Macro: Sandcastle economics
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Another Powell speech and quarter end coming up
John J. Hardy
Chief Macro Strategist
Summary: The USD sell-off has run out of steam a bit ahead of a speech with Q&A from Fed Chair Powell late today. Ahead of quarter end, we wonder if portfolio reallocations could heavily swing price action in coming sessions, given large moves in especially bonds over the last quarter
The USD weakness extended yesterday, but not aggressively so as we await a speech from Fed Chair Powell this evening that offers a chance for him to push back at the market’s takeaway from last week’s Federal Open Market Committee meeting – if that’s what he would like to do.
Otherwise, energy is seeping out of the weak USD story at the moment to a degree as US interest rate drops. And with markets having moved so much – particularly bonds – ahead of quarter end we need to consider the risk that we’ll see large portfolio adjustments (In other words, a bit of consolidation for bonds in particular, which could in turn impact JPY negatively. Note that the last two quarters saw treasuries selling off at the beginning of the quarter after aggressive rallies like the one we have just seen and also note that the US 10-year benchmark has reached a big psychological level at 2.00%).
A Bloomberg article points to Sweden’s upcoming collective bargaining talks, where a number of labor unions are up in arms over the very low wage increase ceilings that look unfair, given widespread shortages in key professions, from teachers to nurses and doctors. This could be driving the downside interest in EURSEK here as a larger wage increase this year could feed into higher inflation and affect the Riksbank’s policy outlook. EURSEK trading since yesterday below the key 10.60 area support.
NZD in focus after last night saw a stronger than expected trade surplus for May, with strong demand for milk products. On that note, China recently announced efforts to increase support domestic producers of infant formula, one of the key products driving demand for New Zealand dairy exports. This move heavily impacted New Zealand milk company stocks earlier this month. But more importantly, the Reserve Bank of New Zealand is set to meet overnight and could cut rates as a surprise cut has more impact than one that is flagged for a future meeting. With AUDNZD struggling below 1.0500, it might be time for Governor Orr to seize the dovish initiative and cut the official cash rate (OCR) by 25 bps tonight.
Chart: EURSEK
EURSEK showing one of the more interesting technical developments at the moment as a strong move here below the local 10.60 pivot area begins to confirm the topping impression created by the prior rejection of the sequence above the old 10.70 high. Watching the outcome of the collective bargaining talks mentioned above as well as signals on the fiscal front in general for the potential for a larger revaluation of SEK versus the single currency.
Otherwise, energy is seeping out of the weak USD story at the moment to a degree as US interest rate drops. And with markets having moved so much – particularly bonds – ahead of quarter end we need to consider the risk that we’ll see large portfolio adjustments (In other words, a bit of consolidation for bonds in particular, which could in turn impact JPY negatively. Note that the last two quarters saw treasuries selling off at the beginning of the quarter after aggressive rallies like the one we have just seen and also note that the US 10-year benchmark has reached a big psychological level at 2.00%).
A Bloomberg article points to Sweden’s upcoming collective bargaining talks, where a number of labor unions are up in arms over the very low wage increase ceilings that look unfair, given widespread shortages in key professions, from teachers to nurses and doctors. This could be driving the downside interest in EURSEK here as a larger wage increase this year could feed into higher inflation and affect the Riksbank’s policy outlook. EURSEK trading since yesterday below the key 10.60 area support.
NZD in focus after last night saw a stronger than expected trade surplus for May, with strong demand for milk products. On that note, China recently announced efforts to increase support domestic producers of infant formula, one of the key products driving demand for New Zealand dairy exports. This move heavily impacted New Zealand milk company stocks earlier this month. But more importantly, the Reserve Bank of New Zealand is set to meet overnight and could cut rates as a surprise cut has more impact than one that is flagged for a future meeting. With AUDNZD struggling below 1.0500, it might be time for Governor Orr to seize the dovish initiative and cut the official cash rate (OCR) by 25 bps tonight.
Chart: EURSEK
EURSEK showing one of the more interesting technical developments at the moment as a strong move here below the local 10.60 pivot area begins to confirm the topping impression created by the prior rejection of the sequence above the old 10.70 high. Watching the outcome of the collective bargaining talks mentioned above as well as signals on the fiscal front in general for the potential for a larger revaluation of SEK versus the single currency.
The G10 rundown
USD – perhaps some risk of consolidation in the USD weakness in the near term if US yields back up into and just beyond quarter end or if Powell pushes back against the market’s interpretation of last week’s FOMC.
