See the latest Australian dollar analysis here:
Ain’t this the truth from Nordea:
The past week has seen the S&P500 future, Nasdaq and Brent oil prices primarily ranging sideways amidst choppy price-action. Aside from higher yields worrying investors – which has been the case on and off for the past few months, investors now also have to think about the direction of the dollar…
While we remain strategic reflationistas and inflationistas (for now), we fully understand these choppier markets. For instance, should the dollar break free (higher) in a more significant way, it would likely spell trouble for broader risk appetite. For instance as it would weigh on global liquidity (in USD).
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Chart 1. A stronger dollar weights on global liquidity (in USD)
Another thing to ponder is that stimmie checks sent out as a part of Biden’s bombing budget has not (yet?) had much of a positive effect on risky assets, at least insofar we can tell.
While the outlook for US excess liquidity remains highly bening at least until August (as the TGA will be drawn down according to the US Treasury’s plan with an added bonus of a further drawdown in July due to to the debt ceiling), tax payments may make the near-term outlook less benign. Indeed, tax payments from US households typically boosts the Treasury’s TGA by some ~200bn during the first half of April, which reduces liquidity in the banking sector by the same amount.
Chart 2. YTD changes to the US Treasury’s General Account
These two aforementioned reasons could cause headwinds for risky assets, but there’s also some potential tailwinds. For instance, the narrative around the end of Fed’s SLR causing primary dealers to dump Treasuries en masse may already be – or at least should be – fully priced in by early April (when last year’s SLR relief ends). Perhaps this will ease investors fears and prompt greater purchases of US Treasuries?
Chart 3. Pent-up sales of 400bn-700bn of Treasuries? We’ll find out soon
The first day of April also marks the start of a new fiscal year in Japan, and Japanese investors are thought to have sold a lot of US Treasuries so far this year. Perhaps this new fiscal year will mean greater risk-taking (purchases of US Treasuries), now with BOJ’s YCC change out of the way – and the SLR situation soon-to-be fully discounted?
Chart 4. US 10y bonds offer the greatest return since 2015 when adjusted for the cost of a 3m FX hedge
If the SLR hysteria is overdone and Japanese investors return in force to the US fixed income market, an associated stabilisation in US rates would be good news for risk appetite, but probably less so for the USD.
We would argue that Japanese investors probably won’t become aggressive purchasers of US Treasuries, since yields and term premium remain depressed vs “normal” levels, and the global narrative of reflation, inflation and growth should strengthen further in coming months with non-farm payrolls growth perhaps of a million, US inflation perhaps rising to 3-4%, ISM manufacturing above 60 and Euro-area GDP growth of 10% yoy in the second quarter. But we are open to being wrong.
We went short EUR/USD earlier this year with a target of 1.1750. We almost got there this past week (1.1762). We keep our fingers crossed for a final move below this level in the coming week or two.
Chart 5. EUR/USD should have more to give, gauging by relative growth
The vast amount of year-end USD selling (due to unwinds of USD asset positions) by Japanese accounts is likely already behind, and USD/JPY usually bottoms around 23rd or 24th of March as fast-money accounts try to front-run the flow-picture. USD/JPY has more upside potential in to the beginning of April with possible spill-overs to the price action in other USD pairs.
Chart 6. USD/JPY typically bottoms out around 23rd or 24th of March. More USD buying from Japanese accounts to be expected in coming days and weeks
The US is currently outpacing right about every peer when it comes to the i) vaccine roll-out, ii) amount of stimulus as % of GDP and iii) lack of direct/indirect yield-curve-control, which generally leaves the USD in a decent spot to perform. The ISM figures have look healthier than peers in recent months, and we are yet to be convinced that a peak is in. Both our short- and medium term indicators hint of further upside to ISM Manufacturing during Q2, which usually goes hand in hand with even higher USD bond yields (and maybe even real rates).
Chart 7. ISM to peak in August?
The cyclical peak in ISM is always one to watch for investors, since it usually coincides with (or causes) a return to a choppier market environment in risk assets. Markets trade the reflationary rebound in an almost linear way on the way up to 60 in the ISM index, while the choppy trading is visible in the months following a peakish ISM figure. The peak is likely to be found over the next 3-4 months, which could augur a removal of a few reflationary chips from the table already now – maybe via a lower hedge ratio of USD assets (seen from European soil)?
Chart 8. S&P 500 before and after ISM hitting 60. From happy-go-lucky to happy-go-choppy
The dark horse during the current cyclical rebound is the service sector since it is mostly driven by the momentum in the governmental restrictions implemented to contain the Covid spread. A strong re-opening momentum during Q2 will likely lead the Service ISM to peak’ish level around the same time as the Manufacturing sector, while a slowed re-opening pace will likely lead the service economy to gather momentum all the way into late-Q3. This may hold true for the European service sector in particular due to the slow vaccination process.
Chart 9. Low correlation between Services and Manufacturing due to the lock-downs
The pure relative vaccine-bet (being short EUR vs. Anglo-Saxon peers) has been a tremendous 2021 bet, and due to the third wave in countries like Germany, Italy, France and partly Spain, the virus spread is now WORSE in continental Europe compared to the UK and US for the first time during the pandemic. Not impressive and Ursula Von Der Leyen and the commission should be ashamed of themselves. This relative vaccine trade is probably running on fumes by now but should continue to work into the beginning of April.
Chart 10. The relative virus spread is a good indicator of EUR vs. peers
Speaking of trends that are running of fumes, we opted to label our Weekly “Bye Bye Reflation” a couple of weeks back in response to increasing signals of a fading Chinese credit impulse. The so-called commodity super cycle already looks shaky among other things due to i) Chinese authorities stepping slightly on the brake, ii) supply positive oil-news due to the Chinese-Iranian deal and iii) the stronger USD development in recent weeks. Let’s see whether the reinforced Chinese-Iranian brotherhood spurs renewed interventionism from Bombing Biden.
We are generally more tempted to remove reflationary bets from the table than adding new ones, why we stick to being short EUR/USD, EUR/GBP and AUD/NZD and opt to add USD/SEK longs to the mix ahead of the Swedish dividend season (USD/SEK – target 8.96, S/L 8.42).
Amen to that.