Head of FX Strategy
We have a veritable whirlwind of crosscurrents at the moment on virtually all fronts. The trade war theme dominates for now, with this Friday seeing a large round of Chinese tariffs on $34 billion in US goods actually going into effect. The temperature with China is also rising with every uptick in USDCNY, which has seen its largest two-week surge higher since the 2015 devaluation move. At what level does the weaker CNY merit a Trump response and/or begin to destabilise global markets? The 6.70 area is the last notable technical resistance ahead of the 7.00 level. Elsewhere, Trump blasted the EU over the weekend for being “possibly as bad as China, just smaller”. And the EU has readied its own retaliatory tariffs.
Over in Germany, the chaos in the ruling CDU/CSU coalition continues to drive uncertainty domestically even as EU leaders managed a degree of solidarity at last week’s summit in agreeing on a framework for dealing with migrants on an EU-wide basis. The CSU head and interior minister Seehofer said that he offered to resign at a meeting over the weekend, but then decided to take back that offer as the two parties try to hash out a way forward. Chancellor Angela Merkel has more leverage after agreeing that deal last week, but the future of the CSU/CDU coalition still hangs in the balance.
Meanwhile in Italy, Lega’s leader Salivini has seized the initiative on every front and has declared the intention to support a coalition of EU-sceptic parties across the EU ahead of the May 2019 EU parliament elections. Next year, 2019, is shaping up as an important year for the EU’s fate. Italian yields, meanwhile, have calmed considerably in the wake of last week’s EU summit and the deal on migrants, with the 2-year BTP back down to 75 basis points from over 100 basis points mid-last week.
As well this week, we have a busy economic calendar, starting with the Reserve Bank of Australia tonight in Asia (see AUD comments below) and the Riksbank tomorrow in Europe. But if we can tear our eyes away from the USDCNY chart and Trump headlines, it’s the heavy US data calendar all week that deserves the most attention after we found out that core US PCE inflation in May hit 2.0% for the first time since early 2012. The Federal Open Market Committee minutes are set for release on Thursday due to the Wednesday Independence Day holiday.
In Mexico, Obrador’s strong victory over the weekend is an important test for emerging markets as MXN is one of the most liquid EM currencies and a proxy for EM. The peso has done very well relative to EM peers in recent weeks as the market has backed away from its worst fears on what an Obrador “left populist” presidency may entail. Importantly, Obrador’s party may also gain both houses of the Mexican Congress, possibly setting up the most powerful government since the mid-1990s in terms of power to implement policy – but the final results will not be clear for days.
Chart: USDCNH
All eyes on the USDCNY this week, where the 6.70 level is the last local resistance area ahead of the cycle top at 7.00.
The G-10 rundown
USD – USD strength eased as EURUSD has rejected attempts at the 1.1500 level, but not expecting anything but a firm message from the FOMC minutes on Thursday on the intent to continue hiking.
EUR – the euro dodged an immediate crisis last week with the summit agreement on migration, but the German coalition uncertainty continues and the European Central Bank has iced forward guidance. Meanwhile, the EU has perhaps the most to lose in a global trade war scenario and likes to play by the rule book rather than considering a realpolitik approach.
JPY – USDJPY is toying with the top of the range, but we’re only looking for notable JPY weakness if US rates lift all along the curve in the wake of this week’s data.
GBP – sterling to continue struggling here and EURGBP remains clear of the recent range and above the 200-day moving average. Still, the massive overhead level is 0.9000, which hasn’t been breached since last summer.
CHF – the EU summit outcome provided EURCHF support, but uncertainties remain and not seeing potential for a major rally here. 1.1500-1.1450 an important downside pivot zone.
AUD - the Reserve BAnk of Australia is not set to upgrade its outlook as Australia has everything to lose in a global trade war and China’s apparent devaluation move and we would expect the RBA to highlight escalating downside risks in line with the market’s waning expectations for eventual rate hikes. As well, Australia’s banks are tightening lending conditions after feeling the heat from regulators for prior practices and interbank funding costs have risen sharply this year.
CAD – USDCAD found support right near the old high from March of this year around 1.3125 – an important support if the greenback is to maintain the upper hand.
NZD – we are bearish on kiwi as long as the NZDUSD break of the sub-0.6800 range holds on the RBNZ’s dovish turn and rate spread developments.
SEK – the Riksbank is up tomorrow and EURSEK is pushing on the last resistance area below 10.50 ahead of the cycle top near 10.70. The market is not looking for Riksbank surprises tomorrow – as Riksbank normalisation plans are a tough sell given EU and trade war risks.
NOK – EURNOK is pulling up above local resistance in a further sign that the Scandies remain out of favour.
Upcoming Economic Calendar Highlights (all times GMT)
0715 – 0800 – Eurozone Jun. Final Manufacturing PMI
0830 – UK Jun. Manufacturing PMI
0900 – Euro Zone May Unemployment Rate
1330 – ECB’s Praet to speak
1400 – US Jun. ISM Manufacturing
0430 – Australia RBA Cash Target
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
