Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
FX Update: USD slide arrested as yields rebound. JPY weak.
John J. Hardy
Global Head of Macro Strategy
Summary: The combination of a drop in US treasury yields but a benign risk sentiment backdrop is typically USD-negative, and the big dollar broadly lost altitude on a drop in yields after a weak ISM Manufacturing report yesterday. But yields have rebounded today in Europe, helping a weak yen weaken further while the USD tries to recover. Elsewhere, the RBA pause on rate hikes partially deflated a fresh AUD rally attempt and the RBNZ is up tonight and more likely to surprise dovish than hawkish.
Our Q2 Outlook, titled The Fragmentation Game is now out.
Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team
FX Trading focus: USD weakness fades today as yields rebound. JPY was weak and weakened further, in part on crude oil spike. AUD churns before and after RBA. RBNZ on tap.
The US dollar was perched at the key EURUSD resistance in the 1.0930+ area at its highs today on the combination yesterday of lower US treasury yields on a weak ISM Manufacturing report, and the market’s benign assessment of the situation (i.e., risk appetite is still firm) - the most USD-negative combination available. Elsewhere, the USD had already broken sharply lower versus sterling after the well-defined sub-1.2450 pivot gave way this morning. Rather comical that that move unfolded and was extending even as the perma-dovish BoE’s Tenreyro was out this morning talking up the need for easier policy: “In the absence of further counterbalancing cost-push shocks, I judge inflation is likely to fall well below target.” The BoE maintains the most aggressively complacent view on inflation over the next 12-24 months relative to its peers, a big risk for the bank’s credibility.
Alas, yields have rebounded and eased a portion of yesterday’s drop, helping to aggravate the weakness in an already vulnerable JPY as the new Japanese financial year gets underway. The yield factor hasn’t correlated consistently of late with the JPY drop, but the surge in crude oil prices is certainly a JPY-negative on Japan’s total reliance on imported supplies. It’s easy to write it off as unexplainable volatility from which we can draw few conclusions as a new Japanese financial year gets underway, but EURJPY, for example, bears watching as it teases the upper edge of the recent range north of 135.00, just as EURUSD also did today. I suspect we could continue to see erratic JPY moves until we have Kazuo Ueda in action and especially around the first BoJ meeting under his leadership on April 28.
Chart: EURUSD
EURUSD has once again teased the 1.0930 area resistance today, the fourth day running it has done so without engineering a proper break. An extension higher requires the difficult, if possible, combination of weaker US data that continues to deflate Fed rate expectations out the curve but doesn’t trigger weaker risk sentiment. A firming in yields today helped walk the EURUSD back lower today, but bears can’t really build a downside case here until or unless we erase the 1.0800-1.0750 zone on a sudden lurch lower. Either way, difficult to see the action sustained for long in this nervous area between that downside swing area and the 1.1000+ resistance.
The RBA paused its rate hike cycle yesterday as expected, a decision that capped an upstart sharp AUD rally into the meeting. Market expectations for an RBA pause had been quite firm, but AUD shorts might have been spooked by data yesterday showing that house prices rose sharply in Sydney by 1.4% in March and nationwide prices showing their first advance after ten months of declines. In any case, AUD rallied hard yesterday ahead of the meeting, which only produced the expected pause and a partial deflation of the rally. The new monetary policy statement retains a bias for further tightening, and positioned today’s hold on further increase as something the “provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.” As of this writing, AUDUSD is still hanging on to the break above the 200-day moving average around 0.6750, but the AUDNZD rally from yesterday has more completely reversed course, although note a tilt in our assessment of the more likely RBNZ surprise side below.
RBNZ – more room for a dovish surprise? The RBNZ is expected to hike 25 basis points to bring the rate to 5.00%, taking its rate to the highest among G10 currencies, just ahead of the US. The market has priced another 25 basis points of further tightening beyond tomorrow’s decision before the RBNZ peak, but at the big round 5.00% level we could have the risk that the RBNZ feels it has done enough for now and would like to indicate that it may like the option to pause soon if it doesn’t pre-commit (somewhat like the RBA today and Bank of Canada recently) after this decision after decelerating from a 75 basis point hike in November to a 50 basis point hike in February and then the 25 basis points tonight. Still, we have perhaps 60% odds that we get a hike and a bias for further tightening with no specifics, 30% odds of some dovish “pivot optionality” similar to the language. 10% odds of a insistence on maintaining a hawkish message because of the kinds of concerns expressed in the February statement (for example, that spending to address a recent flooding disaster could have an additional inflationary impact).
Table: FX Board of G10 and CNH trend evolution and strength.
The US weakness only exceeded now by CNH weakness and the HKMA was also out intervening in the USDHKD rate to maintain the upper edge of that trading band. The AUD has rebounded from aggravated weakness of two weeks ago, but has yet to show a sustained rally. NOK and CAD not getting as much of a boost as one might expect from the oil surge. Sterling enjoying broad strength.
Table: FX Board Trend Scoreboard for individual pairs.
AUDUSD needs to maintain above the 200-day moving average and follow through higher to confirm the new uptrend attempt here. NOKSEK has softened up the long downtrend with this latest reversal, but may only be ready to get something new going to the upside if oil prices can sustain a run higher as well.
Upcoming Economic Calendar Highlights
- 1400 – US Feb. JOLTS Job Openings
- 1400 – US Feb. Factory Orders
- 1430 – UK Bank of England Chief Economist Huw Pill to speak
- 1730-45 – Fed speakers Cook and Collins at conference
- 2245 – US Fed’s Mester (non-voter) to speak
- 0200 – New Zealand RBNZ Official Cash Rate decision
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