Sweden

特別レポート

Highlights Go short the DXY index with a target of 90 and a stop loss of 100. The top-performing G10 currencies in 2020 will be the NOK and SEK. Remain short USD/JPY as portfolio insurance. USD/JPY and the DXY are usually positively correlated. A weak dollar will lend support to gold prices. Gold will also benefit from abundant liquidity and persistently low/negative real rates. EUR/USD should touch 1.18, while GBP/USD will retest 1.40. There are abundant trade opportunities at the crosses. Our favorites are long AUD/NZD and short CAD/NOK. Feature The DXY index has been trading on the weaker side in recent months and is breaking below the upward-sloped channel in place since the middle of last year. In a nutshell, the performance of the dollar DXY index has been unimpressive for this year (Chart 1). The decisive break down represents an important fundamental shift, since the next level of support lies all the way towards the 90-92 zone. Given additional confirmation from a few of our indicators in recent weeks, we are selling the DXY at current levels, with a tight stop at 100. Chart 1A Report Card On Currency Performance Green Shoots On Global Growth Frequent readers of our bulletin are well aware of the observation that the dollar is a countercyclical currency. As such, when global growth is rebounding, more cyclical economies benefit most from this growth dividend. This tends to weaken the dollar. Recent data confirms that this trend remains firmly intact. We expect continued improvement in both the ISM and global manufacturing PMI, but for now, the message is that the epicenter of the growth recovery is from outside the US. Chart 2Major Dollar Tailwinds Have Peaked We expect continued improvement in both the ISM and global manufacturing PMI, but for now, the message is that the epicenter of the growth recovery is from outside the US (Chart 2). This has typically been synonymous with a lower dollar. In the euro area, the expectations components of the ZEW and Sentix surveys continue to outpace current conditions, which tends to lead European PMIs by about six months. It is becoming more and more evident that we will be out of a manufacturing recession in the euro area early next year (Chart 3). Chinese imports surprised to the upside for the month of November, in line with the message from easing in financial conditions (Chart 4). Should stimulus continue to be frontloaded into next year, this should continue to support global growth. The perk-up in copper prices is a good confirmatory signal. Chart 3A V-Shaped Recovery In European Manufacturing Chart 4Chinese Growth Will Benefit From Stimulus Japanese GDP saw a big upward revision for the third quarter, and a few leading indicators suggest nascent green shoots despite the October consumption tax hike. A new fiscal package was announced recently and should go a long way in boosting domestic demand (Chart 5). Chart 5Japanese Growth Chart 6USD/SEK Has Peaked The currencies of small, open economies such as the SEK and the NZD have started to stage meaningful reversals. These currencies are usually good at sensing shifts in the investment landscape, and our suspicion is that they were primary funding vehicles for long USD trades (Chart 6). The slowdown in the global economy has been driven by the manufacturing sector, so it is fair to assume that this is the part of the economy that is ripe for mean reversion. Not to mention, cyclical swings in most economies tend to be driven by manufacturing and exports rather than services. More specifically, the currencies that have borne the brunt of the manufacturing slowdown should also experience the quickest reversals. This is already being manifested in a very steep rise in their bond yields vis-à-vis those in the US (Chart 7A and 7B). For example, yields in Norway, Sweden, Switzerland and Japan have risen significantly versus those in the US since the bottom. Should the nascent pickup in global growth morph into a synchronized recovery, this will go a long way in further eroding the US’s yield advantage. Chart 7AInterest Differentials And Exchange Rates Chart 7BInterest Differentials And Exchange Rates The key risk to a bearish dollar view is a US-led global growth rebound, allowing the Federal Reserve to adopt a much more hawkish stance relative to other central banks. This would be an environment in which US inflation would also surprise to the upside. This is not our baseline view, especially following the dovish revisions of the Summary of Economic projections made by the Fed this week. Bottom Line: Given further confirmation from a swath of indicators, we are going short the DXY index at current levels with an initial target of 90 and a stop loss at 100.  Go Long SEK Our highest-conviction views on currencies are being long the NOK and SEK.  Our highest-conviction views on currencies are being long the NOK and SEK. This view has been in place for a few months via other crosses, but we are taking the leap today in putting these positions on versus the dollar. Less aggressive investors can still stick to NOK and SEK trades as the crosses. Chart 8Soft Data Is Much Worse Of all the G10 currencies we follow, the Swedish krona is probably the most perplexing. The Riksbank is one of the few central banks to have raised rates this year, but the krona remains the weakest G10 currency. Admittedly, the performance of the Swedish manufacturing sector has been dismal, especially so in October (Chart 8). That said, the euro area, which has also experienced a deep manufacturing recession, has seen a better currency performance this year despite a more dovish European Central Bank. The big question for Sweden is whether the manufacturing sector is just in a volatile bottoming process, or about to contract much further. Domestically, retail sales were strong for the month of October and inflation is surprising to the upside. Exchange rates tend to be extremely fluid in discounting a wide swath of economic data, and in the case of Sweden, in discounting the outcome for global growth. This suggests that the quick reversals in the EUR/SEK and USD/SEK – from levels close to or above their 2008 highs – means that it will take anything but a deep recession to justify a weaker krona.  Bottom Line: In terms of SEK trading strategy, short USD/SEK and short NZD/SEK are good bets, since the SEK has a higher beta to global growth than the US dollar and the kiwi (Sweden exports 45% of its GDP versus 27% for New Zealand). However, an additional trade suggestion is to go short EUR/SEK for Europe-centric investors. Go Long NOK As Well Chart 9Opportunity Or Regime Shift? Since the middle of the last decade, another perplexing disconnect has been the divergence between the price of oil and the performance of petrocurrencies. From the 2016 bottom, oil prices have more than doubled, but the petrocurrency basket has massively underperformed versus the US dollar (Chart 9).  We agree with our commodity strategists that the outlook for oil prices is to the upside. Oil demand tends to follow the ebbs and flows of the business cycle, with demand having slowed sharply on the back of a manufacturing recession. Transport constitutes the largest share of global petroleum demand. A manufacturing pickup will therefore boost oil demand. Rising oil prices are bullish for petrocurrencies but being long versus the US dollar is no longer an appropriate strategy. This is because the landscape for oil production is rapidly shifting, with the US shale revolution grabbing market share from both OPEC and non-OPEC members. In 2010, only about 6% of global crude output came from the US. Fast forward to today and the US produces almost 15% of global crude, having grabbed market share from many other countries. In short, as the now-largest oil producer in the world, the US dollar is itself becoming a petrocurrency (Chart 10). Chart 10US Has Grabbed Oil Production Market Share Chart 11Buy Oil Producers Versus Oil Consumers The strategy going forward will be twofold. First, buying a petrocurrency basket versus the dollar will require perfect timing in the dollar down leg. The second strategy is to be long a basket of oil producers versus oil consumers. Chart 11 shows that a currency basket of oil producers versus consumers has had both a strong positive correlation with the oil price and has outperformed a traditional petrocurrency basket. Our recommendation is that NOK long positions should be played both via selling the CAD and USD (Chart 12). The discount between Western Canadian Select crude oil and Brent has also widened, which has historically heralded a lower CAD/NOK exchange rate (Chart 13). We are also long the NOK/SEK, given our belief that interest rate differentials and momentum will favor this cross over the next three months.   Chart 12CAD/NOK And DXY Chart 13NOK Will Outperform CAD Bottom Line: Remain short CAD/NOK for a trade, but more aggressive investors should begin accumulating long NOK positions versus the US dollar outright. The Yen As Portfolio Insurance Chart 14Short USD/JPY: A Contrarian Bet The yen tends to underperform at the crosses as global growth rebounds but still outperform versus the dollar, at least, until the Bank of Japan is forced to act (Chart 14). This places short USD/JPY bets in an enviable “heads I win, tails I do not lose too much,” position. Economic data from Japan over the past few weeks suggests the economy is weakening, but not fully succumbing to pressures of weak external growth and the consumption tax hike. The labor market remains relatively tight, and Tokyo office vacancies are hitting post-crisis lows, suggesting the demand for labor remains tight. The final print of third-quarter GDP growth rose to 1.8%. Wages are inflecting higher as well. The new fiscal spending package is likely to lend support to these trends.  What these developments suggest is that the BoJ is likely to stand pat in the interim, a course of action that will eventually reignite deflationary pressures in Japan (Chart 15). A return towards falling prices will eventually force the BoJ’s hand, but might see a knee-jerk rise in the yen before. Total annual asset purchases by the BoJ are currently a far cry from the central bank’s soft target of ¥80 trillion, and unlikely to change anytime soon (Chart 16). Chart 15What More Could The BoJ Do? Chart 16Stealth Tapering By The BoJ   It is important to remember why deflation is so pervasive in Japan, making the BoJ’s target of 2% a bit of a pipedream if it stands pat. The overarching theme for prices in Japan is a rapidly falling (and rapidly ageing) population, leading to deficient demand (Chart 17). Meanwhile, domestically, an aging population (that tends to be the growing voting base), prefers falling prices. What is needed is to convince the younger population to save less and consume more, but that is difficult when high debt levels lead to insecurity about the social safety net. On the other side of the coin, the importance of financial stability to the credit intermediation process has been a recurring theme among Japanese policymakers, with the health of the banking sector an important pillar. YCC and negative interest rates have been anathema for Japanese net interest margins and share prices (Chart 18). Any policy shift that is increasingly negative for banks could easily tip them over. This suggests the shock needed for the BoJ to act may be greater than history.  Chart 172% Inflation = Mission Impossible? Chart 18Negative Rates Are Anathema To Banks We believe global growth is bottoming, but the traditional yen/equity correlation can also shift. Inflows into Japan could accelerate, given cheap equity valuations and improved corporate governance that has been lifting the relative return on capital. The propensity of investors to hedge these purchases will be less if the dollar is in a broad-based decline. Bottom Line: An external shock could tip the Japanese economy back into deflation. The risk is that if the dollar falls, the yen remains flat to lower in the interim. Given cheap valuations and a lack of ammunition by the BoJ, our view is that it is a low cost for portfolio insurance. EUR/USD As The Anti-Dollar Our near-term target for EUR/USD is 1.18. This level will retest the downward sloping trendline in place since the Great Financial Crisis (Chart 19). Chart 20 plots the relative growth performance of the euro area versus the US, superimposed with the exchange rate. The result is very evident: The collapse in the euro since the financial crisis has been driven by falling growth differentials between the Eurozone and the US. There is little the central bank can do about deteriorating demographic trends, but it can at the margin stem falling productivity. One of its levers is to lower the cost of capital in the entire Eurozone, such that it makes sense even for the less productive peripheral countries to borrow and invest. Chart 19EUR/USD Chart 20Structural Slowdown In European Growth Importantly, yields across the periphery are rapidly converging towards those in Germany, solving a critical dilemma that has long plagued the Eurozone in general and the euro in particular. In simple terms, ECB policy has historically always been too easy for some member countries while too stimulative for others. This has traditionally led to internal friction for the currency. However, with 10-year government bond yields in France, Spain and even Portugal now close to the neutral rate of interest for the entire Eurozone, this dilemma is slowly fading. Labor market reforms in Mediterranean Europe have seen unit labor costs in Greece, Ireland, Portugal and Spain collectively contract by almost 10%. This has effectively eliminated the competitiveness gap that had accumulated over the past two decades. Italy remains saddled with a rigid and less productive workforce, but overall adjustments have still come a long way to closing a key fissure plaguing the common currency area. Earnings estimates for euro zone equities versus the US are rising. This tends to firmly lead the euro by about nine to 12 months, suggesting we are due for a pop in the coming quarters. Chart 21Relative R-Star* In The Eurozone Could Rebound The bottom line is that the various forces that may have been keeping the neutral rate of interest artificially low in the euro area are ebbing. The proverbial saying is that a chain is only as strong as its weakest link. This means that if the forces pressuring equilibrium rates in the periphery are slowly dissipating, this should lift the neutral rate of interest in the entire euro zone. Over a cyclical horizon, this should be bullish for the euro (Chart 21). Bottom Line: European equities, especially those in the periphery, remain unloved, given they are trading at some of the cheapest cyclically adjusted price-to-earnings multiples in the developed world. Earnings estimates for euro zone equities versus the US are rising. This tends to firmly lead the euro by about nine to 12 months, suggesting we are due for a pop in the coming quarters (Chart 22). Chart 22The Euro Might Soon Pop Concluding Thoughts Being long Treasurys and the dollar has been a consensus trade for many years now (Chart 23). According to CFTC data, this has been expressed mostly through the aussie and kiwi, although our bias is that the Swedish krona and Norwegian krone have been the real victims. Chart 23Unfavorable Dollar Technicals Chart 24The US Dollar Is Overvalued Various models have shown valuation to be a very poor tool for managing currencies, but an excellent one at extremes (Chart 24). The results show the US dollar as overvalued, especially versus the Swedish krona, Japanese yen and Norwegian krone. Commodity currencies are closer to fair value, and within the safe-haven complex the Japanese yen is more attractive than the Swiss franc. The euro is less undervalued than implied by the overvaluation in the DXY index. Finally, we are keeping our long GBP/JPY position for now, but with a new target of 155, and tightening the stop to 145 (near our initial target). Inflows into the UK should improve given more clarity from the political overhang, which can lead to an overshoot in the cross. Reviving global growth will also benefit inflows into sterling assets. On a tactical basis however, EUR/GBP is ripe for mean revision given oversold conditions.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

