Head of FX Strategy
Summary: The G20 meeting and Trump-Xi summit is finally rolling into view. We’re not optimistic that the US-China trade showdown will thaw in any meaningful way over the weekend, and a particularly disappointing sense that the relationship is souring further could make for fireworks next week, especially if China unleashes the CNY.
It is clear from these minutes and a parade of recent Fed appearances that the Fed is downshifting and wants a more data dependent stance from here after a very likely hike at the December FOMC meeting. The Fed’s guidance deceleration is likely down to the massive slide in crude prices, clearly tighter financial conditions, signs of a slowdown in the most interest rate sensitive sectors and the pronounced risks from Trump’s trade policies.
Our key barometer for the dollar on the developments in US yields is not just whether they are rising or falling, but the reasons behind the moves as well as, very importantly, the direction of risk appetite. Lower US yields on safe haven seeking and weak risk appetite (for example if the G20 entirely fails to generate anything constructive on trade) would likely prove rather USD positive. Flat to lower (and even very gently rising) yields together with a trade ceasefire emerging from Buenos Aires, meanwhile, could prove a powerful signal for USD weakening for a time.
We see low odds of the G20 driving any lasting improvement in the US-China relationship. The chief question in the event nothing emerges in the wake of this meeting is how quickly China signals its intentions for its currency. A guess would be no immediate volatility and some delay of weeks or longer before that signal is sent.
On a side note, the noise level from the Mueller investigation is escalating dramatically and will occupy increasing bandwidth in the political headlines as well as acting as a significant distraction in the Trump administration, possibly eventually impinging on financial markets as well.
The latest confession from Trump’s lawyer Cohen about Russian contacts ahead of the election related to a real estate deal look serious. Key congressional committees in the new congress that gets underway in January will have Democratic leaders and will exercise “subpoena power” to do everything in their power to take Trump down from any angle it can – with the business side of his past and related conflicts of interest a more likely source of dirt than the collusion angle that obsessed Democrats in the wake of the election and actually prompted the Mueller investigation in the first place.
Trading ranges have mostly been nervously respected in the run-up to the G20 meeting, but one G10 pair in particular has seen a significant move – AUDCAD, which captures both the slide in oil prices and the hopes that G20 will provide some sort of breakthrough that will improve the outlook for China-linked assets and currencies like AUD. The move looks overdone here based on longer-term valuation and relative interest rate developments, but could overextend further if G20 headlines bring a positive spin. Still, we’ll be on the lookout for technical reversals indicating it is time to get short again for a retest of the lows.
USD – pivotal into next week on the reaction to G20 developments. The market has traded rising hostility as USD positive, while a boost to risk sentiment on something constructive emerging would likely prove sharply USD negative, given the Fed’s easing off on the guidance gas.
EUR – German bunds are within a few basis points of their range lows of over a year around 30bps – this points to a weak outlook for the Eurozone. Any upside for EURUSD here will likely be driven by USD weakness rather than euro strength.
JPY – paint is drying here as we await for USDJPY to either move and close north of 114.00 or below perhaps 112.00, although the downside technical are murkier. A broad risk off shock needed to test whether JPY as safe haven works any more.
GBP – sterling mostly on its backfoot on heightened uncertainty. Maybe the UK can get rid of the Irish border issue by having Northern Ireland cease to exist ? (FT article – paywall)
CHF – a weak Swiss GDP print brings a different spin to CHF while fading attention directed at Italy helps boost EURCHF back into the range as well.
AUD – the highest beta G10 currency to the developments at the G20 over the weekend as crowded shorts have backed out of their positions in droves ahead of this weekend. The Reserve Bank of Australia meeting next week is unlikely to bring anything interesting. Credit crunch risk for Australia rising.
CAD – Watch for latest GDP print today. The Bank of Canada is expected to stand pat at 1.75% at next Wednesday’s meeting. This weekend’s G20 could provide a dramatic pivot for oil prices as Saudi Arabia’s Mohammad bin Salman and Russia’s Putin will put their heads together in Buenos Aires. If oil has bottomed here, we will look for technical setups indicating that AUDCAD has turned (wary of jumping in as G20 headlines could aggravate the AUD squeeze in the near term).
NZD – the market has given up on trading the kiwi, as the lowest daily trading in many years attests. Pass, although the 1.0600 area in AUDNZD is rather interesting as a multi-touch trendline comes in around there.
SEK – a negative GDP print yesterday souring the SEK’s rally chances and eroding confidence in the Riksbank’s hike path. EURSEK looking at risk of a squeeze back into the higher end of the longer term range on a close above 10.35.
NOK – oil prices need to ride to the rescue here or else as EURNOK looks like a bull flag setup looking for follow through higher until proven otherwise with a powerful sell-off bar or two.
Upcoming Economic Calendar Highlights (all times GMT)
1000 – Eurozone Nov. Flash CPI
1000 – Eurozone Oct. Unemployment Rate
1330 – Canada Sep. GDP
1400 – US Fed’s Williams to speak on Global Economy
1445 – US Nov. Chicago PMI
G20 Gets underway today