Head of FX Strategy
Summary: The larger than expected Fed balance sheet expansion move has largely been shrugged off by markets, while plenty of scepticism is raining down on the longer term implications of the handshake US-China trade deal trumpeted by US President Trump on Friday. Elsewhere, Boris Johnson is running out of time this week in getting a deal in place before the EU summit later this week.
A trio of news stories late last week doing about everything possible to support risk appetite. First was the Brexit negotiation breakthrough last week that could lead to a Brexit deal, second was the handshake US-China trade deal announced by US President Trump, and finally, late on Friday we get the news that the US Federal Reserve will purchase $60 billion per month in US T-bills “at least into Q2” of next year, bringing far more liquidity than many expected. Markets reacted with restrained enthusiasm, outside of sterling and the bond market, where the price action was more exuberant.
For each of these issues, there are plenty of devils in the details for each of these three developments that may prevent significant follow through in last week’s reaction.
On Brexit, the EU side has tempered some of last week’s enthusiasm by saying that Boris Johnson has a long way to go on the specifics and the schedule could prove too short ahead of this week’s EU summit, set to begin Thursday. Still, some sort of memorandum of understanding could be on the table before the end of the month that the two sides are in agreement, but merely need a three month delay to hash out the details. But are the votes there in the Parliament? We’re still concerned about a UK recession, with or without a deal.
On the US-China trade deal, as our Steen Jakobsen points out in today’s podcast, the risk is that this is merely Trump’s desperation to get a deal and that the key issues remain further down the road, including on technology transfer and national security issues. As well, we still don’t know the fate of the US tariffs scheduled for mid-December, which will be assessed on the last portion of Chinese imports and include popular consumer goods like laptops and mobile phones. Also, what happened to the “currency pact” tease we heard about last week?
On the Fed’s announcement of $60 billion a month in US T-bill purchases, while the magnitude of the programme, at perhaps a minimum of $360 billion if we assume six months of purchases and that the programme ends in April, it was clearly positioned by the Fed as a move to boost reserves and that “These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy.” In other words, it’s not playing as a resumption of QE and the other good news, especially on trade, has driven a slight pull away from pricing an October 30 FOMC rate cut, which this morning sits at around 75%.
Chart: USDJPY
USDJPY found plenty of support last week in the trio of risk sentiment-supportive developments, which drove a chunky sell-off in long treasuries in particular. USDJPY managed to poke above the local pivot levels. Note the resistance from the 200-day moving average, and prior pivot levels around 109.00 as perhaps more important to overcome for the pair to sustain an upside break. Any return of weak risk sentiment and especially any fresh drop in long yields could drive a chunky reversal back to the strong side for the yen. In any case, the next few sessions look important for the JPY.
The G-10 rundown
USD – the modest reaction to the Fed’s provision of more generous than expected liquidity is a warning sign that it may take something far more forceful to turn the US dollar lower here. EURUSD remains in limbo after failing to take out the key first resistance last week toward 1.1100.
EUR – the euro enjoying the chunky rise in EU yields last week, in part driven in Europe by hopes for a Brexit deal – continued strength likely needs to see more of the same, otherwise the risk that the EURUSD price action, for example, once again bogs down.
JPY – as noted above, the JPY slide the most directly linked currency to the bond slide (higher yields). We like USDJPY lower – or at least the yen generally higher – for the long run unless US bond yields have bottomed for the cycle.
GBP – last week made clear that the speculative shorts weren’t ready for the good news, but this latest move has likely cleared a significant portion of those shorts, and the path to Brexit still remains tricky. Price action could prove treacherous in both directions in the near term.
CHF – disappointing for CHF bears to see that EURCHF can’t hold the 1.1000 level after last week’s events. Full on reversal risk back lower for the pair if global long bond yields lurch into a fresh slide.
AUD – the Aussie getting a modest boost on the handshake US-China trade deal, but if more RBA rate cuts and eventual QE await on an Australian credit crunch, it’s tough to call a bottom for the trade-weighted AUD just yet. Note the rejection of local highs in AUDUSD this morning so quickly after the trade deal news.
CAD – Canada had a jobs report like only Canada can – wildly positive +70k full time jobs and this sends fresh USDCAD speculative longs in full reversal, making the chart look very bearish locally, but we’ve been chopping around between 1.3000 and 1.3600+ for…a full year!
NZD – a smart rebound in AUDNZD suggests the lows may be in for the pair after its recent gentle round of consolidation, unless this Wednesday’s Q3 NZ CPI brings a positive surprise.
SEK – hopes around Brexit and a strengthening Euro bringing an even stronger SEK, helped out further by last week’s strong Swedish CPI print, but EURSEK is some ways away from a capitulation lower just yet (at least needing to take out the 10.80-75 area.)
NOK – EURNOK sell-off has been weak stuff so far and if oil and risk appetite don’t bring in the cavalry for the NOK here, risk of a test of the highs.
Upcoming Economic Calendar Highlights (all times GMT)
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