特別レポート

Highlights Net inflows into US assets have been rolling over since the beginning of 2019, given that the repatriation associated with the 2017 tax cuts was a one-off effect. Besides, fading interest rate differentials are making US Treasuries less attractive, which is a headwind for the greenback.  A trade war ceasefire between the US and China should improve the balance of payments dynamics for export-oriented nations. We maintain a pro-cyclical stance.  A revival in oil demand and curbs on supply should underpin oil prices through 2020, which could lift the trade balances of Norway and Canada. However, we expect the Canadian dollar to underperform, weighed by pipeline constraints and the divergence between WCS and WTI prices. Stay short CAD/NOK. Feature The balance of payments is one of the key indicators we watch on a regular basis to gauge the direction of exchange rates. While the power of BoP on currency moves differs from one country to another, it provides a big picture view of a country's transactions with other nations. Generally speaking, persistent surpluses are usually associated with appreciation in currencies, and vice versa. Ongoing trade disputes since early 2018 have caused some fluctuation in current account balances globally. Political uncertainties and rising protectionism have also limited foreign investments in some countries. Going forward, should global growth stabilize amid a possible trade détente, export-oriented regions will have more scope to improve their balance of payments dynamics. In what follows we present balance of payments across G10 through five categories: the trade balance, the current account balance, foreign direct investment, the basic balance, and lastly, portfolio investment. United States Chart 1US Balance Of Payments The US trade deficit has been more or less flat, lingering around 3% of GDP. The trade deficit mostly comes from manufactured goods. On the positive side, the US has been producing and exporting more petroleum and related products, which has decreased oil demand from abroad. Meanwhile, exports of pharmaceutical products are on the rise. The current account is at a smaller deficit of 2.5% of GDP, thanks to a positive net international investment position. Foreign direct investment had been increasing due to repatriation by US companies since the 2017 Trump tax cuts. If this one-off tax break was a source of US dollar strength in 2018, that support is now gone. Meanwhile, dollar strength since the beginning of 2018 may have made US assets less attractive to foreign investors. Since the beginning of 2019, net inflows into US assets have been rolling over, and have fallen to 0.9% of GDP. This has brought the US basic balance down to -1.6% of GDP. In terms of portfolio investment, US bond markets are still appealing to foreign investors, but interest rate differentials are moving against the greenback. Total foreign purchases of US Treasury bonds have been negative this year, of which official purchases stand at US$350 billion of net outflows. In short, the path of least resistance for the US dollar is down, due to a widening current account deficit, waning foreign direct investment, fading interest rate differentials and increasing dollar liquidity. Euro Area Chart 2Euro Area Balance Of Payments The slowdown in global trade has hit European exports, but the trade balance is still sporting a “healthy” surplus of 1.7% of GDP, albeit far below its peak. As a result, the current account as of September 2019 was still at a healthy level of 2.7% of GDP. Should a US-China "phase one" deal be finalized, the trade balance in the euro area is likely to rebound going into 2020. Foreign direct investment has been increasing to the point of being at its highest level over the past 20 years, or 1% of GDP. This has been aided in part by the peripheral countries, further evidence that we are getting a convergence in competitiveness across Eurozone countries. The cheap euro and lower cost of capital have helped. As a result, the basic balance for the euro area reached a new high of 3.8% of GDP in September 2019. Portfolio investment into the euro area has stopped deteriorating since the beginning of 2017 and is now sporting net inflows of 0.8% of GDP. European purchases of both foreign equities and foreign bonds are falling, probably a sign that domestic assets are becoming more attractive. For example, ETF inflows are accelerating. The restart of the European Central Bank’s asset purchase program will continue to act as an anchor for spread convergence in the euro area. Meanwhile, a rally in European equities will be another signal of recovery in the euro area. A healthy current account balance and improving foreign investments both signal a higher euro going forward. Japan Chart 3Japanese Balance Of Payments The trade slowdown has dealt a small blow to Japan’s current account balance. The trade deficit widened further in 2019, reaching -0.5% of GDP in Q3. Exports have been falling for a 10th consecutive month, weighed down in part by lower sales of auto parts and semiconductor equipment. But these will pick up should a trade truce be reached. Among its major trading partners, sales to the US, China and other Asian countries have fallen, but have risen in the Middle East and Western Europe. That said, Japan’s large net international investment position has helped keep the current account surplus at an elevated level of 3.4% of GDP. Foreign direct investment in Japan has been dismal for many years due to an offshoring of industrial production. Net FDI is currently standing at -4% of GDP, which has brought the basic balance below zero for the first time since 2016. The recent deceleration is further evidence that corporate Japan needs structural reforms. Portfolio investment remains in negative territory mostly due to Japanese residents' large purchases of foreign long-term bonds. Going forward, fund inflows to Japan could face more headwinds with the proposed change to the Foreign Exchange and Foreign Trade Act. The change aims to lower the minimum stake for foreign investors without government approval from 10% to 1%. Other changes include requiring foreign directors to seek permission before becoming a board member. That said, Japan’s large net international investment position, which produces a high current account surplus, will continue to make the yen a safe haven amid global uncertainties. United Kingdom Chart 4UK Balance Of Payments So far, a cheap pound has not yet staunched the deterioration in UK balance of payments. The UK trade deficit remained wide at 7% of GDP in the third quarter. Among its major trading partners, the trade deficit comes mainly from Germany and China, offset by a smaller surplus from the US, the Netherlands and Ireland. Net receipts are positive, but the current account balance is still in negative territory at -5% of GDP. The Brexit imbroglio has led to an exodus of foreign direct investment. Many international companies are fleeing the UK, but to the extent that we get a quick resolution after the December elections, the uncertainty is likely to subside. Portfolio investment in the UK has been volatile over the past few years and has not really helped dictate any discernable trend in the UK basic balance. More recently, inflows into UK gilts have been £19 billion in the second quarter, while flows into equities are also improving. Relative interest rate differentials are also likely to move in favor of the UK, especially if reduced uncertainty provides scope for the Bank of England to hike interest rates. At a minimum, compared with other European nations, gilts remain appealing to international investors. We remain positive on the pound and are long GBP/JPY in our portfolio. Canada Chart 5Canadian Balance Of Payments The Canadian trade deficit has been hovering near -1% of GDP over the past few years. The goods trade deficit narrowed this year, led mostly by an increase in energy exports and lower imports of transportation equipment. Further improvement in energy product sales will require an improvement in pipeline capacity and a smaller gap between WCS and Brent crude oil prices. The current account deficit has been narrowing, now standing at -2% of GDP, the smallest since 2008. This is helped by net receipts, especially driven by a rise in direct investment income. FDI has been the bright spot in Canadian BoP dynamics. FDI inflows have been in part helped by increased cross- border M&A activities. Net FDI into Canada now accounts for 2.7% of GDP. This has brought the basic balance back above zero for the first time since 2015. Portfolio investment is positive on a net basis, but the trend looks quite worrisome. Foreign entities are fleeing Canada. In the meantime, Canadian investment in foreign securities is on the rise, reaching C$6 billion in Q3. Profitability, liquidity concerns and a global push towards sustainable investing are making Canadian energy and mining companies unappealing for foreign capital. Moreover, with elevated house prices and depressed interest rates, the outlook for banking profitability is also concerning. A drop in the US dollar will help the loonie in the short term. Over the longer term, however, we prefer to be underweight the Canadian dollar, especially via the Australian dollar and the Norwegian krone, which have a better macro outlook. Australia Chart 6Australian Balance Of Payments Australia has seen the best balance of payments improvement among the G10. The Australian trade balance soared this year and now stands at 2.5% of GDP, the highest in several years. Terms of trade, which have increased by 45% since their 2016 bottom, have been one of the main drivers. Exports of iron ore and concentrates increased by 64% year-on-year in September 2019, adding to the positive trade balance. Ergo, Australia is benefitting from both a price and volume boost. Trade has lifted the current account to be on track to post its first surplus since the ‘70s. Going forward, we expect Australian trade to continue improving amid the US-China trade détente. Foreign direct investment dipped slightly in 2019, but from very elevated levels. At present, it still stands at 3.5% of GDP. This has allowed for a very healthy basic balance surplus of 2.9% of GDP. The largest sources of Australian foreign direct investment are the US and the UK. The FDI inflows tend to be concentrated in the mining and manufacturing sectors and generate a negative income balance for Australia. This has been part of the reason behind the country’s chronic current account deficit, but it is impressively becoming less and less important. Portfolio investment in Australia plunged in 2019, and now stands at -4.2% of GDP. This has been driven by an exodus from the bond market. The repatriation of capital back to the US probably helped exacerbate this trend. The Australian dollar is likely to rebound from a contrarian perspective. We are playing Aussie dollar strength via the New Zealand and Canadian dollars. New Zealand Chart 7New Zealand Balance Of Payments New Zealand is also benefitting from a terms-of-trade boost. The trade deficit marginally narrowed to -1.7% of GDP in the third quarter. Exports rose by 4% year-on-year in the third quarter, while imports rose by 3.6% year-on-year. Terms of trade increased in 2019, mainly driven by a rise in dairy and meat prices. It appears the pork crisis in China is benefitting New Zealand exports. As a result, the current account deficit narrowed slightly to 3.4% of GDP. Foreign direct investment in New Zealand rose sharply to 3.1% of GDP, partly driven by reinvestment in the banking sector. This almost brought the basic balance back into positive territory. If this trend continues, it will be the first time the basic balance is in positive territory in two decades. Portfolio investment in New Zealand has been deteriorating, with net outflows of $6.2 billion in the second quarter. This is almost 4% of GDP on an annualized basis. The withdrawal of equity and investment fund shares by foreign entities, as well as divestment of debt securities by the general government, are some of the reasons behind falling portfolio investment. In a nutshell, increased portfolio investment in New Zealand will be predicated on a terms-of-trade shock that boosts margin growth for agricultural exporters, or a policy shift that boosts domestic return on capital. We like the kiwi versus the dollar, but are underweight against its pro-cyclical peers, namely the Australian dollar and the Swedish krona. Switzerland Chart 8Swiss Balance Of Payments The Swiss trade balance has been in a structural surplus, and hugely underpins the nation’s large current account surplus. The improvement this year, a rebound to 5.4% of GDP in the third quarter, is notable. The increase in exports has been partly driven by higher sales of chemical and pharmaceutical products, jewelry, and metals. Combined with income inflows from its large net international investment position, this has produced a current account balance of 10.7% of GDP. The slowdown in foreign direct investment has eased sharply from a record-low of -16% to -8% of GDP. Tax breaks from the US Jobs Act in 2017 allowed for favorable divestment of FDI in Switzerland and repatriation back to the US. This was a one-off that is now behind us, which explains why the basic balance is shifting back into surplus territory, to the tune of 2.5% of GDP.  