Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief Macro Strategist
Summary: The market is gunning for a dovish Fed and is hardly anticipating this evening’s meeting and policy guidance. We’re hardly likely to see Powell and company administering a hawkish broadside to this market, but has the market run too far with its dovish expectations?
The G-10 rundown
USD – again, not sure that there is really hawkish scenario from the Fed and more about whether the market has overreached. The US dollar is still farther from breakdown levels than from breaking stronger.
EUR – rather pronounced channel in EURUSD is easier to break to the upside than the downside from current levels, but there is an awfully heavy layer of resistance to get through before we can work up interest in a new trend. Germany’s ZEW survey of current conditions released yesterday continued the weakening trend and we’re only a few points above the lowest levels since 2010.
JPY – the BoJ minutes from the prior meeting showing the central bank struggling with what to do next if the economy weakens again and as its inflation target has never come into view. Would expect sensitivity in yen crosses to fall on any “sell the fact” stance over tonight’s FOMC meeting.
GBP – the EU is playing tough ahead of the EU summit tomorrow and Friday, as Prime Minister May will have to promise elections, openness to a second referendum or both to get a longer delay in place if she can’t get her deal through next week. Sterling complacent.
CHF – still looking for a pulse and would expect directional sympathy with the JPY on any larger scale reaction to the FOMC, though Brexit also a test for the currency here.
AUD – a bit softer overnight, likely driven by a chunky sell-off in iron ore on the news that Vale in Brazil is set to resume work on its largest iron ore mine. Tonight sees the release of Australia’s latest jobs data.
CAD – as indicated above, yesterday’s smart reversal in USDCAD sets up a tactical argument for long positions if the FOMC event risk is benign. Relative rate expectations discourage a downside view until proven otherwise.
NZD – looking at tonight’s NZ Q4 GDP print for whether we get the sense that RBNZ outlook will catch up with the RBA expectations and provide a base for AUDNZD
SEK – EURSEK consolidation needs to bite deeper still to get a sense of a broad triple-top in place - back below 10.30-10.25.
NOK – key test for EURNOK tomorrow as 9.65 area has swung into view. We’re constructive on further strength for a run sub-9.50 if oil markets and risk appetite are orderly.
Upcoming Economic Calendar Highlights (all times GMT)
09:30 – UK Feb. CPI
18:00 – US FOMC Rate Decision and statement release
18:30 – US Fed Chairman Powell press conference
21:00 – Brazil Selic Rate
21:45 – New Zealand Q4 GDP