Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
FX Update: We are nearing peak tightness.
John J. Hardy
Chief Macro Strategist
Summary: After US yields and the US dollar leaped to the strong side again after a mostly in-line US September jobs report, the only question for investors is whether we are nearing peak tightness from the Fed or still have some weeks or even months to go before “something breaks”. The USDJPY exchange rate, for its part, is breaking higher, trading significantly above 145.00 for the first time since Japanese officialdom checked a prior rally above that level over two weeks ago. The Thursday US September CPI release is the calendar highlight of the coming week.
FX Trading focus: We are nearing peak tightness
The US September jobs and earnings data was hardly riveting stuff, but the market reacted strongly to it, nonetheless, as US yields tore back to the highs for the cycle at the front end of the curve and the US dollar stormed higher on the combination of higher US yields and weak risks sentiment. The key development that may have driven the reaction was the official US unemployment rate dropping back to the modern record low at 3.5%. This suggests the Fed will have to stay on message for now with its tightening regime. As well, the broader U-6 unemployment rate dropped back to its record low of 6.7% as well, after rising 0.3% to 7.0% in August. Next steps will be the September US CPI print this Thursday and the Retail Sales data for September on Friday. The latter suggest a rather slow pace of spending growth, with core “less Autos and Gas” sales generally sliding in month-on-month comparisons since early this year.
A spike in geopolitical angst is not helping as we start a new week as the US moves ahead with further measures to cinch off semiconductor sales to China and on Russia’s response against Ukrainian civilian targets after unknown operatives significantly damaged the Kerch bridge, the only road link between the Russian mainland and the Crimean peninsula.
Chart: AUDUSD
The RBA dovishness is aggravating inflation risks for Australia from a currency angle as the currency hits new lows versus the USD for the cycle below the prior cycle low of 0.636. Worth noting that the exchange rate has only seen one monthly close below the current level since….2003. A couple of interesting data points are up tonight in Australia, including the latest Westpac Consumer Confidence Survey, Household Spending Survey (was up 15% in August!) and NAB Business Confidence survey. The Aussie weakness also felt heavily in the crosses here, as AUDCAD drops to new lows and AUDNZD is threatening the key 1.1250 area again, which it may not survive on a third test.
Two things worth watching in Asia this week if US treasury yields stick at these high levels or trader higher still: whether USDJPY becomes a bit unhinged and rips toward 150.00 if the Bank of Japan/Ministry of Finance maintain radio silence for now. This is possible if the intent of the prior round of intervention was more to check the pace of JPY weakening rather than defending any absolute level. And if the USDJPY rate does continue notably higher, the pressure may pick up on the USDCNH rate to pull to new highs after not really sticking the move above the prior high water of 7.20 (traded to nearly 7.27 on September 28, only to close the day back below 7.20.). The pressure is building on USDCNH and the volatility is coming at an awkward time for the Chinese political calendar.
As far as the title of this article: I do believe we are nearing peak Fed tightness, and that is likely to mean that we are nearing peak US dollar as well, although I don’t have a sense of whether we are already “there” or have another 25-50 basis points to go at the short end of the yield curve. As well, the USD rollover to weakness could take two-three years or even longer to develop into a new trend, if we look at how prior major regime shifts unfolded in 2001-2003 and in the incredibly protracted 2008-2014 experience. That would make sense in the context of the current cycle as the USD will still retain a liquidity premium as the world goes through recessionary dynamics that will likely prevail wherever this bear market in equities bottoms out in the perhaps year to eighteen months ahead.
Table: FX Board of G10 and CNH trend evolution and strength.
The surge in oil prices after last week’s OPEC+ production cut announcement offering CAD and NOK a helping hand in some of the crosses. AUD is getting the worst of it here as the RBA dovishness sits poorly in a rising yield environment. As noted above, watching CNY and JPY closely here.
Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD looking heavy again as 1.1250 is a kind of bull/bear line (and a close below would conveniently see our trending indicator turn negative as well). Elsewhere, NOKSEK looks close to pivoting higher on the comeback in oil prices, while the new EURGBP “uptrend” looks far from convincing tactically.
Upcoming Economic Calendar Highlights
- 1300 – US Fed’s Evans (voter 2023) to speak
- 1300 – ECB Chief Economist Lane to speak
- 1700 – US Fed Vice Chair Brainard to speak
- 2200 – Australia Sep. CBA Household Spending
- 2330 – Australia Oct. Westpac Consumer Confidence Index
- 0030 – Australia Sep. NAB Business Conditions/Confidence
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