Portfolio investment has been gradually improving and now stands at 0.3% of GDP. Swiss paper and equities (which are defensive) have benefitted from increased safe-haven demand this year. The Swiss franc is likely to continue its slow structural appreciation in the years to come, interspersed with bouts of volatility. In the short-term, however, the Swiss National Bank is likely to use the currency to fight deflationary pressures. This suggests the EUR/CHF has upside tactically. Sweden Chart 9Swedish Balance Of Payments The Swedish trade balance has been in structural decline since 2004 and turned negative in 2016. A large component of Swedish exports are machinery and automobiles which have suffered stiff competition from other global giants. The good news is that the weak krona is starting to help. The third-quarter trade balance shifted to a surplus for the first time since 2016 and is currently standing at 0.2% of GDP. Combined with inflows from Sweden’s external investments, this has nudged the current account balance to 3.3% of GDP. Despite net FDI inflows falling to -2.1% of GDP, the basic balance still managed to remain stable at 1.2% of GDP due to the improvement in the current account balance. The recent decline in Swedish FDI has mirrored those in other countries. However, Swedish exports will benefit from a trade détente as well as from a broader improvement in global growth. This should stem FDI outflows. Net portfolio investment in Sweden has been volatile in recent years, but our expectation is for improvement. A weak krona has typically helped the manufacturing sector with a lag of 12 months. Moreover, with the krona trading at a large discount to its long-term fair value, foreign investors will likely benefit from both equity and currency returns, should cyclical stocks continue to outperform defensives. In summary, Sweden’s basic balance should recover to levels that have prevailed over the past few years. Norway Chart 10Norwegian Balance Of Payments The bottom in oil prices since 2016 has gone a long way towards improving Norway’s trade balance. Net trade has fallen marginally this year due to lower exports of oil and natural gas, but still stands at 7.2% of GDP. The trade balance is the primary driver of the current account balance, and the latter now stands at 6.4% of GDP. Norway has seen an exodus of foreign capital from both direct and portfolio investment.  Net FDI and portfolio investment stand at -3% and -4% of GDP, respectively. Declining oil production in the North Sea has been partly responsible for falling FDI. On the portfolio side of the equation, it has been mainly due to increased purchases of foreign equities and bonds, especially via the Oil Fund. Concerns around sustainable investing have also likely diverted investors away from Norwegian assets. Despite this, Norway still sports a basic balance surplus of 3.4% of GDP. Eventually, this basic balance will move from being supported by trade to income inflows from Norway’s large net international investment position. The Norwegian krone is cheap on many metrics, and is one of our favorite petrocurrencies at the moment. Should global growth stabilize, which will revive oil demand, inflows into Norway should improve.   Kelly Zhong Research Analyst kellyz@bcaresearch.com Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Dear Client, In addition to this short weekly report, you will also receive our 2020 outlook, published by the Bank Credit Analyst. Next week, I will be on the road visiting clients in South Africa. I hope to report my discussions and findings the following week. Best regards, Chester Ntonifor Highlights According to a simple attractiveness framework, the most desirable currencies are the Norwegian krone, the Swedish krona, and the Japanese yen. The least attractive are the New Zealand dollar and the British pound. Take profits soon on our long GBP/JPY position. Feature In this report, we use a simple framework for ranking G10 currencies. First, we consider the macroeconomic environment using as proxies a country’s basic balance and external vulnerability. Next, we look at valuation metrics,  surveying a variety of both short-term and longer-term models. Finally, we consider positioning, to gauge if our view is mainstream or out of consensus. Below are our results. Basic Balance Chart I-1Basic Balance We consider the basic balance to be one of the most important concepts in determining the attractiveness of a currency. In a nutshell, it captures the ebb and flow of demand for a country’s domestic assets. Persistent basic balance surpluses are usually associated with an appreciating currency and vice versa. The euro area sports the best basic balance surplus in the G10 universe, followed by Norway and then Australia (Chart I-1). In simple terms, this means there is constant strong underlying demand for these currencies - either for domestic goods and services, or for investment into portfolio assets. The UK and the US rank the worst in terms of basic balances, driven by Brexit uncertainty and the ebbing of tax reform benefits in the US. We will explore balance of payments dynamics within all of the G10 countries in detail next week. External Debt A currency is sometimes only as vulnerable as its external liabilities. In an absolute sense, external debt as a share of GDP is highest in the UK, euro area, and Switzerland (Chart I-2). However, what matters most times for vulnerability are net external assets rather than gross liabilities. On this measure, Japan, Switzerland, and Norway are the most attractive countries, while the US and Australia rank the worst (Chart I-3). Chart I-2External Vulnerability Chart I-3US Is Least Attractive Purchasing Power Parity (PPP) Chart I-4PPP Model Various models have shown PPP to be a very poor tool for managing currencies, but an excellent one at extremes. However, there is a roadblock that comes from measurement issues, since consumer price baskets tend to differ in composition from one country to the next. In order to get closer to an apples-to-apples comparison across countries, two adjustments are necessary. First, categorizing the consumer price index (CPI) into five major groups. In most cases, this breakdown captures 90% of the national CPI basket. This includes food, restaurants and hotels (1), shelter (2), health care (3), culture and recreation (4), and energy and transportation (5). The second adjustment is to run two regressions with the exchange rate as the dependent variable. The first regression (call it REG1) uses the relative price ratios of the five groups as independent variables. This allows us to observe the most influential price ratios that help explain variations in the exchange rate. The second regression (call it REG2) uses a weighted average combination of the five groups to form a synthetic relative price ratio. If, for example, shelter is 33% in the US CPI basket, but 19% in the Swedish CPI basket, relative shelter prices will represent 26% of the combined price ratio. This allows for a uniform cross-sectional comparison, as opposed to using the national CPI weights. The US dollar is overvalued, especially versus the Swedish krona, Japanese yen, and Norwegian krone.  The results show the US dollar as overvalued, especially versus the Swedish krona, Japanese yen, and Norwegian krone. Commodity currencies are closer to fair value, and within the safe-haven complex, the Japanese yen is more attractive than the Swiss franc. The euro is less undervalued than implied by the overvaluation in the DXY index (Chart I-4). Intermediate-Term Timing Model (ITTM) Back in 2016, we developed a set of currency indicators to help global portfolio managers increase their Sharpe ratio in managing currency exposure. The idea was quite simple: For every developed world country, there were three key variables that influenced the near-term path of its exchange rate versus the US dollar. Our intermediate-term timing models are not sending any strong signals at the moment.  Interest Rate Differentials: Under the lens of interest rate parity, if one country is expected to have lower interest rates versus another, the incumbent’s currency will fall today so as to gradually appreciate in the future and nullify the interest rate advantage. Chart I-5Intermediate-Term Model Inflation Differentials: Assuming no transactional costs, the price of sandals cannot be relatively high and rising in Mumbai versus Auckland. Either the Indian rupee needs to fall, the kiwi rise, or a combination of the two has to occur to equalize prices across borders. Risk Factor: Exchange rates are not government bonds in that few treasury departments and central banks can guarantee a par value on them. Ergo, the ebb and flow of risk aversion will have an impact on the Norwegian krone as well as the yen. For the most part, our models have worked like a charm. On a risk-adjusted return basis, a dynamic hedging strategy based on our ITTMs has outperformed all static hedging strategies for all investors with six different home currencies since 2001. These results give us confidence to continue running these models as a sanity check for our ever-shifting currency biases. That said, our intermediate-term timing models are not sending any strong signals at the moment. The Swedish krona, Norwegian krone, and New Zealand dollar are the most attractive currencies, while the British pound and Swiss franc are the least attractive (Chart I-5). Long-Term Fair Value Model Chart I-6Long-Term Model Our long-term FX models are also part of a set of technical tools we use to help us navigate FX markets. Included in these models are variables such as productivity differentials, terms-of-trade shocks, net international investment positions, real rate differentials, and proxies for global risk aversion. These models cover 22 currencies, incorporating both G10 and emerging market FX markets. The models are not designed to generate short- or intermediate-term forecasts. Instead, they reflect the economic drivers of a currency's equilibrium. Their main purpose is to provide information on the longevity of a currency cycle, depending on where we are in the economic cycle. Our long-term FX models are not sending any strong signals right now, with the US dollar at fair value. The cheapest currencies are the yen, the Norwegian krone, and Swedish krona (Chart I-6). The priciest currencies are the South African rand and the Saudi riyal. Real Interest Rates One defining feature of the currency landscape is that pretty much across the G10 countries, we have negative real rates (Chart I-7). Within  the G10 universe, the US and New Zealand dollars are the highest-yielding currencies, while the British pound and Swedish krona are the least attractive. Chart I-7Real Rates Speculative Positioning Being long Treasurys and the dollar has been a consensus trade for many years now (Chart I-8). According to CFTC data, this has been expressed mostly through the aussie and kiwi, although our bias is that the Swedish krona and Norwegian krone have been the real victims. Chart I-8Positioning That said, flow data highlights just how precarious being long US dollars is right now. Net foreign purchases by private investors are still positive, but the momentum of these flows is clearly rolling over. This is being more than offset by official net outflows. As interest rate differentials have started moving against the US, so has foreign investor appetite for Treasury bonds. Concluding Thoughts Should the nascent pickup in global growth morph into a synchronized recovery, it will go a long way in further eroding the US’ yield advantage. More specifically, the currencies that have borne the brunt of the manufacturing slowdown should also experience the quickest reversals. For example, yields in Norway, Sweden, Switzerland, and Japan have risen by much more than those in the US since the bottom. The most attractive currencies are the Swedish krona, the Norwegian krone, and the Japanese yen. The least attractive are the British pound and New Zealand dollar. This is the message being sent by an aggregate of our ranking model. The most attractive currencies are the Swedish krona, the Norwegian krone, and the Japanese yen. The least attractive are the British pound and New Zealand dollar (Chart I-9). Take profits soon on our long GBP/JPY position. Chart I-9Favor Norway, Japan and Sweden   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been mixed: Retail sales grew by 0.3% year-on-year in October. Industrial production contracted by 0.8% month-on-month in October. On the housing market front, building permits and housing starts both increased by 5% and 3.8% month-on-month in October. However, MBA mortgage applications contracted by 2.2% for the week ended November 15th. The NY Empire State Manufacturing index fell to 2.9 from 4 in November. The Philly Fed manufacturing index, on the other hand, soared to 10.4 from 5.6 in November. The DXY index depreciated by 0.3% this week. The FOMC minutes released this Wednesday showed that the Fed now sees little need to further reduce rates. Last week, we did a reassessment of global growth and the USD, and entered a limit sell for the DXY index at 100. Report Links: Place A Limit Sell On DXY At 100 - November 15, 2019 Signposts For A Reversal In The Dollar Bull Market - November 1, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 The Euro Chart II-3EUR Technicals 1 Chart II-4UR Technicals 2 Recent data in the euro area have been mostly positive: The seasonally-adjusted trade balance fell to €18.3 billion in September. The current account surplus slightly narrowed by €0.3 billion to €28.2 billion. Headline and core inflation were both unchanged at 1.1% and 0.7% year-on-year respectively in October. Consumer confidence improved from -7.6 in October to -7.2 in November. EUR/USD increased by 0.5% this week. The improvement in soft data confirms that the economy is in a bottoming process in the euro area. The fact that the largest economy, Germany, skirted a recession last week also boosted investor confidence. We continue to remain overweight the euro. Report Links: On Money Velocity, EUR/USD And Silver - October 11, 2019 A Few Trade Ideas - Sept. 27, 2019 Battle Of The Central Banks - June 21, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been positive: Exports decreased by 9.2% year-on-year in October. Imports slumped by 14.8% year-on-year. The total trade balance shifted to a surplus of ¥17.3 billion.  The industry activity index increased by 1.5% month-on-month in September. USD/JPY fell by 0.2% this week. While global growth is set to improve given a possible trade détente and easy monetary policy worldwide, uncertainties continue to loom. The US Senate unanimously passed legislation on the "Hong Kong Human Rights and Democracy Act," adding more difficulties to finalize the Phase I trade deal. Global trade uncertainty is positive for safe-haven demand. Report Links: Signposts For A Reversal In The Dollar Bull Market - November 1, 2019 A Few Trade Ideas - Sept. 27, 2019 Has The Currency Landscape Shifted? - August 16, 2019 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been positive: The Rightmove house price index increased by 0.3% year-on-year in November. Public sector net borrowing increased by £3 billion to £10.5 billion in October. The British pound continues to appreciate by 0.7% against the US dollar this week. With Brexit being less of a threat, the pound is poised to rise through next year. We are long GBP/JPY in our portfolio and it is in the money at 6.1%. Report Links: A Few Trade Ideas - Sept. 27, 2019 United Kingdon: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Battle Of The Central Banks - June 21, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been soft: The Westpac leading index fell by 0.1% month-on-month in October, following a slight decline the previous month. AUD/USD has been more or less flat this week. In the monetary policy minutes released this week, the RBA expressed their expectations for stronger growth at 2.75% in 2020 and around 3% in 2021, supported by accommodative monetary policy, infrastructure spending, stabilizing house prices, and strong steel-intensive activities in China. The minutes also presented an argument against lower interest rates: while lower interest rates can support the economy through the usual transmission channels, they could be negative for savers and confidence. That said, the RBA is "prepared to ease monetary policy further if needed." Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Not Out Of The Woods Yet - April 5, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been positive: Both output and input components of the producer price index have increased in Q3: the output component grew by 1% quarter-on-quarter and input component by 0.9% quarter-on-quarter. NZD/USD increased by 0.7% this week. Both growth and inflation in New Zealand are showing signs that the economy is in a bottoming process. We are positive on the kiwi against the US dollar while we remain short against the Australian dollar and Swedish Krona. Report Links: Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Where To Next For The US Dollar? - June 7, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Manufacturing shipments fell by 0.2% month-on-month in September. Both headline and core inflation were unchanged at 1.9% year-on-year in October. ADP employment showed a loss of 22.6K jobs in October. The Canadian dollar fell by 0.6% against the US dollar this week. While a possible trade détente between US and China and rising oil prices could put a floor under the loonie, the pipeline constraints in Canada have dampened the correlation between the oil prices and the loonie.  This will limit the upside potential for the Canadian dollar. Report Links: Making Money With Petrocurrencies - November 8, 2019 Signposts For A Reversal In The Dollar Bull Market - November 1, 2019 Preserving Capital During Riot Points - September 6, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: The trade surplus narrowed to CHF 3.5 billion in October from CHF 4.1 billion the previous month, due primarily to growth in imports, which grew by 1.9 billion month-on-month. Exports also increased by 1.3 billion month-on-month. Import demand remains firm for chemical products. Industrial production grew by 8% year-on-year in Q3. USD/CHF increased by 0.2% this week. The trade balance still remains at a high level in Switzerland, which is bullish for the franc. Moreover, global uncertainties could underpin the safe-haven franc. Report Links: Notes On The SNB - October 4, 2019 What To Do About The Swiss Franc? - May 17, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been positive: The trade balance shifted to a surplus of NOK 5.9 billion in October, after a deficit of NOK 1.4 billion in September. However, this is compared to a surplus of NOK 32.6 billion in the same month last year. On a year-on-year basis, exports slumped by 27%, caused by a decrease in exports of mineral fuels and chemical products. The Norwegian krone appreciated by 0.3% against the US dollar this week, supported by the oil price recovery. On Wednesday, the EIA posted an increase of crude oil inventories by 1.4 million barrels from the previous week, lower than expectations. WTI crude oil prices thus surged by 4% on the news. Going forward, we remain overweight energy prices and the Norwegian krone. Report Links: Making Money With Petrocurrencies - November 8, 2019 A Few Trade Ideas - Sept. 27, 2019 Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been positive: Capacity utilization increased to 0.5% in Q3, up from 0.1% in the previous quarter. The Swedish krona increased by 0.7% against the US dollar this week. The Swedish krona has depreciated by 23% against the USD since its 2018 peak. A global growth revival is likely to give a boost to the krona from a valuation perspective. Report Links: Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

In lieu of the next weekly report I will be presenting the quarterly webcast ‘The Japanification Of Europe: Should We Fear It, Or Celebrate It?’ on Monday 4 November at 10.00AM EST, 3.00PM GMT, 4.00PM CET, 11.00PM HKT. As usual, the webcast will take a TED talk format lasting 18 minutes, after which I will take live questions. Be sure to tune in. Regards, Dhaval Joshi Highlights Global and European growth is experiencing a welcome rebound. Favour a cyclical investment stance, albeit tactical – as there is no visibility in the growth rebound beyond early 2020. Close the overweight to healthcare versus industrials at a small profit. Upgrade Sweden and Spain to overweight, and Norway to neutral. Downgrade Denmark to underweight, and Ireland to neutral. Expect heightened volatility in sterling in the build up to a highly ‘non-linear’ UK election. Fractal trades: 1. long oil and gas versus telecom; 2. long tin. Feature Global and European growth is experiencing a welcome rebound. This we can see from the best real-time indicators of activity, such as the ZEW sentiment, IFO expectations and of course the equity and bond markets (Chart of the Week). Nevertheless, investors make three very common mistakes in interpreting, predicting, and implementing such rebounds. This week’s report describes these three mistakes and the underlying realities. Chart of the WeekGrowth Is Experiencing A Welcome Rebound Mistake #1: Real-Time Indicators Do Not Lead The Market Reality #1: In the short term, markets move in lockstep with indicators such as the ZEW sentiment, IFO expectations, and PMIs (Chart I-2). Chart I-2Economic Indicators Do Not Lead The Markets... Having said that, the evolution of economic indicators can still provide a useful long-term investment signal. If an indicator – like IFO expectations – tends to revert to its mean, and is now near its historical lower bound, the scope for an eventual move up is greater than the scope for a further move down.1 Based on such a reversion to the mean, we are maintaining a structural overweight to the DAX versus the German long bund (Chart I-3). Chart I-3...But Depressed Performances Have Scope For Long-Term Upside But to reiterate, in the short term, the market moves in lockstep with the real-time economic indicators. Hence, to get a useful short-term investment signal, we need to predict where these indicators will be in the coming months – in other words, to predict whether growth will continue to accelerate. In the short term, the market moves in lockstep with real-time economic indicators.  Which brings us neatly to the second mistake. Mistake #2: When Financial Conditions Ease, Growth Does Not Necessarily Accelerate Reality #2: It is not the change of financial conditions but rather its impulse – the change of the change – that causes growth to accelerate or decelerate. For example, a 0.5 percent decline in the bond yield decline will trigger new borrowing through, inter alia, an increase in the number of mortgage applications. The new borrowing will add to demand, meaning it will generate growth. But in the following period, a further 0.5 percent decline in the bond yield will generate the same additional new borrowing and thereby the same growth rate. The crucial point being that if the decline in the bond yield is the same in the two periods, growth will not accelerate. Growth will accelerate only if the first 0.5 percent bond yield decline is followed by a bigger, say 0.6 percent, decline – meaning a tailwind impulse. But growth will decelerate if the first 0.5 percent decline is followed by a smaller, say 0.4 percent, decline – meaning a headwind impulse. To repeat, the counterintuitive thing is that for a growth acceleration it is not the change in the bond yield that is important but rather its impulse. There are four impulses that matter for short-term growth: The bond yield 6-month impulse. The credit 6-month impulse. The oil price 6-month impulse (for oil importing economies like Germany). The geopolitical risk impulse. To be clear the geopolitical risk impulse is not an impulse in the technical sense, but it is a similar concept: is the number of potential geopolitical tail-events going up or down? In the fourth quarter, our subjective answer is down. The Brexit deadline has been pushed back to January 31 2020; the new coalition government in Italy has removed Italian politics as an imminent tail-event; and the US/China trade war and Middle East tensions are most likely to be in stasis. Turning to the other impulses, the credit 6-month impulse should briefly rebound in the fourth quarter following the rebound in the global bond yield 6-month impulse (Chart I-4). All of this favours a cyclical investment stance – albeit tactical, because there is no visibility in this growth rebound beyond early 2020. Chart I-4The Credit 6-Month Impulse Should Briefly Rebound Meanwhile, the recent evolution of the oil price 6-month impulse should provide an additional short-term tailwind for oil importing economies (Chart I-5). Justifying a near-term overweight stance to the cyclical heavy German stock market within a European or global equity portfolio. Chart I-5The Oil Price 6-Month Impulse Should Help Oil Importing Economies Which brings us to the third mistake. Mistake #3: Major Stock Markets Are Not Plays On Their Economies Of Domicile Reality #3: Major stock markets are dominated by multinational corporations, and such companies are plays on their global sectors, rather than the country in which they have a stock market listing. Hence, a stock market’s relative performance is predominantly a play on its distinguishing overweight and underweight ‘sector fingerprint’. What confuses matters is that sometimes the sector fingerprint happens to align with the tilt of the domicile economy. Germany has an exporter heavy stock market and an exporter heavy economy while Norway has an oil heavy stock market and an oil heavy economy, so in these cases there is a connection between the stock market and the economy. But in most instances, there is no alignment: the connection between the UK stock market and the UK economy is minimal, and the same is true in Spain, Denmark, Ireland, and most other countries. When bond yields were declining most sharply, and growth was decelerating, it weighed on cyclical sectors such as industrials and banks versus the more defensive sectors such as healthcare. Banks suffered doubly because the flattening (or inverting) yield curve also ate into their margins. But if the sharpest decline in bond yields has already happened, it suggests that cyclicals could experience a burst of outperformance, at least for a few months (Chart I-6). Hence, today we are closing our four month overweight to healthcare versus industrials at a small profit. Chart I-6If The Sharpest Decline In Bond Yields Is Over, Cyclicals Could Outperform Based on sector fingerprints, this also necessitates the following changes to our country allocation: Overweight banks versus healthcare means overweight Sweden versus Denmark (Chart I-7). Chart I-7Long Sweden Versus Denmark = Long Financials And Industrials Versus Biotech Overweight banks means overweight Spain (Chart I-8). Chart I-8Long Spain = Long Banks Meanwhile, removing our underweight to the cyclical oil sector means removing the successful underweight to Norway (Chart I-9). And indirectly, it means removing the equally successful overweight to Ireland, given its high weighting to Airlines (Chart I-10).  Chart I-9Long Norway = Long Oil And Gas Chart I-10Long Ireland = Long Airlines   Bonus Mistake: You Can Not Hit A Point Target In A Non-Linear System Boris Johnson said that he “would rather be dead in a ditch” than miss the October 31 deadline for delivering Brexit. Well Johnson had to ditch his ditch. Why? Because the UK’s parliamentary arithmetic has made Brexit an inherently non-linear system, and you cannot hit a point target in a non-linear system. Boris Johnson had to ditch his ditch. In a non-linear system a tiny change in an input might have no impact on the output, or it might have a huge impact on the output. The Brexit process is inherently non-linear because a tiny shift in parliamentary votes one way or another, or a tiny shift in the tabled amendments to laws one way or another has had a huge impact on the outcome. That’s why it proved impossible for Johnson to hit his point target of delivering Brexit by October 31. Attention now shifts to another non-linear system – the upcoming UK general election. The UK’s first past the post electoral system is designed for a head-to-head between two dominant parties. But right now, there are five parties in play – Labour, Liberal Democrat, Conservative, Brexit, plus the SNP in Scotland. Mathematically, this creates the possibility of ten types of swings, compared with the usual single swing between Labour and Conservative. Making the outcome of the election highly sensitive to a tiny shift in votes either way in ten different directions. The UK general election is a non-linear system. In The Pound Is A Long Term Buy (And So Are Homebuilders) we initiated a structural long position in the undervalued pound.2 Given that our overweight to the international focused FTSE100 versus the domestic focussed FTSE250 is effectively an inverse play on the pound, it is inconsistent with our long-term view on the currency (Chart I-11). Nevertheless, over the course of the election campaign we expect heightened volatility in sterling as the non-linearity of the election outcome becomes clear. Hence, we await an upcoming better opportunity to remove our overweight FTSE100 versus FTSE250 position. Chart I-11Long FTSE250 Versus FTSE100 = Long Pound Fractal Trading System* There are two recommended trades this week. The underperformance of US oil and gas versus telecom is ripe for a technical rebound based on its broken 130-day fractal structure. Go long US oil and gas versus telecom, setting a profit target and symmetrical stop-loss at 8 percent. The recent sell-off in tin is undergoing a similar technical bottoming process. Go long tin, setting a profit target and symmetrical stop-loss at 5 percent. For any investment, excessive trend following and groupthink can reach a natural point of instability, at which point the established trend is highly likely to break down with or without an external catalyst. An early warning sign is the investment’s fractal dimension approaching its natural lower bound. Encouragingly, this trigger has consistently identified countertrend moves of various magnitudes across all asset classes. Chart I-12US: Oil & Gas Vs. Telecom Chart I-13Tin The post-June 9, 2016 fractal trading model rules are: When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. Use the position size multiple to control risk. The position size will be smaller for more risky positions. * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European  Investment Strategist dhaval@bcaresearch.com Footnotes 1 In technical terms, if the time-series is ‘stationary’, it must eventually rebound from its lower bound. 2 Please see the European Investment Strategy Weekly Report, "The Pound Is A Long-Term Buy (And So Are Homebuilders)," dated October 17, 2019 available at eis.bcaresearch.com Fractal Trading System Cyclical Recommendations Structural Recommendations Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II_8Indicators To Watch - Interest Rate Expectations  