EUR – nothing emerging yet from the first round of talks to choose who will lead the EU Commission and ECB, stay tuned there. Hard to get excited about EUR upside as Bunds continue to pound higher, taking yields to new record lows.
JPY – US longer trading near their lows, which is JPY supportive, but again wondering if we have the risk of consolidation around quarter end.
GBP – GBPUSD poking above 1.2750+ area resistance briefly this morning, though EURGBP was capped and we’ll be starved of developments for a while on Brexit until (most likely) Boris Johnson assumes leadership and we get a feel for the Brexit negotiation temperature.
CHF – the franc having quite a run after having broken 1.1200 area and as the market respects the risk of a last blast of dovish Draghi, though if the rumors are true that the Governing Council is not on board with his recent guidance, they could yet rebel, given he has reached the lame duck period of his term.
AUD – the Aussie rally has underwhelmed given the strong global risk sentiment backdrop since last week’s FOMC meeting, and the key hurdle here for AUDUSD remains the 0.7000 area.
CAD – USDCAD is poking at multi-month lows, but the real question here is whether a more profound and broad USD sell-off is underway and as we asked yesterday, how the USD performs once this latest melt-up in global risk appetite recedes, much less suffers an ugly setback.
NZD – a surprise cut from RBNZ should have impact, given the recent backup in the likes of NZDUSD. A setback for global equities might also finally drive a bit of consolidation in the smaller currencies.
SEK – again, we have a technical breakdown and could be some linkage to collective bargaining talks.
NOK – need some follow through lower in EURNOK for the recent breakdown on Norges Bank guidance and stronger oil prices to have meaning. Watching 9.70-72 as resistance for maintaining a bearish view.
Upcoming Economic Calendar Highlights (all times GMT)
1245 – US Fed’s Williams (Voter) to speak
1300 – US Apr. Home Price Index
1400 – US Jun. Richmond Manufacturing
1400 – US May New Home Sales
1400 – US Jun. Consumer Confidence
1700 – US Fed Chair Powell to speak
0200 – New Zealand RBNZ Official Cash Rate
USD – perhaps some risk of consolidation in the USD weakness in the near term if US yields back up into and just beyond quarter end or if Powell pushes back against the market’s interpretation of last week’s FOMC.
EUR – nothing emerging yet from the first round of talks to choose who will lead the EU Commission and ECB, stay tuned there. Hard to get excited about EUR upside as Bunds continue to pound higher, taking yields to new record lows.
JPY – US longer trading near their lows, which is JPY supportive, but again wondering if we have the risk of consolidation around quarter end.
GBP – GBPUSD poking above 1.2750+ area resistance briefly this morning, though EURGBP was capped and we’ll be starved of developments for a while on Brexit until (most likely) Boris Johnson assumes leadership and we get a feel for the Brexit negotiation temperature.
CHF – the franc having quite a run after having broken 1.1200 area and as the market respects the risk of a last blast of dovish Draghi, though if the rumors are true that the Governing Council is not on board with his recent guidance, they could yet rebel, given he has reached the lame duck period of his term.
AUD – the Aussie rally has underwhelmed given the strong global risk sentiment backdrop since last week’s FOMC meeting, and the key hurdle here for AUDUSD remains the 0.7000 area.
CAD – USDCAD is poking at multi-month lows, but the real question here is whether a more profound and broad USD sell-off is underway and as we asked yesterday, how the USD performs once this latest melt-up in global risk appetite recedes, much less suffers an ugly setback.
NZD – a surprise cut from RBNZ should have impact, given the recent backup in the likes of NZDUSD. A setback for global equities might also finally drive a bit of consolidation in the smaller currencies.
SEK – again, we have a technical breakdown and could be some linkage to collective bargaining talks.
NOK – need some follow through lower in EURNOK for the recent breakdown on Norges Bank guidance and stronger oil prices to have meaning. Watching 9.70-72 as resistance for maintaining a bearish view.
Upcoming Economic Calendar Highlights (all times GMT)
1245 – US Fed’s Williams (Voter) to speak
1300 – US Apr. Home Price Index
1400 – US Jun. Richmond Manufacturing
1400 – US May New Home Sales
1400 – US Jun. Consumer Confidence
1700 – US Fed Chair Powell to speak
0200 – New Zealand RBNZ Official Cash Rate
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