USD firm even as dovish December hike seen
Head of FX Strategy
Summary: The USD holds the line as the Fed moves on towards its likely December hike while trade war concerns play out into the weekend's G20 summit.
Recently appointed Fed vice-chair Richard Clarida was out speaking on the economy and monetary policy yesterday and expressed a confident outlook in the economy while continuing to advocate a data-dependent policy stance. A glance at US short interest rates going nowhere in a hurry yesterday despite the USD posting a solid bounce suggests that the market is clutching at straws in trying to derive a signal from this speech.
Still, Bloomberg parsed the speech and highlighted a slight shift in Clarida’s language: in his first speech in his new position he touted the need for “some further gradual adjustment” which was reformulated to yesterday’s more vague “gradual policy normalisation.” The article argues that this could be the new policy guidance for the December 19 Federal Open Market Committee monetary policy statement, which the market is beginning to price as a dovish hike scenario. Expectations strongly favour a hike at that meeting, with the highest odds for 2019 only seeing one further rate hike for the cycle; Powell will be out speaking late today.
The strongest signal from the Treasury market would be taking the longer yields lower despite the torrent of Treasury issuance this year. Our focus is on the 3.00% level for the 10-year Treasury note, as a break below would suggest a rejection of the attempts higher and likely a bleaker outlook for risky assets. The market absorbed the large auctions of two- and five-year notes very well on Monday and yesterday, respectively, and seven-year notes are on the block later today. Auctions for 10-year notes and the 30-year T-bond are up December 12-13.
US President Trump is full of the usual bluster ahead of a dinner this Saturday with China’s Xi at the Buenos Aires G20 summit, dangling the idea of slapping tariffs on another $267 billion of Chinese imports and vowing to increase the extant tariffs from 10% to 25% on January 1. Many argue this is merely his usual tactic of starting with an aggressive opening position. Trump’s chief economic adviser Kudlow says that talks between the US and China are ongoing “at all levels” ahead of this weekend’s meeting and that President Trump is open to a deal, while the general line is that China has to offer more from its side to address US concerns.
Our most optimistic scenario is a cease-fire on further escalation in tariffs and an agreement to re-engage in talks as China makes vague promises that may take considerable time to verify and still don’t avert the longer-term risks of a trade war. Not sure how the market is pricing this event as there are many moving parts leading to asset markets’ recent funk.
Chart: USDCAD (weekly)
USDCAD is pushing higher and coming up against a major resistance level just ahead of 1.3400, a break of which shifts the focus all the way to the 1.3800 area highs of 2017. The collapse in oil prices has weighed on CAD, although many Canadian producers never even benefited from higher oil prices in the first place due to supply gluts on a lack of overseas export infrastructure now that US crude production is booming again.
The credit cycle has turned tighter in Canada and the overextended housing market is clearly beginning to feel the squeeze. Still, US-Canada two-year yield spreads are stuck in a tight range and in the middle of the range established over the summer, so we arguably need a negative catalyst to send USDCAD significantly higher.
USD – the greenback is bid, but the market clearly waiting for Trump-Xi developments before making a decision here. Interesting to see the USD resilience even as Fed rate expectations fall – is this a safe haven bid?
EUR – the EURUSD retracement after the recent bullish reversal cutting uncomfortably deep as we traded below 1.1300 yesterday, but we won’t know the lay of the land until taking the market’s temperature next week after the G20. Signs of broad economic weakness in the EU even before the empty-toolbox European Central Bank has fully withdrawn from its QE programme have taken over Italian budget concerns as a driver of euro weakness.
JPY – USDJPY bid into 114.00 even as US rates have eased lower recently and the bounce in risk appetite has been meagre at best, while the collapse in oil prices is a distinct JPY positive. This is not the USDJPY of yore and we struggle to piece together a narrative to explain what is going on here.
GBP – little movement in sterling versus the euro as May has backed away from Parliamentary demands to vote on changed versions of the Brexit deal or even a call for a second referendum. Headline risks will remain high for the duration.
CHF – EURCHF trading to new local lows even without Italian budget woes adding to the mix as growth concerns in Europe take centre stage. The SNB will be increasingly not amused if EURCHF drops below 1.1200.
AUD – the persistent AUD bid in the crosses looks like a vote in favour of a positive outcome to Xi-Trump talks this Saturday, so AUD crosses likely to show the most beta to a negative outcome.
CAD – as indicated above CAD a weak link here, though the relative weakness in the crosses like AUDCAD and NZDCAD beginning to look excessive – these pairs will move either way in the wake of the Xi-Trump talks at the G20.
NZD – a fresh financial stability report couldn’t scare up any excitement for trading the kiwi overnight as the RBNZ has moved to ease mortgage lending limits as the housing market faces pressure. AUDNZD is showing its lowest average daily trading range in the last 1000 trading days if not ever (my indicator only looks back 1000 days).
SEK – I tweeted a chart yesterday (@johnjhardy) showing that the Swedish economy is not what it used to be in external surplus terms. The current account has collapsed to below 2.5% of GDP over the last couple of years and former trade surpluses are a thing of the past, with the latest October data showing a large SEK -8.4B shortfall. Still, SEK looks cheap versus the euro.
NOK – the krone suffering recent weakness on the massive slide in oil prices, but EURNOK stayed within the range to 9.80 established in early September.
Upcoming Economic Calendar Highlights (all times GMT)
• 0830 – Sweden Oct. Retail Sales
• 1300 – ECB’s Coeure to Speak
• 1305 – South Africa SARB deputy governor to speak
• 1330 – US Oct. Advance Goods Trade Balance
• 1330 – US Q3 GDP Revision
• 1500 – US Oct. New Home Sales
• 1520 – ECB’s Praet to Speak
• 1630 – UK Bank of England publishes Brexit analysist, Financial Stability Report
• 1645 – UK BoE’s Carney Press Conference on Financial Stability Report
• 1700 – US Fed Chairman Powell to Speak