Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
FX Update: FOMC meeting proves low hurdle for USD bears
John J. Hardy
Global Head of Macro Strategy
Summary: The FOMC meeting last night failed to produce any indication of new easing measures from the Fed, an initial disappointment, but one that was quickly wiped away as Powell and company entirely failed to indicate any concern with recent market developments. Elsewhere, GBPUSD is breaking above major resistance on fresh hopes of a last second Brexit deal breakthrough.
Today’s FX Trading focus:
FOMC wrap – Fed signals little, market says don’t worry, be happy
The FOMC meeting brought no new easing, but market quickly shrugged this off – as the Fed generally failed to remark that it saw any dangerous side effects in what it is doing.The language in the monetary policy statement was only tweaked slightly, with the guidance on how long the Fed is set to continue with its current pace of purchases altered to indicate that it will be maintained “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” In the accompanying economic and policy forecasts, the Fed slightly upgraded its growth and inflation forecasts for 2021 and 2022 but left the forecasted PCE inflation rate for 2023 unchanged at 2.0% - which fits with the dot plot continuing to see 12 of 17 Fed forecasters still seeing no rate hikes through the end of 2023 (a modest change from September, when 13 of the 17 saw no change). The unemployment rate forecasts were adjusted strongly lower, to 3.7% (from 4.0% in Sep.) by end 2023.The press conference flagged no real financial stability concerns and the Fed is clearly now far more optimistic – that could lead to the next policy mistake, but for now the market is in a see-no-evil, hear-no-evil mood, as seen in the “everything up” trade quickly resuming in the wake of the FOMC meeting last night.
In other US news, US Retail Sales in November were very weak, supporting the belief that the incredible stimulus impulse in the spring was the chief driver of the initial V-shaped comeback in the US economy and aggravating fears of a drastically slowing momentum into a Covid-19 plagued winter. The November headline data was out at –1.1% month-on-month versus –0.3% expected, and the October data point was revised a full 0.4% lower. The core “Ex Auto and Gas” number was down –0.8% month-on-month versus +0.1% expected, and the Oct. Number was revised down 0.3%. This weak data may have held up the US Treasury market for now, which was curiously non-reactive to the (a market convinced that inflation and reflationary global boom is coming would surely want to sell long maturity treasuries?).
On the stimulus front, the negotiations on the shape of the US stimuluspackage have taken a new turn as stimulus checks for everyone are back as an option, if only likely to prove half of the size of the first checks of $1,200 sent out in the spring. We are likely moving toward a deal in coming days.
For today, interesting to see how the market absorbs another bad weekly initial claims number today, if that is what we get – but equally if the treasury market is reactive to strong data surprises in either direction.
Chart: GBPUSD weekly
The combination of fresh Brexit breakthrough hopes and weak USD have GBPUSD challenging the huge 1.3500 level and we could see a rapid spring to 1.4000 or even higher toward the early 2018 top north of 1.43 on a last minute breakthrough here after the recent doubts cast a shadow over sterling and squeezed the prior round of hopeful positioning in the currency.
Brexit – the final sprint for a deal after all?
The fact that the knotty UK fisheries issue has been declared the “last remaining hurdle” for a Brexit deal in some news stories, leads to the belief that a deal has been struck on the state aid issue formerly thought to be the chief remaining hurdle for agreement. If a framework for the latter has been agreed, then we are far more likely to finally see the breakthrough that seemed in doubt in recent days. Both sides made somewhat morehopeful sounds yesterday, with EU Commission President Von Der Leyen suggesting a narrow path to a deal and UK Prime Minister Johnson sounded less pessimistic than in previous day. A breakthrough before Christmas? GBPUSD is teasing above the big 1.3500 level and could spring to 1.4000 quickly on a deal announcement with a eak USD backdrop. The medium to longer term ceiling could prove quite low for sterling, however, as the structural issues that dog the currency are the same as for the US (large external deficits), although admittedly, sterling has a far cheaper starting point relative to the US dollar.
The G-10 + CNH rundown
USD – the dollar bears found the FOMC meeting a low hurdle to clear as it may take significant to see the “substantial further progress” in the economic data that would create any risk of Fed action, especially given that the momentum of the US data at present is running the wrong way.
EUR – the euro is higher versus the USD, but not leading the pack. EURUSD traders to keep focus toward 1.2500+ with tactical support now arguably moving up to 1.2175-1.2200.
JPY – the “interesting” scenario did not obtain, but rangebound treasuries allow JPY to follow other currencies higher versus the USD and we remain curious to see what happens if JPY continues to power higher in terms of the heavy short-JPY retail positioning in Japan.
CNH – USDCNY has yet to hit the bottom of the range even with the USD running lower elsewhere, suggesting China doesn’t want to lead in the strength department for now, even as the spread between CNH and CNY is about as wide as it gets with clear pressure in the offshore market to follow the USD lower. Key policy signals could be ahead from China after the Central Economic Work Conference wraps up tonight. More here.
GBP – as noted above, the latest lean in the news and commentary is that a last-second-deal will be pulled out of the hat, with an agreement in principle likely to keep conditions on the ground (customs-wise) unchanged into the New Year, with formal treaty signing not for another few months.
CHF – the SNB shrugs off the US treasury calling it a currency manipulator. Don’t see any reason for CHF to outperform with this backdrop as EURCHF could probe back toward top of range at minimum as long as Brexit deal breakthrough in the cards.
AUD – strong jobs figures overnight and strong risk sentiment and commodities prices are a boost – just have that pesky dark music from the trade spate with China in the background. The next objective is 0.800-0.8100.
CAD – AUDCAD is breaking higher as that pair often shows directional correlation with AUDUSD, so USDCAD may not be a leader in expressing. Eventually would like to get contrarian on AUDCAD for geopolitical risks for AUD, but patient on that front- maybe around parity?
NZD – the NZD finance minister expressed a lack of concern on NZD strength overnight, boosting the kiwi briefly, but AUDNZD is still champing at the bit to bust higher through the 200-day moving average above 1.0650 – backdrop is supportive for more upside. Another leg higher to 1.0750 helps to turn the chart structure focus higher.
SEK – doing what it is supposed to do with the ga-ga strong risk sentiment and we could be set for a run at the 10.00 level if all of the risk appetite cylinders continue to fire here and we take out the sub 10.12 lows.
NOK – would expect NOK to prove an outperformer versus SEK and EUR on a continuation of hopes for the global reflationary trade – Brent doing its part to support the upside potential here.
Upcoming Economic Calendar Highlights (all times GMT)
- 1200 – UK Bank of England Rate Announcement
- 1330 – Canada Nov. Home Price Index
- 1330 – Czech Central Bank Rate Announcement
- 1330 – US Weekly Initial Claims / Continuing Claims
- 1330 – US Nov. Housing Starts / Building Permits
- 1330 – US Dec. Philadelphia Fed Survey
- 1900 – Mexico Overnight Rate Announcement
- 2145 – New Zealand Nov. Trade Balance
- 2330 – Japan Nov. National CPI
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