Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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Trump trade deal tease blasts USD lower, but…
John J. Hardy
Global Head of Macro Strategy
Summary: A squeeze on long USD positioning over the last couple of sessions picked up pace overnight as US President Trump teased the market by supposedly ordering a draft of a US-China trade deal. This wouldn’t have anything to do with next Tuesday’s mid-term elections, would it?
We have speculated over the last couple of days that the CNY boost could be a move by China to pull the currency well away from its assumed floor (7.00 in USDCNY terms) ahead of a meeting with Trump at the G20 meeting at the end of this month. This was already lifting global market sentiment and boosting Asian FX before Trump poured fuel on the situation by supposedly ordering a draft proposal for a US-China trade deal.
No need for details just yet, apparently, or why the sudden change of heart and ongoing lack of any active negotiations. We would strongly suggest that this is nothing more than theatre designed to boost the market ahead of next Tuesday’s mid-term elections. Still, the market was not positioned for this nor China. This is most evident in the G10 FX in the surging AUD.
Yesterday’s Bank of England meeting triggered a powerful rally in sterling, as governor Mark Carney made it clear that he is ready to hike rates under any scenario – also a hard Brexit, due to the risk of a supply side shock. I am a bit surprised that the focus is on the supply and demand and not on defending the currency from an ugly adjustment. Regardless, the promise reduces the “hard Brexit discount” and is sterling supportive, just as the recent budget announcement and the shift away from austerity is strongly sterling supportive. As well, Carney underlined that in a smooth Brexit scenario, the economy is already running hot – a heat that will only get hotter with fiscal relief.
The strong bounceback in global equities is mostly linked to the hopes that the US and China can steer clear of a further escalation in the trade policy showdown. The US treasury market shows that the relief rally only allows a fresh slide in bonds and rise in US yields – ironically a factor that will eventually act against the surge in risk appetite.
That takes us to the most important economic calendar even of the week – today’s US October Average Hourly Earnings, which is already expected to surge to a new high for the cycle at 3.1% year-on-year. A disappointment could fan the flames of the USD correction, while an upside surprise surely revives Fed expectations for a December move and subsequent rate hikes. The December rate hike odds dropped as low as 65% during the recent equity market slump.
Chart: AUDUSD
AUD is leading the charge in pricing in the enthusiasm for a US-China trade relation thaw and a stronger CNY. The first test for the pair is today’s US jobs report and whether a strong surge in earnings that is expected (or even upside surprise) powers a fresh rise in US yields and offers support for the US dollar, or if the focus remains on the prior factors supporting AUD and other Asian (and really global) FX versus the USD. The move has cleared the falling channel and if this extends, the 0.382 Fibo retracement near 0.7450 could become a focus – also as a previous area of interest and where the 200-day moving average is about to converge. This does not shift our longer term outlook for a weaker AUD.
No need for details just yet, apparently, or why the sudden change of heart and ongoing lack of any active negotiations. We would strongly suggest that this is nothing more than theatre designed to boost the market ahead of next Tuesday’s mid-term elections. Still, the market was not positioned for this nor China. This is most evident in the G10 FX in the surging AUD.
Yesterday’s Bank of England meeting triggered a powerful rally in sterling, as governor Mark Carney made it clear that he is ready to hike rates under any scenario – also a hard Brexit, due to the risk of a supply side shock. I am a bit surprised that the focus is on the supply and demand and not on defending the currency from an ugly adjustment. Regardless, the promise reduces the “hard Brexit discount” and is sterling supportive, just as the recent budget announcement and the shift away from austerity is strongly sterling supportive. As well, Carney underlined that in a smooth Brexit scenario, the economy is already running hot – a heat that will only get hotter with fiscal relief.
The strong bounceback in global equities is mostly linked to the hopes that the US and China can steer clear of a further escalation in the trade policy showdown. The US treasury market shows that the relief rally only allows a fresh slide in bonds and rise in US yields – ironically a factor that will eventually act against the surge in risk appetite.
That takes us to the most important economic calendar even of the week – today’s US October Average Hourly Earnings, which is already expected to surge to a new high for the cycle at 3.1% year-on-year. A disappointment could fan the flames of the USD correction, while an upside surprise surely revives Fed expectations for a December move and subsequent rate hikes. The December rate hike odds dropped as low as 65% during the recent equity market slump.
Chart: AUDUSD
AUD is leading the charge in pricing in the enthusiasm for a US-China trade relation thaw and a stronger CNY. The first test for the pair is today’s US jobs report and whether a strong surge in earnings that is expected (or even upside surprise) powers a fresh rise in US yields and offers support for the US dollar, or if the focus remains on the prior factors supporting AUD and other Asian (and really global) FX versus the USD. The move has cleared the falling channel and if this extends, the 0.382 Fibo retracement near 0.7450 could become a focus – also as a previous area of interest and where the 200-day moving average is about to converge. This does not shift our longer term outlook for a weaker AUD.
