Head of FX Strategy
Summary: China reports strong data, boosting the euro modestly overnight and the Aussie, especially versus the New Zealand dollar in the wake of the latest NZ CPI data. Elsewhere, US long interest rates and US equities play a game of chicken as both march higher – which blinks first?
The hope is that a sharp recovery in Asian demand will feed demand for imports from the EU. The Aussie was also firm on the news, though some of the strength there may be down to a sharp acceleration in AUDNZD higher on the Q4 CPI data from New Zealand overnight, which missed badly and has the market moving forward its anticipation for an RBNZ rate cut.
The “melt-up scenario” we have discussed in recent weeks remains more or less fully engaged, as equity markets registered another local high, taking us to less than a percent below the all-time highs before the October. As we have also argued, in a world with vastly larger amounts of debt as percent of GDP, the head-room for a persistent rise in risk sentiment is limited as long as it coincides with tightening liquidity from rising bond yields.
The chart from McKinsey that has circulated for years measured global debt to GDP at some 87% in Q4 of 2000 versus some 199% and rising by Q2 of 2014, so the ability to do something akin to the 1998-2000 period (a combination of both viciously rising bond yields and equity markets) is non-existent.
If we’re to see anything beyond a modest further melt-up in equities, yields will need to remain contained or fall, a development we would argue is not possible as falling yields from here are only possible on concerns for the outlook or the return of the central bank policy punchbowl on said concerns. Until then, rising yields and rising risk sentiment will become an accelerating game of chicken – much like the episodes just ahead of the early 2018 and late 2018 equity market meltdowns.
AUDNZD – the blow off rally overnight took the pair to our near-term target of 1.0700+ – may be more in the tank for the longer term, but we stand aside here.
A strong close in AUDUSD above 0.7200 after tonight (post the latest AU jobs numbers, which could encourage or spoil the rally) could see us taking the bait for longs for a move to the higher resistance above 0.7300.
We’ll be back next Tuesday due to holidays here in Denmark. Until then, the most interesting next steps for this market should be the flash EU April PMI’s and US Retail Sales data for March up tomorrow. A modest improvement from the March survey is expected in the former and a sharp bounce-back from a weak February expected for the latter. As well, we are on the cusp of earnings season, a critical test for equity markets perched near the highs for the cycle.
EURCHF is trying to vault its 200-day moving average and is pulling up through the last shreds of the local trading range since last October – the highest daily close since then was 1.1415. The persistence of the move is worth noting and fits with the JPY weakness on the recent rising global bond yields. Franc weakness can extend further as long as the global melt-up scenario continues to engage, though we suspect the headroom is somewhat low as long as bond yields are rising.
The G10 rundown
USD – in an extension of the melt-up scenario, the US dollar to perform weakly, but the greenback has a hard time falling hard as long as US yields are rising.
EUR – the euro staying resilient against the USD and rising sharply against the JPY and CHF on hopes that the outlook will brighten – the Germany ZEW survey expectations yesterday registered their sixth month in a row of improving expectations. Tomorrow’s flash April PMIs could prove pivotal if these leapfrog expectations for a modest improvement.
JPY – the yen suffering under the weight of improving risk sentiment and higher yields. JPY crosses will likely offer the highest beta to both an extension of the current remarkable complacency and its likely sudden eventual end.
GBP – the long delay scenario doing sterling no favours and EURGBP has entered the upside pivot zone above 0.8650, which extends to about 0.8700 and risks a further squeeze higher if 1.3000 also falls in GBPUSD.
CHF – the weak CHF one of the few persistent directional moves in the G10 space and likely to offer solid beta to any continuation of the melt-up scenario (especially any further rise in bond yields).
AUD – a key test here for AUDUSD as it looks above the 200-day moving average and the 0.7200 area – a strong close today above that level is a technical hook for long positions, though the pair has been trend-less for some six months. Watch out for AU jobs data up tonight.
CAD – USD and CAD joined at the hips as the 2-year rate spread has remained in about a 20-bp range for over nine months – a state of affairs similar to a large chunk of 2013, when USDCAD was stuck between 1.00 and 1.05 as the rate spread was likewise in stasis.
NZD – this latest Q4 CPI data point from New Zealand fully confirms the structural shift in the kiwi to the weak side – although the comeback in the likes of NZDUSD and NZDJPY overnight – likely driven by China’s latest round of data – begs the question of whether this will be limited to a pair like AUDNZD. May be difficult to short NZD as long as risk sentiment remains strong on hopes that Chinese stimulus and a US-China trade deal are set to improve the global growth outlook.
SEK – a strengthening of hopes that the EU economy is on the mend – if that is what obtains on the next round of data – should prove doubly supportive of SEK, but need proof on the chart that EURSEK can punch down through 10.40.
NOK – the inability of NOK to launch a full scale rally against the euro despite all cylinders firing in favour of NOK is a head scratcher.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Mar. CPI / RPI / PPI
0900 – Eurozone Mar. Final CPI
1230 – Canada Feb. International Merchandise Trade
1230 – Canada Mar. CPI
1230 – US Feb. Trade Balance
1300 – UK BoE’s Carney to speak
1600 – South Africa SARB Policy Review
1645 – US Fed’s Bullard (Voter) to speak
1800 – US Fed Beige Book
0130 – Australia Mar. Employment Change / Unemployment Rate