Highlights On a tactical horizon, underweight bonds versus cash, especially those bonds with deeply negative yields… …and underweight bonds versus equities. On a strategic horizon, remain overweight a 50:50 combination of U.S. T-bonds and Italian BTPs versus a 50:50 combination of German Bunds and Spanish Bonos, at either 10-year or 30-year bond maturities. Investors could also play the component pairs: overweight U.S. T-bonds versus German bunds; and overweight Italian BTPs versus Spanish Bonos. New recommendation: switch Japanese yen long exposure into Swedish krona long exposure. Fractal trade: long SEK/JPY. Feature Chart of the WeekSwiss Bond Yields Have Found It Difficult To Go Down, But Easy To Go Up! Anybody who has dared to bet that JGB yields would rise has ended up being carried out of their job, feet first. Shorting Japanese government bonds (JGBs) is known as the widow maker trade. Over the past 20 years, any investment manager who has dared to bet that JGB yields would rise – whether starting from 2 percent, 1 percent, or even 0.5 percent – has ended up being carried out of their job in a box, feet first. Today, the Bank of Japan’s policy of ‘yield curve control’ means that JGB yields are constrained within a tight range around zero, limiting their immediate scope to break higher. The European equivalent of the widow maker trade has been to short Swiss government bonds. Just as with JGB’s during the past two decades, anybody who has dared to bet that Swiss government bond yields would rise – whether starting from 2 percent, 1 percent, or 0.5 percent – has been proved fatally wrong (Chart I-2). Chart I-2Widow Makers: Shorting Japanese And Swiss Bonds That is, until this year, when Swiss government bond yields reached -1 percent. The Lower Bound To Bond Yields Is Around -1 Percent According to several senior central bankers who have spoken to us, the practical lower bound to the policy interest rate is -1 percent, because “-1 percent counterbalances the storage cost of holding physical cash and/or other stores of value”. They argue that if bank deposit rates were to fall much below -1 percent, it would be logical for bank depositors to flee wholesale into physical cash, and such a deposit flight would destroy the banking system.1 Still, couldn’t central banks just abolish physical cash, forcing us all into ‘digital cash’ with unlimited negative interest rates? No, because that would just push us into other stores of value: for example, gold, or the rapidly growing ‘decentralised’ cryptocurrency asset-class. The common counterargument is that cryptocurrencies’ volatility makes them a poor store of value. But that is also true for gold: during a few months in 2013, gold lost one third of its value (Chart I-3). Yet who has ever argued that gold cannot be a store of value just because its price is volatile! Chart I-3Gold Is A Store Of Value ##br## Despite Its Volatility The practical lower bound to the policy interest rate is around -1 percent because the central bank policy rate establishes the banking system’s funding rate – for example, the Eonia rate in the euro area (Chart I-4). If the funding rate fell well below the rate that the banks were paying on deposits, the banking system would come under severe strain and ultimately go bust. The lower bound of the policy rate also sets the lower bound of the bond yield, because a bond yield is just the expected average policy rate over the bond’s lifetime. Chart I-4The Policy Interest Rate Establishes The Banking System's Funding Rate There is one important exception. If bond investors price in the possibility of being repaid in a different and more valuable currency, the bond yield will carry a further redenomination discount as an offset for the potential currency gain. This is relevant to euro area bonds because there remains the remote possibility of euro disintegration. Bonds which would expect to see a currency redenomination gain – notably, German bunds – therefore carry an additional discount on their yields. But for bonds where no currency redenomination is possible, the practical lower bound to bond yields is around -1 percent. Overweight High Yielding Bonds Versus Low Yielding Bonds To state the obvious, the closer that a bond yield gets to the -1 percent lower bound, the more limited becomes the possibility for a further yield decline (capital gain), while the possibility for a yield increase (capital loss) stays unlimited. This unattractive lack of upside combined with plenty of potential downside is called negative skew or negative asymmetry. It follows that, close to the lower bound of yields, the cyclicality or ‘beta’ of bond prices also becomes asymmetric. In risk-off phases, the bond prices cannot rally; while in risk-on phases, bond prices can plummet. Making such bonds a ‘lose-lose’ proposition. Case in point: Swiss bond yields have found it difficult to go down this year, but very easy to go up (Chart of the Week). Because their yields were already so close to -1 percent, Swiss bond yields could not decline much during the bond market’s recent strong rally – meaning, Swiss bond prices were very low beta on the way up. But in the recent reversal, Swiss bond yields have risen much more than others – meaning, Swiss bond prices are high beta on the way down (Chart I-5).   Chart I-5Swiss Bond Prices Are Low Beta Going Up, But High Beta Going Down Does this mean the widow maker trade can finally work? Yes, but only on a tactical horizon. For the full rationale, which we will not repeat here, please see Growth To Rebound In The Fourth Quarter, But Fade In 2020. However in summary, expect bond yields to edge modestly higher, and especially those yields that are deeply in negative territory. Also on a tactical horizon, prefer equities over bonds.  On a longer term horizon, a much safer way to play the asymmetric beta is to short low yielding bonds in relative terms. In other words, overweight high yielding bonds versus low yielding bonds.2 Close to the lower bound of yields, the cyclicality or ‘beta’ of bond prices becomes asymmetric. Our strategic recommendation is to overweight a 50:50 combination of U.S. T-bonds and Italian BTPs versus a 50:50 combination of German Bunds and Spanish Bonos, at either 10-year or 30-year bond maturities. Since initiation five months ago, the recommendation at the 30-year maturity is already up by almost 7 percent. Nevertheless, it has a lot further to go (Chart I-6). Investors could also play the component pairs: overweight U.S. T-bonds versus German bunds; and overweight Italian BTPs versus Spanish Bonos (Chart I-7 and Chart I-8), but the combined two bonds versus two bonds recommendation has better return to risk characteristics. Chart I-6Expect High Yielding Bonds To Outperform Low Yielding Bonds Chart I-7Expect Yield Spread Convergence At 10-Year Maturities... Chart I-8...And At 30-Year ##br##Maturities Switch Into The Swedish Krona   Bond yield spreads are also an important driver of currency moves. The currency corollary of overweighting high yielding versus low yielding bonds is to tilt towards low yielding currencies, because these are the currencies that have the most scope for substantial upside. Our favourite low yielding currency has been the Japanese yen, and this has worked very well. Since early 2018, the yen has been the strongest major currency, and is up 16 percent versus the euro. But our favourite currency is now changing to the Swedish krona, for three reasons: The SEK is depressed from a valuation perspective. For example, it is the only major currencies that is weaker than the GBP compared to before the Brexit vote in 2016 (Chart I-9). Chart I-9The Swedish Krona Has Underperformed The Pound Despite Brexit Unlike other major central banks, the Riksbank is seeking to normalise the policy rate upwards. The SEK is technically oversold on its 130-day fractal dimension, signalling over-pessimism in the price (Chart I-10), while the JPY is showing the opposite tendency. Chart I-10The Swedish Krona Is Due A Countertrend Move Bottom Line: switch Japanese yen long exposure into Swedish krona long exposure. Fractal Trading System* (Chart 1-11) As just discussed, this week's recommended trade is long SEK/JPY. Set the profit target at 1.5 percent with a symmetrical stop-loss. In other trades, long NZD/JPY has started off very well and long Spain versus Belgium achieved its 3.5 percent profit target, at which it was closed, leaving five open positions. For any investment, excessive trend following and groupthink can reach a natural point of instability, at which point the established trend is highly likely to break down with or without an external catalyst. An early warning sign is the investment’s fractal dimension approaching its natural lower bound. Encouragingly, this trigger has consistently identified countertrend moves of various magnitudes across all asset classes. Chart I-11 The post-June 9, 2016 fractal trading model rules are: When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. Use the position size multiple to control risk. The position size will be smaller for more risky positions. For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European  Investment Strategist dhaval@bcaresearch.com Footnotes 1 The cost of holding physical cash is the cost of its safe storage. 2 Please see the European Investment Strategy Weekly Report ‘Growth To Rebound In The Fourth Quarter, But Fade In 2020’, October 3, 2019 available at eis.bcaresearch.com. Fractal Trading Model Cyclical Recommendations Structural Recommendations Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

ハイライト 通貨市場は短期的な期待と長期的な要因の点で二分されている。スウェーデンクローナ、ノルウェークローネ、英ポンドは長期的には堅調に買いだが、短期的には非常にボラタイルなままでいる可能性がある。 我々はドルの単純な押し目買いよりもクロス通貨に引き続き注目している。SEK/NZD、GBP/JPY、NOK/SEKはロングを維持。利益保護のためGBP/JPYのロスカットを引き締める。 世界的な成長が改善すればEUR/SEKは天井を打つはずだ。 先週のレポートで推奨した通り、金/銀比率を90で売る。1 特集 Chart I-1 2018年以降の一方通行 2018年以降の一方通行 2018年以降の一方通行 我々が注目するG10通貨の中で、最も不可解なのはおそらくスウェーデンクローナだ。リクスバンクは今年利上げを行った数少ない中央銀行の一つだが、クローナは依然としてG10で最も弱い通貨である。確かにスウェーデンの製造業のパフォーマンスはみじめで、特に9月はそうだったが、これはスウェーデンだけの話ではない。製造業の深刻な景気後退を経験しているユーロ圏の方が、よりハト派な欧州中央銀行（ECB）にもかかわらず通貨のパフォーマンスは良好だった。 クローナのアンダーパフォーマンスは、世界的な製造業の景気後退が長引くことを示しているのか、それともスウェーデン固有の内生的な問題を示しているのかという疑問を投げかける。言い換えれば、USD/SEK（さらにはUSD/NOK）の上昇を牽引してきたのはドル高なのか、それともより国内的な要因なのか（Chart I-1）？ もし後者であれば、反転が近づいている場合に注目すべき重要な指標は何か？ ソフトデータ対ハードデータの議論 スウェーデンにとって大きな問いは、製造業がただボラタイルに底打ちしているだけなのか、それともこれからさらに大きく収縮するのか、という点だ。鉱工業生産は現在前年比で4％成長しているが、ソフトデータのシグナルは二桁の縮小を示唆している（Chart I-2、上段）。したがって、投資家の認識と現実の間に大きな乖離があるか、あるいは我々がはるかに深刻な製造業の落ち込みの瀬戸際にいるかのどちらかだ。為替は幅広い経済データの織り込みが極めて流動的であり、スウェーデンの場合は世界成長の見通しを織り込む傾向にある。しかし、EUR/SEKが10.8、USD/SEKが9.7（後者は2008年の高値を大きく上回る）であることを踏まえれば、深刻な不況以外の結果であればクローナは強くなると見て差し支えない。 スウェーデン製造業の底を示す比較的一貫した指標の一つは新規受注対在庫比率だ（Chart I-2、下段）。9月の低下は不安を誘う。しかし、製造業PMIとは異なりこの比率は新たな安値を付けていない点は注目に値し、我々が長期的な落ち込みではなくボラタイルな底打ちプロセスにあるかもしれないという暫定的な証拠である。我々がこのような発散を最後に見たのは2011/2012年の欧州債務危機の最中であり、その際にはスウェーデンのハードデータが最終的に経済全体の正しいシグナルを送った。 製造業の悪化は、まだ国内消費一般や労働市場には影響を与えていない。 製造業の悪化は、まだ国内消費一般や労働市場には影響を与えていない。PMI指数の輸入項目は輸出のそれを大きく上回っている。一方で、PMIの雇用項目は今年の中頃から安定化し始めており、雇用成長は約1％前後で底打ちするはずだ（Chart I-3）。スウェーデンの輸出は多くの先進国よりも製造業の上位サプライチェーンに位置しており、自動車は重要な役割を果たす。しかしこれまでのところ、スウェーデン経済は自動車の減速を比較的うまく耐え抜いており、生産は依然として年率約7％で推移している。 Chart I-2 ソフトデータがはるかに悪い ソフトデータははるかに悪化している ソフトデータははるかに悪化している Chart I-3 国内需要は堅調に持ちこたえている 国内需要は堅調に推移している 国内需要は堅調に推移している スウェーデンの失業率の上昇は問題だが、我々はこれが労働市場のダイナミクスに重大な変化をもたらしたとは考えていない。スウェーデンは多くの他の欧州諸国よりも亡命希望者や難民に対して開放的である歴史が長い。数年前のシリア危機は例外的な急増を引き起こし、亡命希望者数は15万人を超え、総人口のほぼ1.5％にまで達した（Chart I-4）。歴史的に移民はスウェーデンに大きな労働力の恩恵をもたらし、成長は米国やユーロ圏を上回ってきた。ただし、新たな移民が労働力に統合される過程で摩擦的失業も生じている。 Chart I-4 統合される必要のある新たな労働力プール 統合しなければならない新たな労働力のプール 統合しなければならない新たな労働力のプール 外国生まれの労働者は現在総人口の約20％を占め、その大部分が新しい言語を学び新たなスキルを習得する必要がある（Chart I-5A）。この成長のメリットは今後何年にもわたって享受されるだろう。統合は政治的に敏感な問題であり、2016年中頃に採択された高度に制限的な亡命・再統合法は移民ブームの後退を意味する可能性が高い。2018年9月の選挙で反移民派のスウェーデン民主党が台頭したのはその典型例だ。しかし、民主主義国の有権者が右寄りに向かう動きは世界的な現象であり、相対的に見ればスウェーデンにとってそれほどネガティブではない。つまり、ほとんどの先進国と比較して、スウェーデンの人口見通しは依然として比較的良好だ（Chart I-5B）。 Chart I-5A 巨大な労働力の恩恵 巨額の労働配当 巨額の労働配当 Chart I-5B 明らかな人口の崖は見えない 明らかな人口の崖は見られない 明らかな人口の崖は見られない 移民の流入はインフレに対して混合的な影響を与える。賃金が低い就業比率の上昇により賃金を押し下げる圧力がある一方で、労働者数の増加に応じて住宅と消費には上押し圧力が掛かる。これは政府が社会サービスに支出を増やす財政刺激にもつながる。一方で、外国生まれの人々の失業率は約15％に達している。これはフィリップス曲線が最初の数年間は平坦で、その後急勾配になることを意味する。しかし新たな労働力が最終的に経済に吸収されれば、賃金圧力を生み出し始めるはずだ。 リクスバンクはこれらのダイナミクスを明確に理解しており、だからこそ過去数年はスウェーデン経済が比較的持ちこたえている局面でもハト派の姿勢を取ってきた。金利は2015年にマイナス領域に引き下げられ、2016年から2017年の世界的な回復期を通じて-0.5％に据え置かれた（ECBの政策金利より低い）。また量的緩和はECBの資産購入プログラムの再開発表よりも早く2020年まで延長された。これらは弱い通貨を通じて含め、スウェーデンの金融状況を大いに緩和した。今後、クローナの下値抵抗が薄く上昇しやすいと考える主要な理由がいくつかある： 弱いクローナは通常12か月のラグをもって製造業を助けてきた。 弱いクローナは通常12か月のラグをもって製造業を助けてきた。マイナスの乖離は深刻な不況の前にしか起こらない傾向がある。現在がまさにそのような状況でない限り、比較的安価になったスウェーデン製品（ボルボ対BMWを想起せよ）への需要が強まれば、クローナは強含みになるはずだ（Chart I-6）。 確かにRiskbankは量的緩和を実施してきたが、バランスシートの拡大ペースはここ数四半期で鈍化している。USD/SEKはリクスバンクとフェドの相対的なバランスシート動向を追う傾向があるが、クローナに有利な大きな差が開きつつある（Chart I-7）。一方で、フェドがバランスシートを再拡大しようとしていることも、USDに対してSEKを強める方向に働くはずだ。 Chart I-6 スウェーデンクローナと製造業 スウェーデン・クローナと製造業 スウェーデン・クローナと製造業 Chart I-7 USD/SEKと相対的バランスシート USD/SEKと相対的バランスシート USD/SEKと相対的バランスシート スウェーデンの住宅市場はリクスバンクにとって悩みの種になりつつある。2015年にマイナス金利が導入された際、住宅価格は前年比で15％という急上昇を見せた（Chart I-8）。最近では移民抑制がある程度の冷却をもたらしたが、スウェーデンの家計のレバレッジは依然として非常に高い。1990年代の住宅危機の記憶が鮮明なため、現行の政策スタンスにリクスバンクは強い違和感を抱いている。 キャリーコストは米ドルをショートするよりNZDをショートする方が低い。 我々のバイアスは、ステファン・イングベス総裁ができるだけ速やかに政策を正常化したがっている一方で、彼が扱っているのは貿易がGDPの約45％を占める小規模開放経済であり、外部条件に翻弄されやすいという点だ。SEKはG10の中で最も割安な通貨であり、世界成長の底打ちを示すいかなる弱い証拠に対しても急反発する可能性がある。さらに、世界的な成長が上向けば資源利用がひっ迫し、スウェーデンの基調的なインフレ圧力が高まるはずだ（Chart I-9）。 Chart I-8 スウェーデンの住宅価格##br## バブル気味 スウェーデンの住宅価格はバブル状態にある スウェーデンの住宅価格はバブル状態にある Chart I-9 スウェーデンの資源利用とインフレ スウェーデンにおける資源の活用とインフレ スウェーデンにおける資源の活用とインフレ SEKの取引ストラテジーに関しては、USD/SEKとNZD/SEKは高い相関を示す傾向にある。SEKはキウイよりも世界成長に対するベータが高い（スウェーデンはGDPの45％を輸出、ニュージーランドは27％）。相対的に見ると、スウェーデン経済は米国よりも底打ちしているように見え、SEK/NZDはUSD/SEKの下落をプレーする魅力的な手段だ。一方、キャリーコストは米ドルをショートするよりもNZDをショートする方が低い（Chart I-10）。EUR/SEKについては、当面現水準で推移したのち下落に向かう可能性があるが、最終的には世界成長が再加速するとピークを打つだろう。 Chart I-10 SEK/NZDはロングを維持 SEK/NZDのロングを維持 SEK/NZDのロングを維持 結論：我々は相対価値プレーとしてSEK/NZDを引き続きロングしているが、真の上昇余地はSEK/USDクロスにある。ソフトデータの失望に市場が注目していることがSEK安の主因である一方、ハードデータは比較的耐性を示しているというのが我々の見方だ。調査が示すほど世界成長環境が危うくないことが明確になれば、クローナは急反発する可能性がある。 事務連絡 我々のGBP/JPYロングは今週5%の含み益となった。利益を守るためストップを138に引き締める。EUR/NOKショートは2%の損失でロスカットされた。現時点では様子見である。EUR/NOKは現在2008年のリセッション時の水準を上回っており、それは長期化した景気後退のみで正当化されうるが、リスク管理の観点からは当面忍耐が必要だ。続報を待たれたい。   チェスター・ントニフォア, 外国為替ストラテジスト chestern@bcaresearch.com 脚注 1 詳細はForeign Exchange ストラテジー 週次レポート、題名「マネー回転率、EUR/USD、そして銀」（2019年10月11日付）を参照。fes.bcaresearch.comで入手可能 通貨 米ドル Chart II-1 USDテクニカル 1 USD テクニカル 1 USD テクニカル 1 Chart II-2 USDテクニカル 2 米ドルテクニカル 2 米ドルテクニカル 2 米国の最近のデータは軟調である： 9月の小売売上高は前月比-0.3％。鉱工業生産は前月比-0.4％。 9月の輸出物価・輸入物価はともに前年比-1.6％下落。 ミシガン消費者信頼感指数は10月に96まで上昇、前月の93.2から上昇。 NYエンパイア・ステート製造業指数は10月に4に上昇、9月の2から。 9月の建築許可と住宅着工はそれぞれ前月比-2.7％、-9.4％と減少したが、住宅回復は維持されている。 10月11日終了週の新規失業保険申請件数は214Kに増加。 DXY指数は今週0.7％下落した。最新のベージュブックは米経済が緩やか〜中程度のペースで拡大しているとまとめた。製造業の減速は依然として最大のリスクであり、貿易摩擦は企業心理と設備投資意向に重しをかけ続けている。最近の貿易協議における“合意”は、夏を通じて続いてきた高い不確実性からの転換点を示す可能性がある。 レポートリンク： マネー回転率、EUR/USD、そして銀 - 2019年10月11日 暴動ポイントにおける資本保全 - 2019年9月6日 通貨の風景は変わったか？ - 2019年8月16日 ユーロ Chart II-3 EURテクニカル 1 EUR テクニカル分析 1 EUR テクニカル分析 1 Chart II-4 EURテクニカル 2 EURのテクニカル分析 2 EURのテクニカル分析 2 ユーロ圏の最近のデータは低調のままである： 9月の総合インフレ率は前年比0.8％に低下し、約3年ぶりの低水準となった。ただしコアインフレは前年比1％に上昇した。 ユーロ圏の鉱工業生産は8月に前年比-2.8％と引き続き縮小した。 ユーロ圏のZEW景況感は10月にさらに低下し-23.5となったが、これは予想の-33を大きく上回る。ドイツのZEW期待指数も10月に-22.8に低下した。期待は現状に比べて改善している点は注目に値する。 ユーロ圏の貿易収支は8月に203億ユーロに改善、7月の下方改定された175億ユーロから上昇した。ただしこれは主に輸入の縮小によるものだ。 EUR/USDは今週0.9％上昇し、広範なドル安が一因となった。ユーロ圏の貿易動向は依然憂慮すべきで、8月の輸出は前年比-2.2％、輸入は前年比-4.1％と大きく落ち込んだ。注目すべきは、年初来で対米のEUの貿易黒字が1年前の910億ユーロから1030億ユーロに拡大する一方、中国との貿易赤字は1160億ユーロから1270億ユーロにさらに拡大している点だ。 レポートリンク： マネー回転率、EUR/USD、そして銀 - 2019年10月11日 いくつかのトレードアイデア - 2019年9月27日 中央銀行の対決 - 2019年6月21日 日本円 Chart II-5 JPYテクニカル 1 JPYのテクニカル分析 1 JPYのテクニカル分析 1 Chart II-6 JPYテクニカル 2 JPY テクニカル指標 2 JPY テクニカル指標 2 日本の最近のデータは引き続き失望的である： 8月の鉱工業生産は前年比-4.7％。 8月の稼働率は前月比-2.9％低下。 日本円は今週対米ドルで0.8％下落した。黒田総裁は経済状況がさらに悪化し続ければ躊躇なく行動すると改めて強調した。一方で、フェドやECBが資産買入を通じてバランスシートを拡大する方向にある中で、日銀がイールドカーブコントロールを超えてどれだけ追加で打ち手を講じられるかは不透明である。