Head of FX Strategy
Summary: Flash October PMI out of Europe nothing to write home about as the narrative in the EU is all about whether Germany and the rest of core EU is ready to switch to expanded fiscal outlays. Draghi likely to press the case for fiscal at his final press conference as ECB chief today. We await a speech from US Vice President Pence that may cool hopes for market friendly trade deal outcomes.
The final ECB with President Draghi at the helm is up later today, with Draghi leaving amidst unprecedented turmoil in the ranks on the ECB’s latest restart of QE. Draghi will likely make a last gasp effort to make clear that fiscal stimulus is really the only policy tool left even if he formerly was ever ready to assuage the market that the ECB had more monetary policy tools in its arsenal to provide further easing. An FT article (paywall) discusses the “architect” of Germany’s strict debt limits, Christian Kastrop, a former finance ministry official, who is now out saying that Germany needs to issue massive debt to invest in infrastructure, technology, and climate initiatives to compensate for years of under-investment.
The US Federal Reserve is having a challenging time getting ahead of USD liquidity pressures into year-end as fresh signs of stress in the system had the NY Fed out yesterday announcing an expansion in its daily repo operations to $120 billion ahead of month-end, up from the current $75 billion. What will the level be for the end of December rush to shrink G-SIFI balance sheets to avoid penalties? $300 billion? More?
The Riksbank supported SEK today – at least in the knee-jerk reaction – in delivering unchanged guidance for “most probably” hiking in December rather than pushing the rate hike further over the horizon. However, the longer term guidance was lowered to zero for a “prolonged period”, suggesting that the Riksbank remains uncertain about the outlook for growth, and the statement also saw the bank retaining easing potential (rate cuts or expansionary policy “in some other way”) in the event “the economy were instead to develop less favourably.” GDP estimates for this year and next were lowered slightly, but the core CPI forecast for 2020 was raised to 1.8% vs. 1.7% previously. The subsequent price action suggests the immediate reaction might be overblown – other key elements needed to stitch together a SEK-positive story – like an upswing in the global growth outlook and EU (and Swedish) fiscal stimulus.
Interesting to watch how aggressively EM central banks like Turkey, out announcing a rate cut today, and the Russian Central Bank, which will cut rates tomorrow, can continue to guide for lower policy rates. Turkey is slashing rates as quickly as it can and in Russia’s case, it is likely happy with the exchange rate where it is and would like to bring as much easing as it possibly can to support a sluggish economy with lower rates. This will erode the carry potential for investors in Russian assets, of course, and present risks of outflows in the event risk sentiment swings to the negative side.
Chart: EURUSD
The euro stuck in neutral here as the market has many irons in the fire here – especially important for the euro is whether the ECB signals from here that it is at the end of the road on rate cuts and QE and is ready to assist as an auxiliary to support fiscal initiatives across the EU. We have pointed out the importance in EURUSD of the 1.1210 area, the location of the 200-day moving average and a major Fibonacci level. Already, the recent rally has neutralized the downside focus, but backfilling on the lack of EUR-positive catalysts is a risk, with 1.1000 as an approximate “pain threshold” for recent long positions.
The G-10 rundown
USD – the dollar is not sending any notable signals at the moment as traders are handcuffed on all fronts by uncertainty over the meaning and implications of the USD liquidity issues (complacent assumption is that the Fed remains on top of this), geopolitical concerns on the US-China trade. US Vice President is set to make a major speech on China that could bring pressure to bear on risk appetite and hopes for a US-China trade deal if it echoes his stance at a notable broadside against China last year.
EUR – the euro not getting the signal it wanted from the flash PMI’s this morning as France surprised positive while Germany remains mired in weakness with the dire 41.9 flash October Manufacturing PMI barely lifting from the September level and the Services PMI declined slightly to a fresh multi-year low. Not thinking that the ECB is a catalyst for much activity today.
JPY – Japan’s flash October manufacturing PMI at a new low for the cycle and the services PMI dropped a couple of points as well. JPY weakness looking a bit extended relative to the last few days of action in sovereign bond markets.
GBP – uncertainty now on the length of the Brexit extension, with France pressuing for a tighter deadline of mid-November while others would allow until end-January. A decision likely tomorrow. A shorter deadline wouldn’t allow time for an election.
CHF – strong risk appetite this morning supporting EURCHF higher, but possibly drawing more attention are the increasing signs out of Germany on swinging toward the need for fiscal stimulus adding to upside pressure there as well. EURCHF has yet to clear the 1.1050 hurdle.
AUD – AUD treading water after never having taken the pivotal 0.6900 area in AUDUSD – risks to aUD from here incoming data from Australia and US-China developments – including Vice President Pence speech today.
CAD – the oil rally yesterday offers a bit of support for CAD, but our chief focus is on whether the Bank of Canada outlook is justified in the event we have widening evidence that the US and Canada are headed for a recession.
NZD – this is the area to test the downside again for NZDUSD bears, as long as the recent highs stay intact.
SEK – The Riksbank decision benign for SEK and could see EURSEK testing key 10.60 area. For continuation lower through 10.50 and more, we may need to see a path opening up to EU fiscal (Swedish fiscal stimulus would be even more supportive) and continued stable to improving risk appetite.
NOK – the Norges Bank meeting sees a very terse statement issued indicating they continue to expect an unchanged policy rate and only modest mention of the weak NOK: “the weak krone may result in higher inflation ahead”. This statement doesn’t look like a catalyst by itself.
Upcoming Economic Calendar Highlights (all times GMT)
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
