Sweden

Highlights The path of least resistance for the DXY remains up. The internal dynamics of financial markets remain constructive for the DXY. We explore more key indicators to complement the analysis in our February 28 report. Our limit buy on NOK/SEK was triggered at parity. We were also stopped out of our long petrocurrency basket trade, which we will re-establish in the coming weeks. Feature Riot points in capital markets usually elicit a swathe of differing views. But more often than not, the internal dynamics of financial markets usually hold the key to a sober view. Given market action over the past few weeks, we are reviewing a few of the key indicators we look at for guidance on buying opportunities as well as false positives. In short, it is a story of standing aside on the DXY for now, while taking advantage of a few opportunities at the crosses. Currency Market Indicators Chart I-1The Dollar Has Scope To Rise Further Many currency market signals continue to point to a higher DXY index for the time being. One of our favorite risk-on/risk-off pairs is the AUD/JPY cross. Not surprisingly, it tends to correlate very strongly with the dollar, which is a counter-cyclical currency. The AUD/JPY cross has consistently bottomed at the key support zone of 70-72 since the financial crisis. This defensive line held notably during the European debt crisis, China’s industrial recession, and more recently, the global trade war. The latest market moves have nudged it decisively lower (Chart I-1). This pins the next level of support in the 55-57 zone, at par with the recessions of 2001 and 2008. The yen appears headed towards 100. A rising yen is usually accompanied by a dollar rally against other procyclical currencies. Outside of the Fukushima crisis, this was a key indicator that the investment environment was becoming precarious (Chart I-2). We laid out our conviction last week as to why we thought 100 is the resting spot for the yen.1 That said, in our trades, our 104 profit target for short USD/JPY was hit this week. We are reinstating this trade with a target of 100, but tightening the stop to 105.4. Chart I-2The Yen Rally Usually Stalls At 100 The recent drop in the dollar is perplexing to most, but it fits the profile of most recessions we have had in recent history. As the world’s reserve bank, the Federal Reserve tends to be the most proactive during a crisis. This means US interest rates drop faster than in the rest of the world, which tends to pressure the dollar lower. Eventually, as imbalances in the economic system come home to roost, the dollar rallies (Chart I-3). 62% of global reserves are still in dollars, suggesting it remains the currency of choice in a crisis. Currencies such as the Norwegian krone and Swedish krona that were already quite cheap are still selling off indiscriminately. Granted, the Norwegian krone has been hit especially hard due to the fallout of the OPEC cartel. But the Swedish krona and Australian dollar that were equally cheap are selling off as well. This suggests the currency market is making a binary switch from fundamentals to sentiment, as we highlighted last week. Chart I-3The Dollar And ##br##Recessions Chart I-4Carry Trades: Long-Term Bullish, Short-Term Cautious Correspondingly, high-beta currencies such as the RUB/USD, ZAR/USD and BRL/USD are plunging into uncharted territory. These currencies are usually good at sniffing out a change in the investment landscape, specifically one becoming precarious for carry trades. The message so far is that the drop in US bond yields may not have been sufficient to make these currencies attractive again (Chart I-4). On a similar note, it is interesting that the USD/CNY is still holding near the 7-defense line. We suggested in a previous report that this represented a handshake agreement between President Xi and President Trump during the trade negotiations. Should USD/CNY break decisively above 7.15 (for example, if Trump’s reelection chances dwindle), it will send Asian currencies into the abyss. The velocity of asset price moves is both surprising and destabilizing. At this rate, previously solvent countries can rapidly step into illiquid territory, especially those with already huge levels of external debt. Granted, this is more a problem for emerging markets than for G10 currencies. So far, it is encouraging that cross-currency basis swaps for the dollar (a measure of currency hedging costs) remain muted (Chart I-5). Chart I-5Hedging Costs Remain Contained In a nutshell, the message from currency markets warns against shorting the DXY for now. Bottom Line: Our profit target on short USD/JPY was hit at 104 this week. We are reinstating this trade with a new target of 100 and a stop-loss at 105.4. Currency market dynamics suggest the DXY is headed higher in the near term. The Message From Equity And Commodity Markets Equity and commodity market indicators continue to suggest the path of least resistance for the DXY remains up over the next few weeks. Since the 2009 lows, the S&P 500 has respected a well-defined upward-sloped trend line, characterized by a series of higher highs and lows. Given this defense line has been tested (and broken), it could pin the S&P 500 around 2200-2400 (Chart I-6). A further drop of this magnitude is likely to unravel financial markets as stop losses are triggered and reinforced selling is supercharged. Non-US equity markets have a much higher concentration of cyclical stocks in their bourses. Thus, whenever cyclical sectors are underperforming defensives at the same time as non-US markets are underperforming US ones, it is a clear sign that the marginal dollar is rotating towards the US (in this case fixed income). During the latest downdraft, what has been clear is that cyclical (and non-US) markets have been underperforming from already oversold levels (Chart I-7A and Chart I-7B). As contrarian investors, we tend to view this development positively, but catching a falling knife before eventual capitulation can also be quite painful. Chart I-6A Break Below The Defense Line Is Bearish Chart I-7ANot A Bullish Configuration For Cyclical Currencies Chart I-7BNot A Bullish Configuration For Cyclical Currencies The 2015-2016 roadmap was instructive on when such a capitulation might occur. Even as the market was selling off, certain cyclical sectors such as industrials started to outperform defensives ones (Chart I-8). So far, it appears that selling pressure in cyclical markets have not yet been exhausted. Chart I-8Equity Market Internals Are Worrisome In commodity markets, the copper-to-gold and oil-to-gold ratios