Recession Fears Spark Global Bond-Buying
Last week we saw the revival of risk-aversion as the Fed surprised everyone (again) by taking rate hikes right off the table for 2019 and sees just one in 2020. The ultra-dovish Fed originally sent US stocks higher, but that quickly changed after fears of economic trouble saw investors buy up treasuries. By Friday, the bond buying saw the US yield curve invert for the first time since 2007 as 3-month T-Bill yields climbed above 10 year-notes. We also saw the Fed Funds rate move within 6 bps of the 10-year, and before long US Equities were deep in the red. As sentiment soured, traders bought up Yen and sent USD/JPY below 110.00 for the first time in over a month. While Powell and Co. were the major catalysts for the flight-to-quality, they weren’t the only culprits.
Across the pond, European data continued to spark recession fears and saw stocks across the continent fall considerably. Friday’s German manufacturing data showed a 3rd straight month of contraction, which raised demand for German Bunds and pushed yields below zero for the first time since 2016. French and British yields also fell, hitting 2016 and 2017 lows, respectively. The euro-zone PMI showed businesses across the bloc have drastically underperformed this month, and leaving the markets worried about the prospects for 2019 and 2020.
Markets Price In Cuts For Fed, But Sour Sentiment Keeps USD Afloat
While the Fed dot-plot shows one hike for 2020, markets don’t believe them. Markets are pricing in a nearly 50% chance of a Fed rate cut in Jan 2020, which on its own is bearish for the dollar. As we have seen, however, the risk aversion has underpinned the USD and prompted a selloff in its G10 counterparts (besides JPY). Risk-off attitudes could continue this week with a Draghi speech, German CPI and the next episode of The Brexit Chronicles all on tap. In the US, the calendar is quite light aside from Thursday’s GDP data. This translates mostly downside risks for the Euro and upside on the Dollar barring any major positive headlines that mask the economic struggles. Friday’s close above the 100 DMA is also good news for Dollar bulls.
Federal Budget, Retail Sales And Risk Aversion Suppress The Loonie
The usdcad was of to a great start last Monday, and we saw USD/CAD fall as low as 1.3248. After two volatile sessions that saw the pair nearly break below the 100 DMA, support proved to be to strong and it catapulted back above 1.3400 to end the weak. Friday’s CFTC Report showed Canadian dollar short sellers increased by about 7000, as traders slowly forget the Loonie’s dream start to the year. Clearly the deteriorating risk-sentiment played a big part, but the Liberal Governments 2019 budget sure helped the cause. The Liberal’s election year budget was pretty much what you would expect. Trudeau targeted spending on voter groups that are his best chance at being re-elected this fall, but the promise to reduce the Debt-to-GDP ratio has once again been pushed aside. If re-elected, it is expected the rising federal debt problem will persist for the next four years. This could make things real interesting if a recession is looming, as the Bank of Canada will find themselves handcuffed by the fiscal debt. Couple that with the disappointing retail sales data from Friday, and its clear why the Loonie can’t muster up sustained strength. The market is pricing in a 20% chance of Bank of Canada rate cut in Q319, and it is reasonable to assume this number could go up much higher by the time Governor Poloz is at the podium again. In case you haven’t noticed, Canada’s yield curve has its own worries too (see below), so if the Fed is done its safe to say the BoC is too. Not a whole lot on the calendar for Canada aside from Friday’s GDP, so the Loonie is going to need a shift in sentiment and some help from oil if it hopes to regain strength.