The G10 rundown
USD – with tepid or worse data today and an extension of the CNY move to the strong side, the USD correction may continue apace, but I’m not sure that is what we’ll get. Let’s watch the bond market closely over today’s data either way.
EUR – the euro has bounced hard off the lows against the USD but only starts to look like it is reversing or neutralizing the trend if it can maintain above 1.1500. Elsewhere, euro not a stand out on the pressure from EURGBP selling, though it is firm versus CHF and JPY.
JPY – the worst of all worlds here for the yen, as risk appetite surges and bond yields rise – with or without broad USD strength, USDJPY may rally here if US yields punch higher in the wake of today’s jobs data.
GBP – sterling is well supported on the BoE and fiscal austerity ending – still have Brexit hurdles ahead, but this latest sterling rally is technically promising in pairs like EURGBP and GBPCHF (note the 200-day moving average in play for the latter).
CHF – Italian spreads to the core are generally deflating and risk appetite is surging make for a weak franc. Next hurdle is the 1.1500 area in EURCHF – also watching whether parity in USDCHF can hang in there after USDCHF once again rejected after an attempt to surge free of resistance.
AUD – a Reserve Bank of Australia meeting next week is the next test for Aussie, though the currency likely to take its clue mostly from the direction of CNY here (up a full percent now from its lowest level just a couple of sessions ago) and risk appetite.
CAD – the rally versus the USD is more muted here as oil prices suffered another ugly blow yesterday – the next pivotal level over today’s Canadian and US jobs data the 1.3000 level.
NZD – a Reserve Bank of New Zealand meeting next week, a day after Q3 jobs and earnings data sets up the potential for AUDNZD finally doing something (we like higher long term on valuation but lack a catalyst). The 0.6700 area a big one on the NZDUSD chart.
SEK – EURSEK is begging to break through lower through the range support – only held back at the moment perhaps by the fact that it is Friday and the 200-day moving average looms here.
NOK – a fresh downdraft in global oil prices after the US’ stunning production figures and a waiver for eight nations to buy Iranian crude after sanctions are scheduled to go into effect on Monday.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – Canada Oct. Employment Data
1230 – US Oct. Change in Nonfarm Payrolls
1230 – US Oct. Average Hourly Earnings
1230 – US Oct. Unemployment Rate.
1400 – US Sep. Factory Orders
USD – with tepid or worse data today and an extension of the CNY move to the strong side, the USD correction may continue apace, but I’m not sure that is what we’ll get. Let’s watch the bond market closely over today’s data either way.
EUR – the euro has bounced hard off the lows against the USD but only starts to look like it is reversing or neutralizing the trend if it can maintain above 1.1500. Elsewhere, euro not a stand out on the pressure from EURGBP selling, though it is firm versus CHF and JPY.
JPY – the worst of all worlds here for the yen, as risk appetite surges and bond yields rise – with or without broad USD strength, USDJPY may rally here if US yields punch higher in the wake of today’s jobs data.
GBP – sterling is well supported on the BoE and fiscal austerity ending – still have Brexit hurdles ahead, but this latest sterling rally is technically promising in pairs like EURGBP and GBPCHF (note the 200-day moving average in play for the latter).
CHF – Italian spreads to the core are generally deflating and risk appetite is surging make for a weak franc. Next hurdle is the 1.1500 area in EURCHF – also watching whether parity in USDCHF can hang in there after USDCHF once again rejected after an attempt to surge free of resistance.
AUD – a Reserve Bank of Australia meeting next week is the next test for Aussie, though the currency likely to take its clue mostly from the direction of CNY here (up a full percent now from its lowest level just a couple of sessions ago) and risk appetite.
CAD – the rally versus the USD is more muted here as oil prices suffered another ugly blow yesterday – the next pivotal level over today’s Canadian and US jobs data the 1.3000 level.
NZD – a Reserve Bank of New Zealand meeting next week, a day after Q3 jobs and earnings data sets up the potential for AUDNZD finally doing something (we like higher long term on valuation but lack a catalyst). The 0.6700 area a big one on the NZDUSD chart.
SEK – EURSEK is begging to break through lower through the range support – only held back at the moment perhaps by the fact that it is Friday and the 200-day moving average looms here.
NOK – a fresh downdraft in global oil prices after the US’ stunning production figures and a waiver for eight nations to buy Iranian crude after sanctions are scheduled to go into effect on Monday.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – Canada Oct. Employment Data
1230 – US Oct. Change in Nonfarm Payrolls
1230 – US Oct. Average Hourly Earnings
1230 – US Oct. Unemployment Rate.
1400 – US Sep. Factory Orders
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