Head of FX Strategy
Summary: The US dollar is resurgent as risk sentiment went on tilt in Asia and the Europe offered up woeful flash June PMI’s, taking EURUSD well south of 1.0900 again and challenging a reversal of the recent attempt to rebuild an up-trend. Elsewhere, NOK and GBP failed to sustain rallies in the wake of larger-than-consensus 50-bp hikes from Norges Bank and Bank of England yesterday with NOK even poking at new local lows on the weakening of energy prices and the weak Eurozone numbers.
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FX Trading focus:
Norges Bank hikes 50, initial rally reverses
The Norges Bank hiked 50 basis points, which only a large minority expected, triggering a knee-jerk rally in NOK, if one that entirely failed to sustain by the end of the day. This shows that rate moves are a marginal consideration for NOK at best. By later in the day yesterday, a steep sell-off in crude oil and European gas benchmarks weighed on the currency, even as short Norwegian rates stuck a move higher on the day. Weak risk sentiment in Asia overnight and ugly European PMI’s this morning (more below) weighed further on NOK, even taking EURNOK to a local new high even as the euro came under intense pressure versus the US dollar. USDNOK rocketed back above 10.80 after touching 10.50 for a heart-beat yesterday and is at risk of entirely reversing the attempt to establish a down-trend after retreating from the high just shy of 11.30, posted at the end of May.
Bank of England hikes 50, GBP shrugs
The Bank of England went with a larger hike than the consensus expected, taking the policy rate 0.50% higher to 5.00%. The market marked up the peak BoE rate to above 6.00% early next year, but Gilt yields hardly reacted beyond the 1-year time horizon, with the peak at the very front-end of the curve only marked several basis points higher. This kept EURGBP relatively sideways, with GBPUSD moves less about the BoE and more about the US dollar. Discussions of the incoming UK mortgage resets for 2-year debt from Q3 extending a year forward remind us of the painful incoming impact on household disposable income in the UK. Some 800,000 households face a mortgage reset on 2-year mortgage debt that will be on the order of 500 basis points and another 1.6 million will reset next year, according to a Reuters article. The burden falls heaviest, of course, on younger borrowers who have the highest loan to equity ratios. If widespread default develops as a risk, can only imagine that the government drums up a rescue plan before it allows widespread evictions, but that is getting ahead of ourselves. For now, this event just shows that the market has largely priced about as much as it can for BoE action at coming meetings and continues to fret the eventual fallout to the economy as seen in the ongoing inverting of the UK yield curve.
Chart: AUDUSD
Weak narrative around China’s outlook, a dovish set of RBA minutes after two hawkish surprises that had recently pumped up Australian rates and the recent setback in risk sentiment (particularly in Asia) had the AUDUSD on the defensive this week. The sell-off has taken the pair into critical levels, even below the 200-day moving average here intraday today. This is beginning to look like a full reversal of the rally wave from the early June lows, especially now that we find ourselves more than a figure below the original 0.6800 breakout area to the upside. The coming few sessions should tell us whether the pair can dig itself out of the hole or if we are headed for a full capitulation back to the sub-0.6500 lows of earlier this month. Without a brightening outlook in China-centered sentiment and possibly the CNH, the downside remains the side of least resistance.
Euro and EURUSD after weak Eurozone flash June PMIs this morning.
Weak preliminary EU PMI’s this morning shocked Eurozone rates lower, with the German 2-year Schatz yield off some 10 basis points as of this writing as the market brings forward ECB peak and reduces expectations for the number of hikes beyond the July meeting (less than 50 bps priced to peak ECB after today’s figures). France’s ugly miss on Services (48.0 vs. 52 expected and 52.5 in May) and Germany and Eurozone Manufacturing PMI dipping to new cycle lows of 41.0 and 43.6, respectively were the negative low-lights. The data sent EURUSD into a tailspin, but this local sell-off has not yet reversed the prior large rally wave. That would require a capitulation below perhaps 1.0780-1.0750, but the technical outlook in the bigger picture remains in limbo as we continue to coil in the range established early in the year, as the attempt up through 1.1000 in April-May was rebuffed. A significant move lower requires perhaps one side of the “USD smile” to kick into gear, whether weak risk sentiment on the one side or higher Fed/higher long US treasury yields on the other. The euro needs a stronger economy and for strong risk sentiment to return (and broad risk-sentiment strength, as in, not just AI-linked themes)
Next week
In past cycles, next week’s economic calendar might have been more highly anticipated, but given the tepid reception of larger-than-expected rate hikes this week and the market thoroughly ignoring Fed Chair Powell’s two days of testimony this week, there is little anticipation of drama at next week’s ECB Sintra conference (Tuesday and Wednesday), with speakers from many of the major global central banks. Other highlights include the German IFO Survey on Monday (Expectations rolled over slightly in May after several months of improvement), US June Consumer Confidence on Tuesday, Germany flash June CPI on Thursday, Eurozone flash June CPI on Friday, and finally the tardy May US PCE inflation data on Friday.
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY and CNH remain bottom of the pile, but precious metals are also very weak (anticipated longer term inflation drop flatters anticipated higher real yields in part). Also note the incredible turnaround in AUD in momentum terms over the last week, which has only neutralized the prior rally, taking the trend back to zero. The Canadian dollar looks too strong without resurgent oil prices/risk sentiment as BoE expectations doing too much of heavy lifting there.
Table: FX Board Trend Scoreboard for individual pairs.
Huge reversals in NOK pairs yesterday with follow through today, NOKSEK perhaps most spectacularly with the new highs yesterday harshly rejected, although EURNOK and USDNOK require a look as well. EURAUD has flipped, NZDUSD is trying to register a flip to a negative trend.
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