我々は日銀が攻撃的に動くには「リーマン級の瞬間」が必要だと考えており、円をロングで保有している。 レポートリンク： いくつかのトレードアイデア - 2019年9月27日 通貨の風景は変わったか？ - 2019年8月16日 薄い夏場の取引に向けたポートフォリオ調整 - 2019年7月5日 英ポンド Chart II-7 GBPテクニカル 1 GBP テクニカル指標 1 GBP テクニカル指標 1 Chart II-8 GBPテクニカル 2 GBP テクニカル分析 2 GBP テクニカル分析 2 英国の最近のデータは概ねネガティブである： ILO失業率は8月にわずかに上昇して3.9％に。平均賃金の四半期成長率は3.8％に鈍化したが、予想の3.7％を上回った。 小売物価指数は9月に前年比2.4％と、前月の2.6％から減速。 総合インフレ率は9月に前年比1.7％で横ばい、コアインフレは1.5％から1.7％に上昇。 小売売上高は9月に前年比3.1％増、前月の2.6％から上昇。 GBP/USDは欧州理事会のブレグジットに関する楽観が高まったことで今週3.3％急騰した。バリュエーションの観点からは、ポンドはそのフェアバリューに対して大きく割安で取引されている。ブレグジットに関するポジティブなニュースが続けば、ポンドはさらに上昇し得る。我々はGBP/JPYをロングしており含み益は5％超。ストップを138に引き上げる。 レポートリンク： いくつかのトレードアイデア - 2019年9月27日 英国：循環的減速か構造的停滞か？ - 2019年9月20日 中央銀行の対決 - 2019年6月21日 豪ドル Chart II-9 AUDテクニカル 1 AUD テクニカル 1 AUD テクニカル 1 Chart II-10 AUDテクニカル 2 AUD テクニカル分析 2 AUD テクニカル分析 2 豪州の最近のデータは穏やかである： NAB企業景況感はさらに-2に低下したが、Q3の活動状況は1に改善した。 労働市場では9月の失業率が5.2％に低下。14.7Kの雇用が創出され、うち26.2Kがフルタイム、11.4Kがパートタイムの減少だった。 AUD/USDは今週0.4％上昇した。今週初めにRBA議事録が公表されたが、低金利の効果について鋭い論争が示されている。一方では低金利は完全雇用とインフレ目標達成のため理論的に正当化される。だが他方で、一部のRBAメンバーは低金利が既に高騰している住宅価格をさらに煽ることを懸念している。したがってRBA議事録後、追加利下げの確率は低下した。 レポートリンク： 豪ドルに関するコントラリアンの見解 - 2019年5月24日 限界効用逓減に注意 - 2019年4月19日 まだ安全圏を脱していない - 2019年4月5日 NZドル Chart II-11 NZDテクニカル 1 NZD テクニカル分析 1 NZD テクニカル分析 1 Chart II-12 NZDテクニカル 2 NZドルのテクニカル分析 2 NZドルのテクニカル分析 2 ニュージーランドの最近のデータはネガティブである： 観光客到着数は8月に前年比1.8％増と、前月の2％からわずかに低下。 第3四半期の総合インフレ率は前年比1.5％に鈍化。 NZD/USDは今週ほぼ横ばいで推移した。世界成長に密接に結びつくニュージーランドドルは米中貿易の見出しの浮き沈みに伴って変動している。両国は先週部分合意に達したが、詳細はまだあいまいだ。キウイはハイベータ通貨である一方、クロスではアンダーパフォームするはずだ。我々は引き続きオーストラリアドルとスウェーデンクローナを通じてキウイの弱さをプレーしている。 レポートリンク： USD/CNYと市場の動揺 - 2019年8月9日 米ドルは次にどこへ向かうか？ - 2019年6月7日 まだ安全圏を脱していない - 2019年4月5日 カナダドル Chart II-13 CADテクニカル 1 CADのテクニカル分析 1 CADのテクニカル分析 1 Chart II-14 CADテクニカル 2 CADのテクニカル 2 CADのテクニカル 2 カナダの最近のデータは比較的強い： 9月の失業率はさらに低下し5.5％に。さらに平均時給は前年比4.3％の伸びを続け、前月の3.8％から加速した。最後に9月の雇用者数は53.7Kの増加で、予想の10Kを大きく上回った。 9月の総合インフレ率とコアインフレ率はともに前年比1.9％で横ばいだった。 カナダドルは先週公表された好調な雇用データを受けて対米ドルで1％の上昇となった。今月の総選挙はカナダのエネルギーセクターと環境政策の将来にとって重要となり得る。 レポートリンク： 暴動ポイントにおける資本保全 - 2019年9月6日 薄い夏場の取引に向けたポートフォリオ調整 - 2019年7月5日 金、原油、暗号通貨について - 2019年6月28日 スイスフラン Chart II-15 CHFテクニカル 1 CHF テクニカル分析 1 CHF テクニカル分析 1 Chart II-16 CHFテクニカル 2 CHF テクニカル 2 CHF テクニカル 2 スイスの最近のデータは良好である： 貿易黒字（貴金属除く）は9月に急拡大し28.8億CHFとなった。特に化学・製薬製品の販売増によりスイスの輸出は月次で8.2％増の203億CHFとなった。輸入は月次で1.4％減の174億CHFだった。 生産者物価と輸入物価は9月に前年比-2％のまま推移した。 USD/CHFは今週1％下落した。スイスフランは防御的通貨としての性格と、SNBによる操作ツールとしての性格の綱引きにさらされ続けるだろう。我々の推定ではEUR/CHF1.06が究極のストレスポイントである。グローバルポートフォリオは構造的にアウトパフォームするという単純な理由からスイスフランを保険として保有すべきだ。 レポートリンク： SNBに関する注記 - 2019年10月4日 スイスフランへの対処法 - 2019年5月17日 限界効用逓減に注意 - 2019年4月19日 ノルウェークローネ Chart II-17 NOKテクニカル 1 NOKのテクニカル指標 1 NOKのテクニカル指標 1 Chart II-18 NOKテクニカル 2 NOK テクニカル 2 NOK テクニカル 2 ノルウェーの最近のデータは低迷している： 貿易収支は9月に12億NOKの赤字に転じた。これは前年比で240億NOKの減少である。 ノルウェークローネは今週対米ドルでほぼ1％下落した。エネルギー価格はここ数週間低迷している。さらにノルウェーの貿易収支は2017年11月以来初めて赤字に転じた。輸出はエネルギー製品の販売減により前年比-19.5％と急落し、一方で輸入は前年比+12.9％と増加した。メッセージは明確だ――ノルウェーは国内的には比較的堅調だが、石油輸出への依存が成長見通しにボラティリティをもたらしている。BCAは2019年の原油価格見通しを引き下げており、これがノルウェークローネの魅力をそいでいる。続報にご期待ください。 レポートリンク： いくつかのトレードアイデア - 2019年9月27日 薄い夏場の取引に向けたポートフォリオ調整 - 2019年7月5日 金、原油、暗号通貨について - 2019年6月28日 スウェーデンクローナ Chart II-19 SEKテクニカル 1 SEK テクニカル 1 SEK テクニカル 1 Chart II-20 SEKテクニカル 2 SEK テクニカル 2 SEK テクニカル 2 スウェーデンの最近のデータは中立的である： 9月の失業率は7.1％で横ばいだった。 USD/SEKは今週1.1％下落した。今年に入って最もパフォーマンスが悪いG10通貨として、スウェーデンクローナは現在そのフェアバリューに対して大きく割安に取引されている。今週の本文前半でスウェーデン経済とクローナに関する詳細分析を提示しているので参照されたい。 レポートリンク： 米ドルは次にどこへ向かうか？ - 2019年6月7日 G10全体の国際収支 - 2019年2月15日 通貨の単純な魅力度ランキング - 2019年2月8日 トレード＆予測 予測サマリー コアポートフォリオ タクティカルトレード 指値注文 決済済み取引

Highlights In this Weekly Report, we present our semi-annual chartbook of the BCA Central Bank Monitors. All of the Monitors are now below the zero line, indicating a growing need to ease global monetary policy (Chart of the Week). Central bankers have already gone down that path in several countries over the past few months (the U.S., the euro area, Australia and New Zealand), helping sustain the powerful 2019 rally in global bond markets. Feature With the global manufacturing & trade downturn now threatening to spill over into domestic demand in the major developed markets, policymakers will need to stay dovish to stave off recession. This will keep global bond yields at depressed levels in the near term, at least until widely-followed data like manufacturing PMIs stabilize and/or there is positive news on U.S.-China trade negotiations. Chart of the WeekStrong Pressures To Ease Global Monetary Policy Yields already discount a lot of bad economic news, however, and there is a ray of hope visible in the bottoming out of our global leading economic indicator. A sustainable bottom in global bond yields, though, will require some change in the current downward growth or inflation momentum highlighted in our Central Bank Monitors. Yields already discount a lot of bad economic news, however, and there is a ray of hope visible in the bottoming out of our global leading economic indicator. A sustainable bottom in global bond yields, though, will require some change in the current downward growth or inflation momentum highlighted in our Central Bank Monitors.  An Overview Of The BCA Central Bank Monitors* Chart 2Low Bond Yields Are Consistent With Our CB Monitors The BCA Central Bank Monitors are composite indicators designed to measure the cyclical growth and inflation pressures that can influence future monetary policy decisions. The economic data series used to construct the Monitors are not the same for every country, but the list of indicators generally measure the same things (i.e. manufacturing cycles, domestic demand strength, commodity prices, labor market conditions, exchange rates, etc). The data series are standardized and combined to form the Monitors. Readings above the zero line for each Monitor indicate pressures for central banks to raise interest rates, and vice versa. Through the nexus between growth, inflation, and market expectations of future interest rate changes, the Monitors do exhibit broad correlations to government bond yields in the Developed Markets (Chart 2). All of the Monitors are currently pointing in a bond-bullish direction, making them less useful as a country allocation tool within global bond portfolios. With easing pressures most intense in the euro area, given that the ECB Monitor has the lowest reading, our recommended overweight stance on core euro area government bonds (hedged into U.S. dollars) remains well supported. In each BCA Central Bank Monitor Chartbook, we include a new chart for each country that we have not shown previously. In this edition, we show the components of the Monitors, grouped into those focusing on economic growth and inflation, plotted against our central bank discounters that indicate the amount of rate cuts/hikes priced into global Overnight Index Swap (OIS) curves. Fed Monitor: Signaling A Need For More Cuts Our Fed Monitor has fallen below the zero line (Chart 3A), indicating that the Fed’s summer rate cuts were justified with more easing still required. The Monitor, however, has not yet fallen to levels seen during U.S. recessions and is more consistent with the below-trend growth periods in 2016 and the late-1990s. The views of the FOMC on U.S. monetary policy are more deeply divided now than has been seen in many years. The doves can point to slumping global growth, persistent trade uncertainty, contracting capital spending and falling inflation expectations as reasons to continue cutting rates. The hawks can look at continued labor market tightness, elevated asset prices and realized inflation rates holding near the Fed’s 2% inflation target (Chart 3B) as reasons to keep monetary policy steady. That mixed picture can be seen in the components of our Fed Monitor, with the growth components showing the biggest pressure for more rate cuts compared to more stable readings from the inflation and financial components (Chart 3C). Chart 3AU.S.: Fed Monitor Chart 3BU.S. Realized Inflation Holding Firm Chart 3CGreatest Pressure For Fed Rate Cuts From Growth Components Of Our Fed Monitor The U.S. Treasury market may have gotten ahead of itself after the latest decline in yields, which looks stretched versus the Fed Monitor. The U.S. Treasury market may have gotten ahead of itself after the latest decline in yields, which looks stretched versus the Fed Monitor (Chart 3D). We still expect the Fed to deliver just one more rate cut at the FOMC meeting at the end of October, as the “hard” U.S. data is outpeforming the “soft” data like the weak ISM surveys. That leaves Treasury yields vulnerable to some rebound if global growth stabilizes, although that is conditional on no new breakdown of the U.S.-China trade negotiations – a factor that continues to weigh on U.S. business confidence. Chart 3DTreasury Yields More Than Fully Discount Fed Easing Pressures BoE Monitor: Easier Policy Needed Our Bank of England (BoE) Monitor, which was in the “tighter money required” zone from 2016-18, has been below the zero line since April of this year (Chart 4A). The market agrees with the message from the Monitor and is now pricing in -12bps of rate cuts over the next twelve months. The relentless uncertainty surrounding Brexit has triggered sharp downgrades of growth expectations and weakened business confidence, which the BoE is now factoring into its own projections. In the August Inflation Report, the BoE lowered its 2020 inflation forecast to below 2% - no surprise given the sharp fall in realized inflation that has already occurred even as economic growth has still not yet fallen substantially below trend (Chart 4B). Chart 4AU.K.: BoE Monitor Chart 4BFalling U.K. Inflation Opens The Door To A BoE Ease Still, weakening growth components have been the main driver of the BoE Monitor into rate cut territory (Chart 4C). While a strong jobs market is helping support consumer spending, the Brexit turmoil is having a lasting impact on future growth. Since the 2016 Brexit referendum, business confidence and real business investment have collapsed which, in turn, has hurt productivity growth, as we discussed in a Special Report last month.1 Chart 4CBrexit Uncertainty + Slumping Growth = Pressure For BoE Rate Cuts The uncertainty around Brexit dominates the economic outlook and any future BoE decisions. Our Geopolitical Strategy service anticipates that Brexit will be delayed beyond October 31st. As a result, uncertainty will continue to weigh on Gilt yields, even though yields have already fallen in line with our BoE Monitor (Chart 4D). We continue to recommend an overweight stance on U.K. Gilts. Chart 4DGilt Yields Have Fallen In Line With Our BoE Monitor ECB Monitor: Intense Pressure For Easier Monetary Policy Our European Central Bank (ECB) Monitor is now well below the zero line, signaling a strong need for easier monetary policy (Chart 5A). The global manufacturing downturn has hit the export-dependent economies of the euro area hard, with Germany now likely in a technical recession. Our European Central Bank (ECB) Monitor is now well below the zero line, signaling a strong need for easier monetary policy. Despite the weaker growth momentum, there remains far less spare capacity in the euro area economy than at any time since before the 2009 global recession (Chart 5B). This is keeping realized inflation in positive territory, in contrast to what was seen during the previous downturn in 2015-16. Chart 5AEuro Area: ECB Monitor Chart 5BEuro Area Inflation Is Subdued, Despite Tight Labor Markets The ECB has already responded to the weakening growth & inflation pressures, introducing a new TLTRO program back in March and then cutting the overnight deposit rate and restarting its Asset Purchase Program in September. The latest policy moves were reported to be more contentious, with the “hard money” northern euro area countries opposed to restarting bond purchases. The new incoming ECB President, Christine Lagarde, will likely have her hands full trying to gain consensus on any further easing measures from here, even as both the growth and inflation components of our ECB Monitor indicate that more stimulus is needed (Chart 5C). Chart 5CA Consistent Message On The Need For Future ECB Easing From Growth & Inflation The big decline in euro area bond yields, which has pushed large swaths of sovereign yields into negative territory, does not look particularly stretched relative to the plunge in the ECB Monitor (Chart 5D). Without signs that the global manufacturing downturn is ending, however, euro area yields will stay mired at current deeply depressed levels. We recommend a moderate overweight on core European government bonds, on a currency-hedged basis into U.S. dollars. Chart 5DBund Rally Looks In Line With The ECB Monitor BoJ Monitor: A Rate Cut On The Horizon? Our Bank of Japan (BoJ) Monitor has drifted slightly below the zero line into “rate cut required” territory (Chart 6A). Over the past few years, the BoJ’s monetary policy has remained unchanged for the most part and its messaging has grown less dovish, citing an expanding economy. However, recent Japanese economic data shows widespread deterioration in growth momentum, as the nation has been hit hard by the global manufacturing and trade recession. Yet even with weaker growth, Japan’s unemployment rate keeps hitting all-time lows. This has not helped boost inflation much, though, with Japan’s CPI inflation still struggling to reach even the 1% level (Chart 6B). Still, the latest leg lower in our BoJ Monitor has been driven by the growth, rather than inflation, components (Chart 6C). Chart 6AJapan: BoJ Monitor Chart 6BNo Spare Capacity In Japan, But Still No Inflation Weakening confidence has resulted in significant declines in both consumer spending and business investment. Due to the struggling domestic economy, it was expected that the Abe government would postpone the scheduled consumption tax hike, but it was finally initiated on October 1st. The timing could not be worse given the ongoing contraction in global manufacturing and trade activity that has clearly spilled over into Japan’s export and industrially-focused economy. Chart 6CThe Slumping Japanese Economy Could Use Some More BoJ Assistance The BoJ will likely try and deliver some sort of easing in the next few months, but its options are limited after years of already hyper-easy policy. A modest rate cut is likely all that will be delivered, on top of a continuation of the Yield Curve Control policy. That will be enough to keep JGB yields at depressed levels (Chart 6D), even if global yields were to begin climbing. Chart 6DJGB Yields Look Fairly Valued Vs The BoJ Monitor BoC Monitor: Rate Cuts Needed, But Will The BoC Deliver? The Bank of Canada (BoC) Monitor has been below zero since April of this year, indicating a need for easier monetary policy (Chart 7A). Although the BoC has maintained its policy rate at 1.75%, dovish Fed policy and softening domestic economic growth are making it harder for the BoC to continue sitting on its hands Although the Canadian labor market remains solid, household consumption has continued to weaken alongside falling consumer confidence. However, the inflation rate for both headline and core CPI measures is still hovering near the mid-point of BoC 1-3% target range (Chart 7B). Chart 7ACanada: BoC Monitor Chart 7BRising Inflation Making The BoC’s Job Harder At the moment, our BoC Monitor is more influenced by weaker growth components than stabilizing inflation components (Chart 7C). Similar mixed messages are also