The week ahead in macro
Saxo Bank Head of APAC Macro Strategy Kay Van-Petersen takes a look at the weak ahead with special focus on Sino-US relations into the November 29 G20 summit in Buenos Aires.
Head of FX Strategy
Summary: The Fed’s almost entirely recycled new monetary policy statement last night kept US yields at the highs of the recent range and keep odds high for a December hike. Meanwhile, long US bonds have bounced back and risk appetite has soured a bit, which has seen the USD and JPY both firming today.
The latest Federal Open Market Committee statement provided no fresh angle on the Fed’s policy intentions, which sends its own message by supporting the market’s assumption that the odds are as good as ever (still curiously only about 75% according to Bloomberg’s assessment) for a December rate hike. The only real change was a tweak to the language describing the current state of fixed business investment, which is now seen as having “moderated from its rapid pace earlier in the year”.
We take the reaction at face value, i.e., that this is USD supportive at the margin. There are a few USD pairs that are now nearing pivotal levels, including EURUSD, which we discuss below, and USDCHF and USDJPY. The yen is clearly marching to the beat of a different drummer than the rest of the non-USD as the yen bid outpaced a strong USD bid this morning as US treasuries bounced and risk appetite soured again.
The Swedish krona finally caught a solid bid yesterday and took EURSEK down through the range lows and the 200-day moving average. The trigger was the Riksbank Governor Ingves telling the Swedish parliament that if the economy continues on the expected course, “it is appropriate to start increasing the interest rate at some point over the next few months, in either December or February.” This isn’t exactly new information, but the market is taking it as raising the odds of a December move.
Not so great timing for these comments, by the way, as Swedish average home prices are starting to show consistent year-on-year declines and the latest in the data series was printed yesterday morning around the time of these comments. It is likely that the Swedish economy will be slowing down or even moving into a recession before the Riksbank ever gets appreciably above zero. If this EURSEK move lower doesn’t hold, expect an ugly squeeze risk.
CAD relative weakness late yesterday to the FOMC really stood out, and may be partially related to story earlier in the day yesterday that 2015 and 2016 Canadian GDP data have been revised sharply lower, even if growth is strong at present (the spin is the collapse in oil prices in 2015 and into early 2016 was a larger negative drag than previously thought – somewhat magnifying the import, perhaps, of the recent large slide in oil prices). Overnight, a headline that the Keystone XL pipeline project has been halted by a US federal judge in Montana pending environmental investigations didn’t exactly help CAD’s cause. Further delays in this project are CAD negative as the inability to get oil efficiently out of Alberta means that many Canadian crude grades are priced with massive discounts.
Charts: EURUSD – Weekly
We’re back to the “how low can it go” question here for EURUSD and would suggest that new uncomfortable headlines on Italy’s budget issue or even just bad EU data (notable deceleration has been consistent, with increasingly widespread awareness that the EU, and Germany in particular, is poorly positioned for a global trade war or even just a global slowdown, given its large current account surplus. First objective lower if 1.1300 is taken out early next week, as we have argued before, would be the 1.1186 Fibonacci level for the entire rally sequence from the early 2015 lows to the highs early this year, and then the round 1.1000 level.