Macro Monday (week 8): Low volatility, golden central banks
Saxo Head of APAC Macro Strategy Kay Van-Petersen looks at key issues including central bank policy, the US' border security emergency, and ongoing low volatility.
Head of FX Strategy, Saxo Bank Group
Summary: Canada has arrested Huawei’s CFO at the behest of the USA as she stands accused of violating Iran sanctions. China has protested the move and global risk appetite has nosedived, and barely registered the China’s commerce ministry putting a positive spin on trade negotiations with the US this morning.
The arrest yesterday in Canada of Huawei’s CFO on charges of violating US sanctions against Iran set global markets on edge overnight, to say the least. Huawei has received considerable negative attention outside of China on national security concerns related to its mobile telephony and network technology and is banned from use by US government employees.
As well, its 5G mobile network equipment has already been banned in New Zealand, Australia and the UK. This echoes the risk I have mentioned in previous updates that targeted sanctions against Chinese companies could be as much of a risk for keeping the US-China relationship rocky as the risk of further tariff implementation.
This story appears to be the proximate cause of the very ugly downdraft in risk appetite overnight, with the Asian session seeing its heaviest selling of equities in weeks. US equity futures opened after yesterday’s closure in such a frenzy of selling that the CME was forced to implement brief trading pauses to keep the market orderly. Suddenly, the US S&P 500 is staring down the lows for the cycle just a couple of days after trying significant resistance several percent higher (2,810 is the hurdle for a more risk-on stance).
In FX, volatility spiked higher, but the heavy hand of China over its exchange rate is likely muffling volatility potential at every turn as such a bloodletting in equity markets would normally see more cross-market contagion, particularly into EM. The heaviest selling was in AUD, showing the high sensitivity we expected to all things US-China related.
An interesting test of market sentiment arrived this morning as a Chinese Commerce Ministry spokesperson was out this morning putting a positive spin on hopes for a trade agreement with the US, ticking all the boxes that the market would probably have welcomed with far more enthusiasm were it not for the arrest news overnight. The spokesperson specifically mentioned the US’ 90-day negotiation window and listed most of the menu of negotiation areas (cyber was missing from the list) and stated that the US and China have a high level of consensus and that the ultimate joint goal is to remove all new tariffs.
Yesterday, the Bank of Canada waxed cautious in its outlook in its latest monetary policy statement. The market was already a heavy seller of CAD in recent sessions, but the dovishness in the outlook cleared the bar of expectations and USDCAD reached new highs for the year above 1.3400, opening the range to the next major chart level just shy of 1.3800. In the statement, the BoC noted that the large downward revisions to past GDP levels could mean more space for Canada’s economy to grow without aggravating inflation. It also upped the profile of trade conflicts as a risk to the Canadian economy. The January hike that the market had priced at 75% odds is now priced at mere 25%.
The AUD sell-off took on new urgency in overnight trading as fresh longs were send running for cover by market developments and the risk that the US-China relationship may be taking a turn for the worse. The rejection of the entire recent rally sequence suggests a top is in place until proven otherwise, potentially setting us up for a try at the lows and then some to the downside, though the gravity of China defending the CNY floor could make life difficult for AUD bears looking for a more notable trend to develop here.
The G10 rundown
USD – the US dollar is mostly coming out on top on the strength of risk aversion, though mostly only against the riskier currencies in G10. The USD bid versus EM is a couple of standard deviations less than one would expect in normal times – wondering if the USDCNY cap is preventing EM volatility here… Headline risk mounting again.
EUR – the euro is impressing by managing to more or less tread water versus a strong US dollar – strength in the crosses could persist here, though we’re increasingly concerned on the economic outlook.
JPY – the yen safe haven bid may not come in with full force until China allows the CNY to float – until then the JPY only seems to rise modestly versus the USD and across the board when risk deleveraging is in full swing.
GBP – the endgame is approaching for Brexit and the outlook is as hazy as ever. May looks a lame duck here as parliament is taking control. Cheating the deadline is still the most likely scenario in the wake of parliament officially rejecting May’s deal next Tuesday.
AUD – more pain for the AUD on deteriorating risk appetite and risks from a fresh angle to the US-China relationship over Huawei overnight. The deep reversal back through 0.7300 in AUDUSD suggests a technical top is in place and will warm bear’s hearts for a try at the cycle lows below 0.7100.
CAD – a big blow for the loonie as BoC waxes dovish – still prefer CAD slightly in the crosses like AUDCAD and NZDCAD, but a bit of patience on those may be required. USDCAD may look toward 1.3800+ if risk-off and weak oil prices persist.
NZD – AUDNZD pushing lower still on the Aussie’s woes. Bears may look to take profit soon there, especially if NZDUSD continues to reverse lower (testing the 200-day moving average this morning).
SEK – we like EURSEK lower towards 10.00 if the Riksbank does hike at the December meeting, but the degree of risk aversion makes life a bit more difficult for SEK bulls – not traditionally a currency that performs well in white knuckle markets.
NOK – OPEC meeting today could provide developments for oil markets. Until oil posts a more notable rally and risk appetite improves, NOK may default to the weak side.