evident in other data. According to the latest BoC Business Outlook Survey, the overall outlook has edged up to the historical average,2 but real capex growth remains in negative territory and manufacturing new orders are still falling. In contrast, the Canadian labor market remains tight and both wage and price inflation are holding firm. Chart 7CBoC Growth & Inflation Components Signaling Moderate Pressure To Ease Canadian government bonds have rallied strongly this year, but the yield momentum has appeared to overshoot the decline in our BoC Monitor (Chart 7D). The Canadian OIS curve is discounting -27bps of rate cuts over the next twelve months, but the BoC is not signaling that they will ease. We upgraded our recommended stance on Canadian government bonds to neutral back in May, and we see no need to alter that view without further evidence of more deterioration in Canadian growth or inflation data.3 Chart 7DCanadian Bond Rally Looks A Bit Stretched RBA Monitor: Expect Another Cut The Reserve Bank of Australia (RBA) Monitor has been below the zero line since September 2018, indicating a need for easier monetary policy (Chart 8A). The RBA has already delivered on that signal this year, cutting the Cash Rate twice to an all-time low of 0.75%. Markets are still expecting more, with the Australian OIS curve discounting another -29bps of cuts over the next year, although most of those cuts are expected to occur within the next six months. The signal from our RBA Monitor suggests that Australian bond yields should remain under downward pressure, although the yield momentum has been excessive relative to the fall in the Monitor. Both headline and core CPI inflation remain below the RBA’s 2-3% target range (Chart 8B), and the central bank continues to lower its inflation forecasts, suggesting an entrenched dovish bias. Chart 8AAustralia: RBA Monitor Chart 8BNo Inflation For The RBA To Worry About The latest downturn in our RBA Monitor is related to declines in both the inflation and growth components (Chart 8C). The weakness in the growth components is led by falling exports to Asia, in addition to the sharp drop in house prices in the major cities. The fall in the inflation components reflects both weak inflation expectations and spare capacity in labor markets. Chart 8CA Loud & Clear Message On The Need For RBA Easing The signal from our RBA Monitor suggests that Australian bond yields should remain under downward pressure, although the yield momentum has been excessive relative to the fall in the Monitor (Chart 8D). Australia’s economy will not begin to outperform again, however, until China’s current growth slump starts to bottom out, which is unlikely to occur until the first quarter of 2020 at the earliest. Thus, we expect the RBA to deliver another rate cut before the end of the year, justifying a continued overweight stance on Australian government bonds. Chart 8DA Lot Of Bad News Discounted In Australian Bond Yields RBNZ Monitor: More Easing To Come Our Reserve Bank of New Zealand (RBNZ) monitor remains well below zero, indicating that easier monetary policy is still required (Chart 9A). The central bank has already delivered two rate cuts this year: a -25bps cut in May and, more importantly, a shock rate cut of -50bps in August. Forward guidance remains dovish, with RBNZ Governor Adrian Orr signaling more easing is likely and even hinting at negative rates in the future. This rhetoric is reflected in the NZ OIS curve, which is pricing in a further -42bps of easing over the next twelve months. High inflation is not a constraint for the RBNZ. Both headline and core measures of inflation are currently at 1.7% (Chart 9B). As the RBNZ targets a 1-3% range over the medium term, the prospect of overshooting the 2% longer-term target will not restrict policymakers from acting as appropriate to boost growth. Chart 9ANew Zealand: RBNZ Monitor Chart 9BNZ Inflation Creeping Higher Most of the pressure to ease has come from the continued deterioration in the growth component of our RBNZ Monitor (Chart 9C), reflecting weakness in manufacturing and consumption. The manufacturing PMI is currently in contractionary territory at 48.4, having fallen almost five points since February of this year. Annual growth in retail sales has been slowing for the past two years while consumer confidence is at 7-year lows. Chart 9CWeak Growth Is The Reason RBNZ Rate Cuts Are Needed We feel confident in reiterating our bullish recommendation on NZ government bonds versus U.S. and German sovereign debt. The RBNZ Monitor suggests that policy will stay dovish for some time, while NZ yields still offer a relatively attractive yield, unlike deeply overbought Treasuries and Bunds (Chart 9D). Chart 9DStill A Bullish Case For New Zealand Government Bonds Riksbank Monitor: Watching And Waiting Our Riksbank Monitor remains very slightly below zero and the market is currently priced for -4bps of rate cuts over the next year (Chart 10A). The Riksbank has decided to hold the Repo Rate constant at -0.25% while forecasting a hike towards the end of this year or the beginning of 2020. Given the policy environment, rate cuts remain unlikely. At most, the Riksbank can further delay rate hikes if the data continues to disappoint. The Riksbank noted in its September Monetary Policy Report that the unexpectedly weak development of the labor market indicates that resource utilization will normalize sooner than expected. This is reflected in Chart 10B, where the unemployment gap is now negative. Meanwhile, inflation readings are giving a mixed signal for the central bank. While the headline CPI measure has declined precipitously year-to-date, owing to the dramatic fall in oil prices, core inflation has continued to climb steadily. Chart 10ASweden: Riksbank Monitor Chart 10BMixed Messages From Swedish Inflation As a result, the inflation components of our Riksbank monitor - driven by a spike in the Citigroup Inflation Surprise Index, wage growth hooking upward and inflation expectations holding firm around 2% - are signaling the need for tighter monetary policy (Chart 10C). However, the growth components – led by weak exports, employment, and manufacturing data - are exerting pressure in the opposite direction. This is evident in the Swedish Manufacturing PMI, which tumbled from 51.8 to 46.3 in September, deep into contractionary territory. Chart 10CThere Is A Reason Why The Riksbank Has Been On Hold Keeping in mind the inflation constraint, it remains unlikely that the Riksbank will cut rates unless the economic data disappoints more significantly to the downside. This should help put a floor under Swedish bond yields in the near term (Chart 10D). Chart 10DSwedish Yields Have Fallen Too Far, Too Fast Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com   Ray Park, CFA Research Analyst ray@bcaresearch.com   Shakti Sharma Research Associate shaktis@bcaresearch.com Footnotes * NOTE: All information in this report reflects our knowledge of global events as of Thursday, October 10. 1 Please see BCA Global Fixed Income Strategy Special Report “United Kingdom: Cyclical Slowdown Or Structural Malaise?” dated September 20, 2019, available at gfis.bcaresearch.com. 2https://www.bankofcanada.ca/2019/06/business-outlook-survey-summer-2019/ 3 Please see BCA Global Fixed Income Weekly Report, “Reconcilable Differences” dated May 8, 2019, available at gfis.bcaresearch.com. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights Currency markets continue to fight a tug-of-war between deteriorating global growth and easing global financial conditions. Such an environment is typically fertile ground for a dollar bull market, yet the trade-weighted dollar is up only 2.3% this year. The lack of more-pronounced strength in the greenback suggests that other powerful underlying forces are preventing the dollar from gapping higher. The breakdown in the bond-to-gold ratio is an important distress signal for dollar bulls. As both political and economic uncertainty remain elevated, likely winners in the interim remain safe-haven currencies such as the yen and the Swiss franc. For the remainder of the year, portfolio managers should focus on relative value trades at the crosses, rather than outright dollar bets. Stand aside on the pound for now. Aggressive investors can place a buy stop at 1.25 and sell stop at 1.20. The Riksbank’s hawkish surprise was a welcome development for the krona. Remain long SEK/NZD. The SEK might be the best-performing G10 currency over the next five years. Feature Yearly performance is an important benchmark for most portfolio managers. As most CIOs return to their desks from a summer break, they will be looking at a few barometers to help them navigate the rest of 2019. On the currency front, here is what the report card looks like so far: The dollar has been a strong currency, but the magnitude of the increase has been underwhelming, given market developments. The Federal Reserve’s trade-weighted dollar is up only 2.3% this year. In contrast, the yen is up 3.6% and the Canadian dollar 2.3%. Meanwhile, the best shorts have been the Swedish krona (down 9.7%) and the kiwi. Through the lens of the currency market, the dollar has been in a run-of-the-mill bull market, rather than in a panic buying frenzy (Chart I-1). Chart I-1A Report Card On Currency Performance Gold has broken out in every major currency. This carries a lot of weight because it has occurred amid dollar strength, a historical rarity. Importantly, the breakout culminates the seven-or-so-year pattern where gold was stable versus many major currencies (Chart I-2). We are no technical analysts, but ever since gold peaked in 2011, all subsequent rallies have seen diminishing amplitude, which by definition were bull traps. This appeared to have changed since 2015-2016, which could be a signal that the dollar bull market is nearing an end. Commodities have been a mixed bag. Precious metals have surged alongside gold. Despite the recent correction, oil is still up 13.8% for the year. Meanwhile, natural gas is in a bear market. Among metals, nickel has surged 70%, while Doctor Copper is down 5.1%. The only semblance of agreement is among soft commodities, which have been mostly deflating (Chart I-3). In short, there has been no coherent theme for commodity currencies. All the talk of a Sino-U.S. trade war, Chinese A-shares are up 18.7% for the year. This more than makes up for any CNY depreciation.  Equities have performed well across the board, mostly up double digits. The only notable laggards have been in Asia, specifically Japan, Hong Kong and Korea. That said, of all the talk of a Sino-U.S. trade war, Chinese A-shares are up 18.7% for the year. This more than makes up for any CNY depreciation. This also suggests that capital flows into equities have not been a major driver of currencies this year. Chart I-2Gold Has Been The Ultimate Currency Chart I-3Commodities Are A Mixed Bag Yields have collapsed, with higher-beta markets seeing bigger drops. Differentials have mostly moved against the dollar in recent weeks as the U.S. 10-year yield plays catch-up to the downside. One important question is that with Swiss 10-year yields now at -0.96% and German yields at -0.67%, is there a theoretical floor to how low bond yields can fall (Chart I-4)? Chart I-4Yields Have Melted Heading back to his office, the CIO is now pondering how to deploy fresh capital. On one hand, the typical narrative that we have been operating in the quadrant of a deflationary bust, given the trade war, manufacturing recession, political unrest and rapidly rising probability of recession is not clearly visible in financial data. This would have been historically dollar bullish, and negative for other asset classes. However, the plunge in bond yields begs the question of whether this is a prelude to worse things to come. A more sanguine assessment is that we might be at a crossroads of sorts. If economic data continues to deteriorate due to much larger endogenous factors, a defensive strategy is clearly warranted. One way to tell will be an emerging divergence between our leading indicators and actual underlying data. On the flip side, any specter of positive news could light a fire under sectors, currencies and countries that have borne the brunt of the slowdown. Time is of the essence, and strategy will be dependent on horizons. A review of the leading indicators for the major economic blocks is in order. Are We At The Cusp Of A Recession? Centripetal systems tend to stay in equilibrium, while centrifugal forces can explode in spectacular fashion. In the currency world, this means that the tug of war between deteriorating global growth and easing liquidity conditions cannot last forever. Either the dollar breakout morphs into a panic buying frenzy or proves to be a bull trap. Are we at the cusp of a bottom in global growth, or approaching a riot point? Let us start with the economic front: U.S.: Plunging U.S. bond yields have historically been bullish for growth. More importantly, the recent decline in the ISM Manufacturing Index is approaching 2008 recessionary levels. Either easing in financial conditions revive the index, or the decoupling persists for a while longer. The tone on the political front appears reconciliatory, which means September and October data will be critical. In 2008, the divergence between deteriorating economic conditions and falling yields was an important signpost for a riot point (Chart I-5). Eurozone: The Swedish manufacturing PMI ticked up to 52.4 in August. Most importantly, the new orders-to-inventories ratio is suggesting that the German (and European) manufacturing recession is reversing (Chart I-6). For all the debate about whether China is stimulating enough or not, the beauty about this indicator is that there are no Chinese variables in it (the euro zone and Sweden export a lot of goods and services to China). Any surge higher in this indicator will categorically conclude the euro zone manufacturing recession is over, lighting a fire under the euro in the process. Whatever the number is, if it can stabilize Chinese growth, a powerful deflationary force that dictated markets in 2018-2019 will dissipate.  China: Chinese bond yields have melted alongside global yields. This is reflationary, given the liberalization in the bond market over the past few years. Policy makers are currently discussing the quota for next year’s fiscal spending. Whatever the number is, if it can stabilize Chinese growth, a powerful deflationary force that dictated markets in 2018-2019 will dissipate. Chart I-5Is U.S. Manufacturing Close ##br##To A Bottom? Chart I-6Is Eurozone Manufacturing Close To A Bottom? Discussions among industry specialists suggest some anecdotal evidence that many manufacturers have been engaged in re-routing channels and parallel manufacturing chains to avoid the U.S.