continue to head lower from oversold levels. Together with the fall in government bond yields, it signifies that the liquidity-to-growth transmission mechanism is impaired (Chart I-9). The speed and magnitude of the latest drop could signify capitulation, but since the European debt crisis there has been ample time to catch the upswings, since they tend to be powerful and durable. Earnings revisions continue to head lower across all markets. Bottom-up analysts are usually spot on about the direction or earnings. Not surprisingly, the downgrades have been driven by emerging markets, meaning that return on capital will be lower in cyclical bourses. Chart I-9Commodity Market Internals Are Worrisome A selloff in equity markets has tended to occur in cycles. The speed and intensity of the first selloff usually wipes out stale longs, especially those that bought close to the recent market peak. It is fair to assume with yesterday’s selloff that the process is near complete. The next wave comes from medium-term investors, making a judgment call on whether they are at the cusp of a recession. Unfortunately, this phase usually involves a cascading selloff with capitulation only evident a few weeks or months later. The fact that cheap and deeply oversold currencies like the Norwegian krone and Australian dollar are still falling suggests we are stepping into the second wave of selloffs. What remains peculiar about the dollar is that it continues to be whipsawed between relative fundamentals and sentiment. Bottom LIne: Equity market internals continue to suggest we have not yet hit a capitulation phase for pro-cyclical currencies. Stand aside on the DXY for now. On Interest Rates, The Euro, And Petrocurrencies Chart I-10The Bear Case For The US Dollar What remains peculiar about the dollar is that it continues to be whipsawed between relative fundamentals and sentiment. For example, interest rate differentials across much of the developed world have risen versus the dollar, in stark contrast with the drop in their exchange rates (Chart I-10). The risk is that as a momentum currency, a surge in the dollar triggers a negative feedback loop that tightens global financial conditions, reinforcing the same negative feedback loop. A few questions we have fielded this week have been in surprise to the rise in the euro. What has been remarkable is that the drop in Treasury yields has wiped out the carry from being long the dollar for a number of countries. For example, the German bund-US Treasury spread continues to collapse. The message is that at least initially, room for policy maneuvering remains higher at the Fed, which corroborates the market view of a disappointing European Central Bank meeting this week. A drop in oil prices is also a huge dividend on the European economy, which partly explains recent strength in the euro. Within this sphere of multiple moving parts, one key question is what to do with oil plays. Usually recessions are triggered by rising oil prices that impose a tax on the domestic economy. But rather, oil prices have fallen dramatically in recent weeks as the pseudo-alliance between Russia and OPEC appears to have broken down. Our commodity and geopolitical strategists believe that while some sort of resolution will ultimately be reached, the path of least resistance for oil prices in the interim is down, as market share wars are re-engaged.2 Risks to oil demand are now also firmly tilted to the downside. Oil demand tends to follow the ebb and flows of the business cycle. Transport constitutes the largest share of global petroleum demand, and the rising bans on travel will go a long way in curbing consumption (Chart I-11). Balance-of-payment dynamics also tend to deteriorate during oil bear markets. Altogether, these forces combine to become powerful headwinds for petrocurrencies. A fall in oil prices tends to be bullish for the US dollar. This is because falling oil prices reduce government spending in oil-producing countries, which depresses aggregate demand and leads to easier monetary policy. Meanwhile, a fall in oil prices also implies falling terms of trade, which further reduces the fair value of the exchange rate. Balance-of-payment dynamics also tend to deteriorate during oil bear markets. Altogether, these forces combine to become powerful headwinds for petrocurrencies. Chart I-11Oil Demand Will Collapse Further Chart I-12Resell CAD/NOK NOK Will Outperform CAD We were stopped out of our long petrocurrency basket trade for a small loss of 0.9% (on the back of a positive carry). We are standing aside on this trade for now. We were also stopped out of our short CAD/NOK trade which we are reinstating this week. Further improvement in Canadian energy product sales will require not only rising oil prices, but an improvement in pipeline capacity and a smaller gap between Western Canadian Select (WCS) and Brent crude oil prices. With the US shale revolution grabbing production market share from both OPEC and non-OPEC producing countries, the divergence between the WCS (and WTI) price of oil versus Brent is likely to remain wide (Chart I-12). Rebuy NOK/SEK Our limit buy on long NOK/SEK was triggered at parity this week. Relative fundamentals, especially from an interest rate perspective, still favor the cross. The cross has approached an important technical level, with our intermediate-term indicator signaling oversold conditions. Should the NOK/SEK pattern of higher lows and higher highs in place since the 2015 bottom persist, we should be on the cusp of a reversal (Chart I-13). Interest rate differentials continue to favor the NOK over the SEK (Chart I-14). Meanwhile, Norway mainland GDP growth continues to outpace that of Sweden. Chart I-13Rebuy NOK/SEK Rebuy NOK/SEK Chart I-14A Yield Cushion The risk to this trade is that we have not yet seen a capitulation in oil prices. This will largely be driven by geopolitics. But given that the cross is already trading near the 2016 lows in oil prices, this has already largely been priced in. We are placing a tight stop at 0.94 to account for volatility in the coming weeks. Housekeeping Our short CHF/NZD trade briefly hit our stop loss of 1.75. We are reinstating this trade today, with a new entry level of 1.74 and a stop-loss of 1.76. We were also stopped out of our short USD/NOK trade, and we will look to rebuy the krone in the near future. Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Weekly Report, titled “Are Competitive Devaluations Next?”, dated March 6, 2020, available at fes.bcaresearch.com. 2 Please see Commodity & Energy Strategy Special Report, titled “Russia Regrets Market-Share War?”, dated March 12, 2020, available at ces.bcaresearch.com. Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been positive: Nonfarm payrolls increased by 275 thousand and average hourly earnings grew by 3% year-on-year in February. The NFIB business optimism index ticked up to 104.5 in February. Core CPI grew by 2.4% year-on-year from 2.3% in February. The DXY index appreciated by 0.8% this week. Core inflation has consistently printed at or above 2% for the last two years, but with inflation expectations plunging to new lows, the February print is likely to mark an intermediate-term high in CPI. As a counter-cyclical currency, the DXY is likely to continue getting a bid in the near term, even if we get more aggressive stimulus from the Fed. Report Links: Are Competitive Devaluations Next? - March 6, 2020 The Near-Term Bull Case For The Dollar - February 28, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been mixed: GDP grew by 1% year-on-year in Q4 2019, from 0.9% in Q3. The Sentix investor confidence index plummeted to -17.1 from 5.2 in March. Industrial production grew by 2.3% month-on-month in January from a contraction of 1.8% in December. The euro appreciated by 0.5% against the US dollar this week. The European Central Bank (ECB) kept rates unchanged at its Thursday meeting but implemented measures that support bank lending to small and medium-sized enterprises and injected liquidity through longer-term refinancing operations. The ECB also introduced additional net asset purchases of EUR 120 billion until the end of the year. This will help ease financial conditions in the euro area, but until global demand picks up, the exodus of capital from cyclical European stocks could continue.   Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: The current account surplus increased to JPY 612.3 billion from JPY 524 billion while the trade balance went into a deficit of JPY 985.1 billion from a surplus of JPY 120.7 billion in January. Machine tool orders contracted by 30.1% year-on-year in February. The outlook component of the Eco Watchers survey plummeted to 24.6 from 41.8. The Japanese yen appreciated by 2.2% against the US dollar this week. An increase in foreign investments boosted the current account surplus, helping offset the deficit in goods trade. The government announced a package totaling JPY 430.8 billion to support financing for small businesses squeezed by the virus. The sharp rally in the yen could begin to garner discussions from both the MoF and BoJ on further actions. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been negative: GDP growth was flat month-on-month in January. Industrial production contracted by 2.9% year-on-year in January, from a contraction of 1.8% the previous month. The total trade balance shrank to GBP 4.2 billion from GBP 6.3 billion in January. The British pound depreciated by 2.2% against the US dollar this week. The Bank of England (BoE) responded to the Covid-19 shock with an emergency rate cut of 50 basis points. This dovetailed with the government’s announcement of a GBP 30 billion stimulus package financed largely by additional borrowing. With the policy rate at 0.25%, the BoE has ruled out negative rates so further easing will likely come in the form of QE if rates go to zero. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been negative: The Westpac consumer confidence index fell to 91.9 from 95.9 in February, a five-year low. National Australia Bank business confidence decreased to -4 from -1 while business conditions fell to 0 from 2 in February. Home loans grew by 3.1% month-on-month in January, from 3.6% the previous month. The Australian dollar depreciated by 3.9% against the US dollar this week. The Australian government joined other economies in announcing a stimulus package worth more than $15 billion that includes an extension of asset write-offs and measures to protect apprenticeships across the country. Reserve Bank of Australia Deputy Governor Debelle confirmed that the bank would consider quantitative easing if necessary. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: Manufacturing sales grew by 2.7% quarter-on-quarter in Q4 2019. The preliminary ANZ business confidence numbers plummeted to -53.3 from -19.4 in March. Export intentions, at -21.5, hit an all-time low in March. Electronic card retail sales grew by 8.6% year-on-year in February, picking up from 4.2% in January. The New Zealand dollar depreciated by 1.9% against the US dollar this week. The government is planning a business continuity package that will be ready in coming weeks. Reserve Bank of New Zealand Governor Orr stated that the bank would consider unconventional policy such as negative rates, interest rate swaps, and large scale asset purchases only if policy rates hit the effective zero bound. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been mixed: Average hourly earnings grew by 4.3% year-on-year and 30.3 thousand new jobs were added to the Canadian economy in February. Imports fell to CAD 49.6 billion, exports fell to CAD 48.1 billion, and the deficit in international merchandise trade swelled to CAD 1.47 billion in February.  The Ivey PMI decreased to 54.1 from 57.3 on a seasonally-adjusted basis in February. The Canadian dollar depreciated by 3% against the US dollar this week. The petrocurrency sold off as oil plunged in its biggest decline since the Gulf War in 1991. Exports of motor vehicles and energy products were down, contributing to the widening deficit. Supply and demand factors are bearish for oil, which will put a floor under our long EUR/CAD trade. Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 There were scant data out of Switzerland this week: The unemployment rate remained flat at 2.3% in February. Foreign currency reserves increased to CHF 769 billion from CHF 764 billion in February while total sight deposits ticked up to CHF 598.5 billion from CHF 503.6 billion in the week ended March 6.   The Swiss franc appreciated by 0.7% against the US dollar this week. The franc was driven by safe-haven flows at the beginning of the week but sold off as the market posted a tentative rally. Sight deposit and reserve data suggest the Swiss National Bank (SNB) intervened to keep EUR/CHF above the key 1.06 level. The ECB’s decision to hold rates will take some pressure off the SNB. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been negative: Headline CPI grew by 0.9% from 1.8% while the core figure grew by 2.1%, slowing from 2.9%, in February. Manufacturing output contracted by 1.4% month-on-month in January. The PPI contracted by 7.4% year-on-year in February, deepening the contraction of 3.9% the previous month. The Norwegian krone depreciated by 8.2% against the US dollar this week. As expected, the currency was hit hard by tumbling oil prices. The government is set to present emergency measures which will target bankruptcies and layoffs in sectors hit hard by Covid-19, such as airlines, hotels, and parts of the manufacturing industry. There may also be scope for the government to directly stimulate demand in the oil industry. Report Links: Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2   There were scant data out of Switzerland this week: The current account surplus shrank to SEK 39 billion from SEK 65 billion in Q4 2019. The Swedish krona depreciated by 3% against the US dollar this week. The Swedish government announced a SEK 3 billion supplementary budget bill to combat the shock from Covid-19, in addition to preexisting tax credits and an extra SEK 5 billion promised to local authorities in the upcoming spring mini-budget. Riksbank Governor Ingves emphasized the need to maintain liquidity via more generous terms for loans to banks or direct purchases of securities. A rate cut, however, does not seem to be on the table. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights The latest interest rate cuts by central banks confirms the narrative that the authorities view economic risks as asymmetrical to the downside. This all but assures that competitive devaluation will become the dominant currency landscape in the near future. If the virus proves to be just another seasonal flu, the global economy will be awash with much more stimulus, which will be fertile ground for pro-cyclical currencies. In the event that we get a much more malignant outcome, discussions around interest rate cuts will rapidly evolve into quantitative easing and debt monetization. The dollar will be the ultimate loser in both scenarios, but this path could be lined with intermediate strength. Our highest-conviction call before the dust settles is to short USD/JPY. We are also making a few portfolio adjustments in light of recent market volatility. Buy NOK/SEK and NZD/CHF and take profits soon on long SEK/NZD. Feature The DXY rally that began last December faltered below overhead psychological resistance at 100, and has since broken below key technical levels. The V-shaped reversal has been a mirror image of developments in equity markets, with the S&P 500 off 6% from its lows. The catalyst was aggressive market pricing of policy action from the Federal Reserve, to which the authorities yielded. The latest policy action confirms the narrative that most central banks continue to view deflation as a much bigger threat than inflation, since few have been able to achieve their mandate. This all but assures that competitive devaluation will become the dominant currency landscape, as each central bank prevents appreciation in their respective currency. Should the Fed continue on the path of much more aggressive stimulus, this will have powerful implications for the dollar and across both G10 and emerging market currencies.   The US 10-year Treasury yield broke below 1% around 1:40 p.m. EST on March 3rd. This was significant not because of the level but because it emblematically erased the US carry trade for a number of countries (Chart I-1). Should the Fed continue on the path of much more aggressive stimulus, this will have powerful implications for the dollar and across both G10 and emerging market currencies.  Chart I-1The Big Convergence To Buy Or Sell The DXY? If the virus proves to be only slightly more lethal than the seasonal flu, the global economy will be awash with much more stimulus, which will be fertile ground for pro-cyclical currencies. As a counter-cyclical currency, the dollar will buckle, lighting a fire under our favorites such as the Norwegian krone and the Swedish krona. The euro will be the most liquid beneficiary of this move. Chart I-2 shows that the global economy was already on a powerful V-shaped recovery path before the outbreak. More importantly, this recovery was on the back of easier financial conditions. Chart I-2V-Shaped Recovery At Risk Chart I-3A Second Wave Of Infections? Our roadmap is the peak in the momentum of new infections outside of China. During the SARS 2013 episode, the bottom in asset prices (and peak in the DXY) occurred when the momentum in new cases peaked. Currency markets are currently pricing a much worse outcome than SARS. The risk is that we are entering a second wave of infections outside Hubei, China, which will be more difficult to control than when it was relatively more contained within the epicenter (Chart I-3). As we aptly witnessed a fortnight ago, currency markets will make a binary switch to risk aversion on such an outcome. This warns against shorting the DXY index or buying the euro or pound in the near term. As we go to press, the virus has been identified on almost every continent except Antarctica. Even in countries such as the US, with modern and sophisticated health facilities, the costs to get tested are exorbitant for underinsured individuals.1 This all but assures that the number of underreported cases is likely non-trivial, which could trigger another market riot once they surface. Chart I-4DXY and USD/JPY Tend To Move Together Our highest-conviction call before the dust settles is therefore to short USD/JPY. As Chart I-1 highlights, the Bank of Japan is much closer to the end of their rope in terms of monetary policy tools. Long bond yields have already hit the zero bound, which means that real rates in Japan will continue to rise until the authorities are forced to act. One of the triggers to act will be a yen soaring out of control, which is not yet the case. Speculative evidence is that it will take a yen rally in the order of 12% to catalyze the BoJ. More importantly, the speed of the rally will matter. This was the trigger for negative interest rates in January 2016 as well as yield curve control in September of 2016. The first rally from USD/JPY 125 to around 112 and the subsequent rise towards 100 were both in the order of 12%. A similar rally from the recent peak near 112 will pin the USD/JPY at 100.   