Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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FX Update: What happens to risk rebound if US yields break higher?
John J. Hardy
Global Head of Macro Strategy
Summary: Yesterday saw a capitulation of weak longs in risky assets after key support gave way, with the JPY playing the safe haven currency du jour. Since then, we have seen a powerful rebound starting in late US trading yesterday, but we still have the overhanging question of what the FOMC brings tomorrow and how strongly this risk sentiment bounce can extend if US treasury yields break higher in the wake of the FOMC meeting tomorrow.
FX Trading focus: Robust risk rebound, but…FOMC tomorrow. Dampest of Riksbank squibs.
So far, while valid concerns are out there in the ether, including those centered on China’s property sector, how far US politicians are willing to dance along the edge of default in the coming US debt ceiling showdown, the FOMC meeting tomorrow and longer term, fiscal cliff concerns, the sell-off in risk sentiment since last week and especially yesterday’s huge acceleration when the incredibly obvious support in the S&P 500 broke had a very technical feel to it. Regardless, we are now seeing a very strong rebound, where we identified the 4,408 level as the possible key tactical level of resistance in today’s Saxo Market Call podcast.
During the sell-off in risk sentiment yesterday, it was interesting to note that the US dollar went fairly quiet, while a tardy bid in safe haven sovereigns yesterday finally lit up the Japanese yen, where most of the action was yesterday in currencies as the yen rallied on the double whammy of risk-off and lower yields. So far so good, but one reason USD traders were and perhaps should have been a bit sidelined here, and one reason we need to remain sidelined here on market direction is that we have an important FOMC meeting up tomorrow with considerable uncertainty on what the Fed will have to say. And if what the Fed has to say in the policy statement and in the fresh projections on the economy and dot plot forecasts is more hawkish than expected, we could see a considerable jolt to US treasury yields. Those yields have been entirely quiescent for several weeks and a break in notable resistance at the long end of the curve on a more hawkish than expected Fed (or the realization that treasury issuance will have to pick up sharply in the wake of the debt ceiling resolution or both) could provide a fresh source of pressure on risk sentiment, and one that is less JPY-supportive (quite the opposite, in fact) and more USD-supportive.
Chart: GBPJPY
GBPJPY is at a very interesting technical crossroads here, with a very nicely etched and clear, if somewhat broad head-and-shoulders formation with an odd double-neckline twist (and 200-day moving average in the mix) but clearly waiting for further fundamental catalysts here in the near term, including a key Bank of England meeting this Thursday which arrives as the market is leaning heavily on a more hawkish message (surprise side therefore being dovish), while yields after the US FOMC meeting are the most important coincident indicator for the JPY, even as the Bank of Japan meets tonight as well. The head-and-shoulders extension target is all the way down at 141.00.
Riksbank a real party pooper. Sweden’s Riksbank announcement this morning saw the central bank remaining Camp Cautious, with pointless tweaks to growth and employment forecasts and with zero recognition of the recent inflation spike as the furthest-out Q3 2024 headline inflation forecast actually lowered while the core inflation forecast was left unchanged for that time frame at 2.1%. The bank left its policy rate forecast through Q3 ’24 unchanged at 0% as it expects “it will take a couple years more before CPIF inflation is assessed to be more permanently close to 2 per cent.” The SEK has managed to keep an even keel and is impressively back close to the 200-day moving average as a function of the comeback in risk sentiment, certainly not down to this as-dovish-as-possible Riksbank meeting.
CAD clears away minor election distraction. Canadian Prime Minister Trudeau has plenty of egg on his face, but has survived the ill-advised snap election yesterday and will return as Prime Minister with the status quo minority government that was in place before this unnecessary distraction that provides no real new policy mandate. CAD is higher more on oil prices failing to lose altitude as viciously as did risk assets during this recent sell-off and the snapback in both oil and risk since yesterday. Canadian two-year yields remain near the high of the range while the US two-year yields are buried in the doldrums, suggesting that USDCAD is more than a bit mispriced if the FOMC fails to wax hawkish and/or risk sentiment continues to surge higher together with oil prices. Technically, a close back well south of 1.2700 in USDCAD after the FOMC would suggest the squeeze to 1.3000+ scenario has been averted for now.
Table: FX Board of G10 and CNH trend evolution and strength
The JPY showing the most strength here as NOK outperformance eases (Norges Bank Thursday!), but the critical question through tomorrow night is whether the USD firming of late blasts into outright rally mode post-FOMC meeting. If the driver there is higher US yields, JPY could take a back seat or worse.
Table: FX Board Trend Scoreboard for individual pairs
Note that the NZDUSD rally has now rolled over badly enough to turn negative, although just barely so as the next session or two looks pivotal (basically, the FOMC outcome). Elsewhere, the EURGBP trend turning positive looks like a function of risk sentiment direction at the moment, but the BoE will likely weigh heavily on Thursday. The big rally in USDCNH is noteworthy, but only gets more technically relevant on a follow through higher – note the 200-day moving average near 6.48 there.
Upcoming Economic Calendar Highlights (all times GMT)
- 0730 – Sweden Aug. Unemployment Rate
- 0830 – Sweden Riksbank meeting
- 1200 – Hungary Central Bank Rate Decision
- 1230 – US Aug. Housing Starts and Building Permits
- 1230 – US Q2 Current Account Balance
- 0015 – Australia RBA’s Debelle, Berkelmans before Parliament committee
- 0130 – China PBOC rate decision
- 0200 – Australia RBA’s Bullock
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