker Eurozone prints this week.
Higher Treasury yields refreshed the pain for the Japanese yen as US and Japan yields continued to widen. USDJPY printed fresh 10-month highs of 147.82 in the Asian morning today, building on the overnight gains. Fresh highs ironically came after a round of verbal intervention with currency chief Kanda-san asserting that speculative moves could prompt action. Yen weakness was however more a dollar strength story, rather than pronounced yen weakness.
Yen’s verbal intervention begs the question whether a real intervention is likely? As we have seen in the past, real intervention barely reverses the course of the yen sustainably. The last BOJ intervention resulted in yen gains for two days, before the weakness came back. As such, intervention may only be impactful if monetary policy is geared in the same direction, i.e. the direction of yen strength.
The next question, then, is whether the BOJ could consider another tweak to its monetary policy at the September 22 meeting? With Japan’s 10-year yield still below 0.7%, or 30bps below the new 1% ceiling, there will be little room for the yields to rise if BOJ moved to further raise the ceiling. So any effective move will have to be towards ending the negative interest rate policy, but that may only come if USDJPY moves beyond 150, which is not completely off the mark if oil prices extend gains further. Comments from BOJ member Takata hinted at scope of a policy tweak. He flagged progress in the goal to achieving sustainable 2% inflation. He stayed away from direct FX comments but was heard commenting on (the end of) negative rates, spooking more speculations of a September tweak.
While Japanese authorities stopped at verbal intervention, things got real on the Chinese side. USDCNH moved above 7.30 overnight and the move extended to a high of 7.33 in the Asian morning despite a strong +1000pips fixing signal from the PBoC reaffirming the stance to defend any rapid decline in the yuan. That prompted a stealth intervention by Chinese authorities and state-owned banks were in the market selling USDCNY to support the yuan. Moves in onshore yuan filtered through to the offshore pair as well and USDCNH moved lower to 7.3140.
Bigger focus is on the broadening out of China’s property sector reforms after earlier reforms seemingly supported only the tier-1 and stronger tier-2 cities. Property developer stocks were however lifted today as Chinese state media outlet the Securities Times had an article calling for the removal of “unnecessary” home buying curbs in non-first-tier cities. Such a move can further help ease the funding pressure on developers, so may provide a temporary relief to sentiment and Chinese assets.
AUDUSD was hurt the most in the ascent of the US dollar, with a miss in China PMI, broader risk-off and RBA standing pat, all at once. Australia’s Q2 GDP growth of 2.1% YoY came in above expectations (1.8%) but slowed from Q1 (2.4%). While headline growth appeared strong at 0.4% QoQ, the per-capita growth fell 0.3% QoQ suggesting a technical per-capita recession which is currently being masked by population growth due to immigration. Household consumption was also up a mere 0.1% QoQ, so overall GDP growth was only supported by exports and government spending. This may mean that the RBA’s pause can turn into an end of the tightening cycle unless inflation comes back roaring higher. AUDUSD has found support at 0.6360 for now, but a decisive break below could bring November lows of 0.6270 in sight.
Meanwhile, CAD was the strongest currency on the G10 board on Tuesday with support coming from higher oil prices after Saudi Arabia and Russia extended production/export curbs through to the end of the year which saw Brent breaking above the key $90/barrel mark. The setup going into the BOC meeting today is proving to be complex with oil price surge again raising inflation fears globally which may caution the central bank against a clear dovish turn that is demanded by the weak growth metrics.
Bond. Long Bond(s)
Bond. Long Bond(s)
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.
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.
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.
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.
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.
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