Bottom Line: The yen is the most attractive currency to play dollar downside at the moment. Remain short USD/JPY. If global growth does pick up and the dollar weakens, the USD/JPY and the DXY tend to be positively correlated most of the time, providing ample room for investors to rotate into more pro-cyclical pairs (Chart I-4). Competitive Devaluation? In the event that we get a much more malignant outcome, discussions around interest rate cuts will rapidly evolve into quantitative easing and debt monetization. The Reserve Bank of Australia has already stated that QE is on the table if rates touch 0.25%.2 Other central banks are likely to follow suit. As the chorus of central banks cutting rates and stepping into QE on COVID-19 rises, the rising specter of currency brinkmanship is likely to unnerve countries pursuing more orthodox monetary policies. The currency of choice will be gold and other precious metals, though the dollar, Swiss franc, and yen are likely to also outperform.  The velocity of money in both the US and the euro area was in a nascent upturn, but has started to roll over.  Whether or not countries adopt QE, what is clear is that balance sheet expansion at both the Fed and the European Central Bank is set to continue. Chart I-5 shows that the velocity of money in both nations was in a nascent upturn, but has started to roll over. This tends to lead inflation by a few quarters. On a relative basis, our bias is that the pace of expansion should be more pronounced in the US. This will eventually set the dollar up for a significant decline, albeit after a knee-jerk rally. Chart I-5ADownside Risks To US Inflation Chart I-5BDownside Risks To Euro Area Inflation In terms of quantitative easing, it is most appealing when a country has low growth, low inflation, and large amounts of public debt. If we are right that inflation is about to roll over in the US, then the public debt profile and political capital to expand the budget deficit places the nation as a prime candidate for QE (Chart I-6). Fiscal stimulus is a much more difficult discussion in Europe, Japan, or elsewhere for that matter, and likely to arrive late. Chart I-6US Government Debt Is Very High The backdrop for the US dollar is a 37% rise from the bottom. The New York Fed estimates that a 10 percentage point appreciation in the dollar shaves 0.5 percentage points off GDP growth over one year, and an additional 0.2 percentage points in the following year.3 With growth now hovering around 2%, a strong currency could easily nudge US growth to undershoot potential.  The Fed is one of the few G10 central banks with room to ease monetary policy. This sets the dollar up for an eventual decline. However, the path to QE will be lined by a strong dollar if the backdrop is flight to safety. This entails rolling currency depreciations among some developed and emerging markets. When looking for the next candidates for competitive devaluation, the natural choices are the countries with overvalued exchange rates that are exerting a powerful deflationary impulse into their economies. Chart I-7 shows the deviation of real effective exchange rates from their long-term mean, according to the BIS. Chart I-7Competitive Devaluation Candidates Bottom Line: The Fed is one of the few G10 central banks with room to ease monetary policy. This sets the dollar up for an eventual decline. It will first occur among the safe havens (currencies with already low interest rates), before it rotates to more procyclical currencies. Where Does US Politics Fit In? Politics should start to have a meaningful impact on the dollar once the democratic nominee is sealed. Super Tuesday revealed a powerful shift to the center, pinning former Vice President Joe Biden as the preferred candidate (Chart I-8). The dollar tends to thrive as political uncertainty rises. While not a forgone conclusion, a Sanders–Trump rivalry would have been a very polarized outcome, putting a bid under the greenback. Markets are likely to take a more conciliatory tone from a Biden victory, which will be negative for the greenback.   Chart I-8US Politics Will Be Important Our colleague Matt Gertken, chief geopolitical strategist, just published his analysis of Super Tuesday.4 While a contested convention remains unlikely, it will likely favor Trump’s reelection odds. What is common about a Biden-Sanders-Trump trio is that fiscal policy is set to expand in the US. This will ultimately be dollar bearish (Chart I-9). Chart I-9The Dollar And Budget Deficits Bottom Line: The election is still many months away and much can change between now and then. For now, Biden is the preferred democratic nominee. Portfolio Adjustments Chart I-10Sell CHF/NZD The sharp rally in the VIX index has opened up a trading opportunity on the short side. The historical pattern of previous spikes in the VIX is that unless the market starts to price in an actual recession, which is quite plausible, the probability of a short-term reversal is close to 100%. Given our base case that we are not headed for a recession over the next six to 12 months, we are opening a short CHF/NZD trade today. The cross tends to benefit from spikes in volatility, correcting sharply as the market unwinds overreactions. More importantly, the cross has already priced in an overshoot in the VIX in an order of magnitude akin to 2008. Place stops at 1.75 with a target of 1.45 (Chart I-10). We are also placing a limit buy on NOK/SEK at parity. The risk to this trade is a further down-leg in oil prices, but at parity, the cross makes for a compelling tactical trade. Momentum on the cross is currently bombed out. We will be closely watching whether Russia complies with OPEC production cuts and act accordingly. Remain long NOK within our petrocurrency basket against the euro. We are also looking to take profits on our long SEK/NZD trade, a nudge below our initial target. The market has fully priced in a rate cut by the Reserve Bank of New Zealand, suggesting the kiwi could have a knee-jerk rally, similar to the Aussie on the actual announcement. Finally, we were stopped out of our short gold/silver trade for a loss of 5.5%. We will be looking to re-establish this trade in the coming weeks. Stay tuned. Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Bertha Coombs and William Feuer, “The coronavirus test will be covered by Medicaid, Medicare and private insurance, Pence says,” CNBC, dated March 4, 2020. 2 Michael Heath, “RBA Says QE Is Option at 0.25%, Doesn’t Expect to Need It,” Bloomberg News, dated November 26, 2019. 3 Mary Amiti and Tyler Bodine-Smith, “The Effect of the Strong Dollar on U.S. Growth,” Federal Reserve Bank of New York, dated July 17, 2015. 4  Please see Geopolitical Strategy Special Report, titled “US Election: A Return To Normalcy?”, dated March 4, 2020, available at gps.bcaresearch.com. Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been positive: The ISM manufacturing PMI fell slightly to 50.9, dragged down by the prices paid and new orders component, while the non-manufacturing index ticked up to 57.3. Core PCE inflation increased to 1.6% year-on-year in January. Unit labor costs came in at 0.9% quarter-on-quarter in Q4 of last year. This is a deceleration from the previous print of 2.5%. The DXY index depreciated by 1.4% this week. Following a conference call with G7 central banks, the Fed made an emergency rate cut of 50bps. Chairman Powell cited risks to the outlook from Covid-19 but acknowledged that the Fed can keep financial conditions accommodative, not fix broken supply chains or cure infections. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Building A Protector Currency Portfolio - February 7, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been positive: Core CPI inflation increased slightly to 1.2% year-on-year in February.  The producer price index contracted by 0.5% year-on-year in January. The unemployment rate remained flat at 7.4% in January. Retail sales grew by 1.7% year-on-year in January, remaining flat from the previous month. The euro appreciated by 3.6% against the US dollar this week. As the ECB is limited by the zero lower bound, the euro strengthened on expectations that rate differentials with the US will continue to narrow. The ECB could resort to policy alternatives such as a special facility targeting small and medium enterprises. Markets are pricing in an 81% probability of a rate cut as we go into the ECB meeting next week. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: The Tokyo CPI excluding fresh food grew by 0.5% year-on-year in February from 0.7% the previous month. The jobs-to-applicants ratio decreased to 1.49 from 1.57 while the unemployment rate increased to 2.4% from 2.2% in January. The consumer confidence index declined to 38.4 from 39.1 in February. Housing starts contracted by 10.1% year-on-year in January from 7.9% the previous month. The Japanese yen appreciated by 2.5% against the US dollar this week. Lower US yields, combined with continued risk-on flows, have extended the rally in the Japanese yen. Weakness in the Japanese economy is broad based, but the BoJ has limited policy space and fiscal action looks unlikely anytime soon. Global central bank action will drive the yen in the near term. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been mixed: Consumer credit decreased to GBP 1.2 billion from GBP 1.4 billion while net lending to individuals fell to GBP 5.2 billion from GBP 5.8 billion in January. Mortgage approvals increased to 70.9 thousand from 67.9 thousand in January, while the Nationwide housing price index grew by 2.3% year-on-year in February from 1.9% the previous month.  The British pound appreciated by 0.2% against the US dollar this week. At a hearing this week, incoming governor Andrew Bailey stated that the BoE is still assessing evidence on the nature of the shock from Covid-19. The BoE has limited room to cut and is constrained by possible stagflation; we expect targeted supply chain finance and cooperation with fiscal authorities to take precedence.   Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been mixed: GDP grew by 2.2% year-on-year in Q4 2019, improving from 1.7% the previous quarter.  Imports and exports both contracted by 3% while the trade balance dropped to AUD 5.2 billion in January. Building permits contracted by a dramatic 15.3% month-on-month in January, compared to growth of 3.9% in December. The RBA commodity price index contracted by 6.1% year-on-year in February.  The Australian dollar appreciated by 0.8% against the US dollar this week. The Reserve Bank of Australia cut its official cash rate to 0.5%, an all-time low, citing the impact of Covid-19 on domestic spending, education, and travel. Watch to see if the signal from building permits is confirmed by other housing market indicators. The RBA might not be done easing. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: The terms of trade index grew by 2.6% quarter-on-quarter in Q4 2019, improving from 1.9% in Q3. The ANZ commodity price index contracted by 2.1% in February, deepening from 0.9% the previous month. Building permits contracted by 2% month-on-month in January, from growth of 9.8% in December.  The global dairy trade price index contracted by 1.2% in March.  The New Zealand dollar appreciated by 0.3% against the US dollar this week. There is pressure on the Reserve Bank of New Zealand (RBNZ) to ease at its next meeting on March 27, with markets pricing in 42 basis points of easing over the next 12 months. However, the RBNZ has dispelled notions of a pre-meeting cut. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Annualized GDP grew by 0.3% quarter-on-quarter in Q4 2019, slowing from 1.4% the previous quarter.  The raw material price index contracted by 2.2% and industrial product price index contracted by 0.3% month-on-month in January.  Labor productivity contracted by 0.1% quarter-on-quarter in Q4 2019, compared to growth of 0.2% the previous quarter. The Canadian dollar depreciated by 0.1% against the US dollar this week. The Bank of Canada (BoC) followed the Fed and cut rates by 50bps. In addition to the confidence hit from Covid-19, the BoC cited falling terms of trade, depressed business investment, and dampened economic activity due to the CN rail strikes. The BoC stands ready to ease further, and Prime Minister Trudeau has raised the possibility of a fiscal response.   Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: GDP grew by 1.5% year-on-year in Q4 2019, from growth of 1.1% the previous quarter. The SVME PMI increased to 49.5 from 47.8 in February. The KOF leading indicator increased to 100.9 from 100.1 in February. CPI contracted by 0.1% year-on-year in February, from growth of 0.2% the previous month. The Swiss franc appreciated by 1.6% against the US dollar this week. A combination of strong domestic data and global risk-off flows contributed to strength in the Swiss franc. However, the Swiss government will be revising down growth forecasts and a recent UN report has estimated that Switzerland lost US$ 1 billion in exports in February due to Chinese supply disruptions. Combined with a strong franc, this puts the domestic outlook at risk.  Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been positive: The current account decreased to NOK 19.1 billion from NOK 29.5 billion in Q4 2019. The credit indicator grew by 5% year-on-year in January. Registered unemployment decreased slightly to 2.3% from 2.4% in February.  