-China tariffs. This is welcome news, since global exports and global trade are still in a downtrend. A key barometer to watch on whether the global slowdown is infecting domestic demand will be Chinese imports (Chart I-7). So far, the message is that traditional correlations have not yet broken down. As a contrarian, this is positive. Manufacturing slowdowns have tended to last 18 months peak-to-trough, the final months of which are characterized by fatigue and capitulation. However, unless major imbalances exist (our contention is that so far they do not), mid-cycle slowdowns sow the seeds of their own recovery via accumulated savings and pent-up demand. In the currency world, the dollar has tended to be an excellent counter-cyclical barometer. On the dollar, the bond-to-gold ratio is breaking down, in contrast to the rise in the DXY. This is not a sustainable divergence (Chart I-8). The last time the bond-to-gold ratio diverged from the DXY was in 2017, and that proved extremely short-lived. As global growth rebounded and U.S. repatriation flows eased, dollar support was quickly toppled over. Chart I-7Chinese Imports Could Soon Rebound Chart I-8Mind The Gap Ever since the end of the Bretton Woods agreement broke the gold/dollar anchor in the early 1970s, bullion has stood as a viable threat to dollar liabilities, capturing the ebbs and flows of investor confidence in the greenback tick-for-tick. While U.S. yields remain attractive, portfolio outflows and a deteriorating balance-of-payments backdrop will keep longer-term investors on the sidelines. Chart I-9Dollar Bulls Need A More Hawkish Fed Capital tends to gravitate towards higher returns, and the U.S. tax break in 2017 was a one-off that is now ebbing. Meanwhile, despite wanting to resist the appearance of influence from President Trump, the Fed realises that the neutral rate of interest in the U.S. is now below its target rate, which should keep them on an easing path. A dovish Fed has historically been bearish for the dollar (Chart I-9). Bottom Line: In terms of strategy, heightened uncertainty can keep the greenback bid in the coming weeks, but we will be sellers on strength. Our favorite plays remain the Swedish krona, the Norwegian krone, and, for insurance purposes, the Japanese yen. Outright dollar shorts await confirmation from more economic data. What To Do About CAD? The Bank of Canada (BoC) decided to stay on hold at its latest policy meeting. This was highly anticipated, but the silver lining is that the BoC might later reflect on this move as a policy mistake, given the arms race by other central banks to ease policy. The three most important variables for the Canadian economy are a:) what is happening to the U.S. economy, b:) what is happening to crude oil prices and c:) what is happening to consumer leverage and the housing market. On all three fronts, there has been scant good news in recent weeks. Heightened uncertainty can keep the greenback bid in the coming weeks, but we will be sellers on strength.  The Nanos Investor Confidence Index suggests Canadian GDP might be at the cusp of a slowdown after an excellent run of a few quarters (Chart I-10). One of the key drivers for the CAD/USD exchange rate is interest rate differentials with the U.S., and the compression in rates could run further (Chart I-11). Unless the BoC adopts a looser monetary stance, a rising exchange rate is likely to tighten financial conditions. Rising energy prices will be a tailwind, but the Western Canadian Select discount, and persistent infrastructure problems are headwinds. As such, we think domestic conditions will continue to knock down whatever benefit comes from rising oil prices. Chart I-10Canadian Data Has##br## Been Firm Chart I-11A Firm Exchange Rate Could Tighten Financial Conditions On the consumer side, real retail sales are deflating at the worst pace since the financial crisis, but consumer confidence remains elevated given the robust labor market data (Chart I-12). However, if house prices continue to roll over, confidence is likely to crater (Chart I-13). Chart I-12Canada: Consumer Spending Is Weak Chart I-13Canada: The Housing Market Is Softening On the corporate side of the equation, the latest Canadian Business Outlook Survey suggests there has been no meaningful revival in capital spending. This is a big headwind, since Canada finances itself externally rather than via domestic savings. For external investors, the large stock of debt in the Canadian private sector and overvaluation in the housing market are likely to continue leading to equity outflows (from bank shares) on a rate-of-change basis (Chart I-14). Chart I-14Foreign Investors Are Fleeing Canadian Securities Technically, the USD/CAD failed to break below the upward sloping trend line drawn from its 2012 lows, and the series of lower highs since the 2016 peak is forcing the cross into the apex of a tight wedge. The next resistance zone on the downside is the 1.30-1.32 level. Our bias is that this zone will prove to be formidable resistance. We continue to recommend investors short the CAD, mainly via the euro. Housekeeping We were stopped out of our short XAU/JPY position amid fervent buying in gold. Even though we are gold bulls, the rationale behind the trade was that the ratio of the two safe havens was at a speculative extreme. We will stand aside for now and look to re-establish the position in the near future. The Risksbank left rates on hold this week. This was welcome news for our long SEK/NZD position. The weakness in the SEK this year was expected given the surge in summer volatility, but the magnitude of the fall took us by surprise. In general, as soon as President Trump ramped up the trade-war rhetoric and China started devaluing the RMB, the environment became precarious for all pro-cyclical currencies. In terms of strategy going forward, the SEK probably has some additional downside, but not a lot. It is currently the cheapest currency in the G10. Should the Riksbank be actively trying to weaken the currency ahead of ECB policy stimulus this month, the final announcement, depending on what it entails, might be the bottom for the SEK and top for the EUR/SEK. Finally, as the Brexit drama unfolds, the outlook for the pound is highly binary. Aggressive investors can place a buy stop at 1.25 and a sell stop at 1.20. Anything in between should be regarded as noise.    Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the U.S. have been firm: PCE deflator nudged up from 1.3% to 1.4% year-on-year in July. Core PCE was unchanged at 1.6% year-on-year. Michigan consumer sentiment index fell from 92.1 to 89.8 in August. Trade deficit narrowed marginally by $1.5 billion to $54 billion in July. Notably, the trade deficit with China increased by 9.4% to $32.8 billion in July. Initial jobless claims was little changed at 217 thousand for the past week. Unit labor cost increased by 2.6% in Q2. Nonfarm productivity remained unchanged at 2.3%. Factory orders increased by 1.4% month-on-month in July. More importantly on the PMI front, Markit manufacturing PMI was down from 50.4 in July to 50.3 in August. ISM manufacturing PMI deteriorated to 49.1 in August, while ISM non-manufacturing PMI increased to 56.4, up from the previous 53.7 and well above estimates. DXY index fell by 0.5% this week. The recent worries about a near-term recession since the 10/2 yield curve inverted last month has been supporting the dollar, together with possible additional tariffs against China and the Chinese yuan devaluation. Going forward, we believe the dollar strength will ebb, given fading interest rate differentials. Report Links: Has The Currency Landscape Shifted? - August 16, 2019 USD/CNY And Market Turbulence - August 9, 2019 Focusing On the Trees But Missing The Forest - August 2, 2019 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been firm: Unemployment rate was unchanged at 7.5% in July. Both headline and core preliminary inflation were unchanged at 1% and 0.9% year-on-year respectively in August. PPI fell from 0.7% to 0.2% year-on-year in July. On the PMI front, Markit composite PMI was little changed at 51.9 in August. Manufacturing component was unchanged at 47, while services component nudged up slightly to 53.5. Retail sales growth fell from upwardly-revised 2.8% to 2.2% year-on-year in July, still better than the estimated 2%. EUR/USD appreciated by 0.5% this week. While the manufacturing sector across Europe remain depressed, the services sector seems to be alive and well. The ECB monetary policy meeting next Thursday will be key for the path of the euro. Report Links: Battle Of The Central Banks - June 21, 2019 EUR/USD And The Neutral Rate Of Interest - June 14, 2019 Take Out Some Insurance - May 3, 2019 The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been mixed: Housing starts fell by 4.1% year-on-year in July. Construction orders increased by 26.9% year-on-year in July, a positive shift from 4.2% contraction in the previous month. Capital spending growth slowed to 1.9% in Q2. Manufacturing PMI fell slightly to 49.3 in August, while services PMI jumped from 51.8 to 53.3. USD/JPY increased by 0.5% this week. The consumption tax hike in Japan is scheduled for October 1. The tax rate will rise from 8% to 10%, with possible exemption on several goods such as food and non-alcoholic beverages, which could be a drag on domestic spending. That being said, we continue to favor the Japanese yen due to the risk of a recession amid the escalating global trade war. Report Links: Has The Currency Landscape Shifted? - August 16, 2019 Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 Battle Of The Central Banks - June 21, 2019 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the U.K. continued to deteriorate: Nationwide house price index was unchanged in August. Markit composite PMI fell to 50.2 in August: Manufacturing component slowed to 47.4; Construction PMI fell to 45; Services component decreased to 50.6. Retail sales contracted by 0.5% year-on-year in August. GBP/USD increased by 1.2% this week. Brexit remains the biggest driver behind the pound. British PM Boris Johnson’s brother resigned this week, citing tension between “family loyalty” and “national interest”. Our Geopolitical Strategy upgraded a no-deal Brexit probability to about 33%, maintaining that it is not the base case since nobody wants an imminent recession. From a valuation perspective, the pound is quite cheap and currently trading far below its fair value. Report Links: Battle Of The Central Banks - June 21, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 Take Out Some Insurance - May 3, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been mixed: Building approvals keep contracting by 28.5% year-on-year in July. Australian Industry Group (AiG) manufacturing index increased to 53.1 in August. The services index soared to 51.4 in August from a previous reading of 43.9. Current account balance shifted to A$5.9 billion in Q2, the first surplus since 1975. Retail sales contracted by 0.1% month-on-month in July. GDP growth slowed down to 1.4% year-on-year in Q2, the lowest rate in over a decade. Exports and imports both grew by 1% and 3% month-on-month respectively. Trade surplus narrowed marginally to A$7.3 million. AUD/USD increased by 1.4% this week. While Q2 GDP growth rate continued to soften, the current account and PMI data are showing tentative signs of a recovery. On Monday, the RBA kept interest rates unchanged at 1%. In the press release, the Bank acknowledged that low income growth and falling house prices limited household consumption in the first half of the year. Going forward, the tax cuts, infrastructure spending, housing market stabilization, and a healthy resources sector should all support the Australian economy, and put a floor under the Aussie dollar. Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Beware Of Diminishing Marginal Returns- April 19, 2019 Not Out Of The Woods Yet - April 5, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: Consumer confidence improved slightly to 118.2 in August. Building permits continued to contract by 1.3% month-on-month in July. Terms of trade increased to 1.6% in Q2. NZD/USD increased by 1.2% this week. In a Bloomberg interview earlier this week, the New Zealand finance minister Grant Robertson expressed his confidence on the fundamentals of the domestic economy, especially the low unemployment rate and sound wage growth. The largest downside risk remains the global trade and manufacturing slowdown. As a small open economy, New Zealand is ultimately vulnerable to exogenous factors, especially those related to its large trading partners including U.S., China, and Australia. On the policy side, the finance minister believes that there is “still room to move” in terms of monetary policy. Report Links: USD/CNY And Market Turbulence - August 9, 2019 Where To Next For The U.S. Dollar? - June 7, 2019 Not Out Of The Woods Yet - April 5, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been mostly negative: Annualized Q2 GDP growth jumped from 0.5% to 3.7% quarter-on-quarter, well above estimates. Bloomberg Nanos confidence fell slightly from 57 to 56.4. Markit manufacturing PMI fell to 49.1 in August, right after a small rebound in July to 50.2.  Trade deficit widened to C$1.12 billion in July. USD/CAD fell by 0.5% this week. On Wednesday, BoC held its interest rate unchanged at 1.75%, as widely expected. In its monetary policy statement, the BoC sounded cautiously dovish, and expects economic activity to slow in the second half of the year amid global growth worries. The strong Q2 rebound was mostly driven by cyclical energy production and robust export growth, which could be temporary given the current market volatility. The rate cut probability next month is currently at 40%. Report Links: Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: KOF leading indicator was unchanged at 97 in August. Real retail sales grew by 1.4% year-on-year in July, up from the previous 0.7%. Manufacturing PMI increased to 47.2 in August, up from 44.7 in the previous month. Headline inflation remained muted at 0.3% year-on-year in July. GDP yearly growth slowed to 0.2% in Q2, from a downwardly-revised 1% in Q1. USD/CHF fell by 0.2% this week. We remain positive on the Swiss franc. The global economic slowdown and increasing worries about a near-term recession remain tailwind for the safe-haven franc.  Report Links: What To Do About The Swiss Franc? - May 17, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Balance Of Payments Across The G10 - February 15, 2019 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been mostly negative: Retail sales increased by 0.9% year-on-year in July. Current account surplus plunged by 60% from NOK 73.1 billion to NOK 30.6 billion in Q2, the lowest since Q4 2017. USD/NOK fell by 1.3% this week. The rebound in oil prices this week has supported petrocurrencies. On the supply side, the production discipline is likely to be maintained. On the demand side, fiscal stimulus globally should revive overall demand. A potential weaker USD should also support oil prices in the second half of the year, which will be bullish for the Norwegian krone. Report Links: Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been mixed: Manufacturing PMI increased slightly to 52.4 in August, from 52 in the previous month. Current account surplus narrowed from SEK 63 billion to SEK 37 billion in Q2. Industrial production increased by 3.2% year-on-year in July. Manufacturing new orders increased by 0.4% in July compared with last month. However, on a year-on-year basis, it fell by 2.2%. The Swedish krona rallied this week, appreciating by 1.4% against USD. The Riksbank held its interest rate unchanged at -0.25% this Thursday, and stated that they still plan to raise interest rates this year or early next, but at a slower pace than the previous forecast. Report Links: Where To Next For The U.S. Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades