House View: Dollar in focus as equities push to March highs

Anders Nysteen

Quantitative Analyst, Saxo Bank Group
Anders has a degree in Physics and Nanotechnology from the Technical University of Denmark and holds a Ph.D. in Quantum Photonics.

FOREX: We are seeing a 'status check' on USD this week as trade tensions may come back into focus.

 • USD: rally has faltered as long US yields remain capped, risk appetite returns.
 • US: trade war back in focus this week with hearings on Trump tariff plans Tuesday through Thursday.
 • FX volatility: risk appetite very strong until proven otherwise; this presents a challenge to the strong USD trend.
 • SEK: run higher largely triggered by positioning, may run out of steam if no new SEK-positive catalysts.
 • EURUSD: first sentiment test on consolidation around 1.2000 level and 200-day SMA just above (1.2020).
 • GBP: latest Bank of England meeting triggers more weakness but the big support level (1.3500 in GBPUSD) is so far holding.
 • JPY: strong risk appetite, stable yields, and high oil prices very negative... big structural focus on the 110.00 area.
 • EM: currencies seeing big relief as risk spreads contract, volatility does likewise, USD rally fades.
 • NZD: sharply weaker after dovish surprise and two-way policy potential comments from the Reserve Bank of New Zealand last week.

Tech levels on watch for developments

 • AUDUSD: Big resistance zone (trend-line and former range) up into 0.7600-50.
 • USDJPY:  110.00 has been twice tested and 200-day moving average is just above - a pivotal area for the yen.
 • GBPUSD: 1.3500 is an area with significance stretching back to global financial crisis, etc.

Trade themes

 • Tactical USDCHF downside: Bears to trade for 0.9800 area consolidation if price action remains below 1.0050.
 • AUDNZD upside: watching for extension as high as 1.1300 eventually, 1.1000 to start.
 • EURNOK downside: bears to stay short with price action below 9.60; 9.50 as break could trigger a run to 9.25.

EQUITIES: Global equities have their March highs in sight.


 • Remain neutral on US equities until S&P 500 Index breaks above the 2,800 level; stronger USD is likely to be a headwind.
 • Remain positive on EM equities as long as MSCI EM stays above the 1,130 level (recent lows); strong USD is key risk.
 • Remain neutral on UK equities despite strong momentum; would like to see January highs taken out first.
 • Remain positive on European equities as a weaker EUR provides tailwind and the macro surprise cycle is likely to turn.
 • Remain positive on Hong Kong equities as long as Hang Seng stays above 29,000; potential upside catalyst is China stimulus and A-shares inclusion.
 • Switching to positive from neutral on Japanese equities as momentum is strong and a weaker JPY helps exporters.

Industries / factors

 • Highly leveraged and value factors are the worst performers. As long as USD interest rates remain high, this trend will continue.
 • Preferred industries: semiconductors, retailing, software, apparel, technology hardware.
 • Least preferred industries: media, telecom, beverage & tobacco, biotechnology, household products.
 • Minimum volatility stocks are the strongest performer in the past week; investors becoming more defensive?


 • The US 10-year interest rate (smoothed 60-days) is the highest since Q3 2011.
 • The recent turn in the G10 macro surprise cycle has been rejected and is close to the worst levels since Q2 2013.
 • While we remain positive on EM, as the Chinese A-shares inclusion in June will attract inflow, EM is fragile to rising rates.
 • Stronger oil prices will impact inflation; recent surge has removed energy sector from the least-preferred list.
 • Tariffs and trade war concerns have not faded. Trump is considering 20% tariff on imported cars and ZTE situation is fluid.

BONDS: High-yield sales fell but high demand keeps valuations tight. Investors hold off EM bonds as USD surges.


 • The yield of 10-year US Treasuries continues to trade below 3% as investors start to sell riskier bonds in the EM space.
 • Although Italy may soon have a populist government formed by the Five-Star Movement party and the Northern League, Italian bond spreads remain stable and near a two-year low. What keeps investors positive is a stronger financial industry and improved growth outlook, however markets seem to forget that these parties are looking to implement policies which will cost approximately €30 billion, adding to Italy's large extant debt.
 • The spread between two- and 10-year Treasury yields has hit a new low, making it the yield curve the flattest since 2007. There is more room for flattening as  the Federal Reserve continues to be hawkish and the Treasury increases the supply of short-term  bonds to fund its rising deficit.


 • US high-yield bonds gained last week  with B and Caa rated bonds outperforming.
 • Sentiment for high-yield corporate bonds remains positive as junk bond issuance remains light and equities are rallying. Moody's expect US junk bond defaults to decline to 1.5% in one year, from more than 3% today.

Investment grade

 • US high-grade bonds look ripe for allocation as IG spreads have widened since the beginning of the year. The average yield for US high-grade 10-year corporates at the moment is above 4%

Emerging markets

 • EM start to become weaker as USD strengthens. Argentina, Turkey, and Indonesia  are some of the first victims
 • Chinese high-yield corporate bonds are coming under more and more pressure as investors grow more cautious in the primary. Political risk adds to weakness.
 • S&P raises Egypt's sovereign rating to B as economic growth is strenghtening. The yield of Egyptian sovereigns with maturity January 2027 has fallen to 6.8%, approximately 50 basis points on the news.

COMMODITIES: Supply disruptions raising Brent range to between $71 and $82/barrel.


 • An ongoing and future threat to supplies from Venezuela and Iran has shifted Brent's trading range sharply higher.
 • Downside risks: Extended fund long, rising US rig count, and potential cessation of the Opec/Russia deal.
 • Sanctions and tariffs together with rising fuel prices may eventually lower outlook for global growth and demand.
 • Bias: Brent taking aim at Saudi Arabia's preferred target of $80/b with support at $75/b.


 • Gold stuck in $1,300 to $1,365/oz range with rising dollar off-setting geopolitical tensions.
 • Hedge funds currently unprepared for an upside break after cutting the gross-long to a 26-month low.
 • Bias: Bullish above $1,300 with s/t focus on a $1,326 break. Neutral below $1,280/oz.
 • Silver continues to find relative strength against gold with the ratio to gold sitting above 80.
 • Copper: Rangebound between $2.95/lb and $3.3/lb with focus on global trade tensions and China slowdown.


 • We are turning bullish the agriculture sector as a countercyclical hedge
 • The grain market is currently a battle between ample stocks and unfavourable weather potentially impacting new crops.

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