The Norwegian krone appreciated by 1.3% against the US dollar this week. Expect the petrocurrency to trade on news from the OPEC meetings in the coming days. The committee has proposed a production cut of 1.5 million barrels per day through Q2 2020, conditional on approval from Russia, to offset the demand shock from Covid-19.  Report Links: Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been positive: The Swedbank manufacturing PMI increased to 53.2 from 52 in February. Industrial production grew by 0.9% year-on-year, from a contraction of 2.6% the previous month. GDP grew by 0.8% year-on-year in Q4 2019, slowing from 1.8% the previous month. The Swedish krona appreciated by 1.5% against the US dollar this week. After hitting a 2-decade high near 10, USD/SEK has violently reversed and is now trading at the 9.45 level. What is evident from incoming data is that the cheap currency has been a perfect shock absorber, cushioning the domestic economy. We are protecting profits on long SEK/NZD today and we will be looking for other venues to trade SEK on the long side.   Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights For stock markets, the best inoculation against Covid-19 is ultra-low bond yields. Our tactical underweight to equities versus bonds achieved its 5 percent profit target and is now closed. We are now awaiting the fractal signal to go tactically overweight (Chart of the Week). Price to sales is a much better predictor of 10-year returns than is price to earnings, especially when profit margins are stretched as they are now. New long-term recommendation: overweight Swedish equities versus bonds. Germany and Switzerland also offer attractive excess 10-year equity returns over bonds. Fractal trade: the 130 percent outperformance of palladium versus nickel in just six months is now technically stretched. Chart of the WeekStocks Are Approaching Oversold – Stay Tuned For Stock Markets, The Best Inoculation Against Covid-19 Is Ultra-Low Bond Yields A global slowdown, exacerbated by the Covid-19 virus contagion, is dominating the news and financial headlines. There are worries that the stock market is still in denial and has a long way to fall – rather like Wile E. Coyote suspended in disbelief as he runs over the cliff-edge. In fact, some of the most economically sensitive equity sectors have already fallen a long way. For example, the oil and gas sector is down by 20 percent (Chart 2). Chart I-2Economically Sensitive Sectors And Bond Yields Have Plunged Meanwhile, bond yields have plunged to new lows, and in some cases all-time lows. Hence, we are pleased to report that our tactical underweight to equities versus 10-year bonds, initiated on January 9, has achieved its 5 percent profit target and is now closed.1 We are now awaiting the fractal signal to go tactically overweight. Bond yields have plunged to new lows. Having said that, when the world economy is set to grind to a halt in the first quarter, and halfway to a recession, is a 5 percent underperformance of equities versus bonds enough? There is certainly scope for some further downside, but for investors with a multi-year horizon, equities still win the ugly contest versus bonds. Where bond yields are approaching the lower limit to their yields – around -1 percent – it means they are approaching the upper limit to their prices. Hence, bonds become a ‘lose-lose’ proposition. Bond prices cannot rise much further, even in an economic slump, but they can fall a lot if sentiment suddenly recovers. As the riskiness of bonds rises relative to equities, the prospective return that investors will accept from equities rapidly collapses to the ultra-low level of bond yields. And as valuation is just the inverse of prospective return, this underpins and justifies an exponentially higher valuation of equities. How can we best gauge the prospective (long-term) returns that equities now offer? To answer this question, we need to take a Japanese lesson. A Japanese Lesson: Price To Sales Is The Best Predictor Of Prospective Return A great advantage of being a European investor is that the difficult investment questions have already been asked and answered by our friends in Japan – so we just need to take some Japanese lessons. One of the most important lessons is that the Japanese stock market’s price to sales multiple has a near-perfect predictive record for Japanese 10-year returns since the 1980s.2 For world equities, market capitalisation to GDP (which broadly equates to price to sales at a world level) also has a near-perfect predictive record for 10-year returns since the late 1990s.3 The corollary lesson is that the price to earnings multiple – either based on 12-month trailing or 12-month forward earnings – is not such a good predictor of prospective return. Price to earnings wrongly pinpointed Japan’s highest valuation in 1994 rather than at the peak of the bubble in 1989. Moreover, since 2000, price to earnings has suggested that Japan’s stock market is cheaper than it truly is, and grossly overestimated prospective returns. Price to earnings made the same mistake for world equities in the mid-noughties, understating valuations and thereby overestimating prospective returns. The trouble with price to earnings is that it takes no account of the likely evolution of profit margins – treating a stock market multiple of, say, 30 on a high profit margin the same as 30 on a low profit margin. The problem is that when the market is trading at 30 on a low margin it has the capacity for higher profit growth through margin expansion – and thereby a higher prospective return – than when it is trading at 30 on a high margin (Chart 3). Chart I-3Price To Earnings Takes No Account Of Changing Profit Margins It follows that a high price to earnings on a low profit margin makes the market appear more expensive than it truly is, and thereby underestimates prospective returns. In 1994, Japan appeared to be more expensive than at the peak of the bubble in 1989 because profit margins halved through 1989-94. The trouble with price to earnings is that it takes no account of the likely evolution of profit margins. Conversely, a low price to earnings on a high profit margin makes the market appear less expensive that it truly is, and thereby overestimates prospective returns (Chart 4 and Chart 5). Chart I-4Price To Sales Has An Excellent Predictive Record In Japan… Chart I-5…Whereas Price To Earnings Has Made Many Mistakes   In the mid-noughties, Japan appeared to be less expensive than it truly was because profit margins surged through 2001-07. The same was true for world equities. Hence, price to earnings grossly overestimated the prospective long-term return in 2007 (Chart 6). Chart I-6Profit Margins Are At Generational Highs Price to sales avoids the mistakes of price to earnings by removing profit margins from the equation. Put another way, it is like using price to earnings with a constant long-term profit margin. This tends to be more prudent – especially today when margins are close to generational highs and facing several threats in the coming years. One threat to profit margins comes from a growing populist backlash against record high corporate profitability, especially in the most profitable sectors. The threat manifests through populist politicians or parties which vow to rein in runaway profitability through higher taxes and/or regulation and/or nationalisation. Think Bernie Sanders. A second threat comes from environmental, social, and corporate governance (ESG). Think carbon taxes. A third threat comes the possible break-up of the pseudo-monopoly tech behemoths, killing both their pricing power and market penetration. Think antitrust suit against Google or Facebook. Admittedly, this is likely to be a US focussed threat, but the impact on stock markets would be felt worldwide. Given these threats, long-term investors should assume some pressure on profit margins from today’s generational highs. Accordingly, just as in 2007, price to sales is likely to be a much better predictor of prospective returns than is price to earnings (Chart 7 and Chart 8). Chart I-7At A World Level, Market Cap To GDP Has An Excellent Predictive Record… Chart I-8…Whereas Price To Earnings Was Very Wrong In 2007 Sweden Is An Attractive Long-Term Opportunity Price to sales predicts that stock markets, on average, are set to deliver feeble single-digit total nominal returns over the coming decade. Nevertheless, with bond yields even closer to zero, and the riskiness of bonds much higher at ultra-low yields, equities still beat bonds in the ugly contest of long-term prospective returns. In fact, in those countries where bond yields are approaching their lower limit of around -1 percent – meaning bond prices are approaching their upper limit – equities win the contest more handsomely. On this basis, the stock markets in Germany and Switzerland offer attractive excess 10-year returns over their bond markets. But the most attractive long-term opportunity is Sweden. Based on its price to sales multiple, Sweden’s stock market is set to deliver around 6 percent a year over the coming decade (Chart 9). Chart I-9Sweden’s Stock Market Is Set To Deliver 6 Percent A Year Given that Sweden’s 10-year bond yield is negative, Sweden’s stock market takes the honour of offering one of the world’s highest excess 10-year returns over its bond market (Chart 10). Chart I-10Sweden’s Stock Market Has The Highest Excess Return Over Bonds Accordingly, we are adding Sweden to our existing structural overweight to equities versus long-dated bonds in Germany, in a 50:50 combination. Fractal Trading System* As discussed, we are pleased to report that underweight S&P 500 versus the 10-year T-bond achieved its 5 percent profit target and is now closed. Elsewhere, the palladium price has surged. In just six months, palladium has outperformed nickel by 130 percent, making its 130-day fractal structure extremely fragile. Accordingly, this week’s recommended trade is short palladium versus nickel, setting a profit target of 32 percent with a symmetrical stop-loss. The rolling 1-year win ratio now stands at 60 percent. 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.   Dhaval Joshi Chief European Investment Strategist dhaval@bcaresearch.com   * 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 Footnotes 1 Our expression of this was underweight S&P 500 versus US 10-year T-bond. 2 Prospective returns are nominal total (capital plus income) 10-year returns, shown as an annualised rate. 3 Price/sales per share = (price*number of shares)/(sales per share * number of shares) = market capitalisation/total sales. At a global level, total sales broadly equal GDP, so price/sales per share = market capitalisation/GDP. But note that this does not apply at a regional or country level because sales can originate from outside the domestic economy.. Fractal Trading System Cyclical Recommendations Structural Recommendations 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 The elevated uncertainty about global growth stemming from the COVID-19 virus in China has not only made investors more anxious, but central bankers as well. This means that, only six weeks into the year, policymakers may already be having to rethink their expected strategies for 2020 - which were, for the most part, sitting on hold after the monetary easing in 2019. This has important implications for the direction of global bond yields, which were starting to see a cyclical increase before the viral outbreak. In this report, we present what we see as the most important data for investors to focus on in the major developed markets to get the central bank call correct. This is based on our interpretation of recent speeches, press conferences and published research. We also provide our own suggested data series to watch for each country – which do not always line up with what central bankers are saying they are most worried about. We conclude that it is still not clear that the global growth backdrop has turned sustainably more bond bullish, but there is no pressure on any of the major central banks to move away from extremely accommodative policy settings. Feature Over the past four weeks, all of the major central banks have had the opportunity to formally communicate their current views to financial markets. Whether it was through post-policy- meeting press conferences or published monetary policy reports, central bankers have tried to signal their intentions about future changes in the direction of interest rates, given the heightened uncertainties about the momentum of global growth. At the moment, our global leading economic indicator (LEI) is still signaling that 2020 should see some rebound in global growth – and bond yields – after the sharp 2019 manufacturing-led slowdown (Chart 1). Unfortunately, the latest read on the global LEI uses data as of December, so it does not include what is almost certainly to be a very severe slowdown in the Chinese (and global) economy in the first quarter of 2020 due to the COVID-19 virus outbreak. Underlying stories within each developed market economy – on growth, inflation and potential financial imbalances – suggest that the additional interest rate cuts now discounted globally may not come to fruition if the China shock is contained to the first quarter of the year.  Central bankers are in the same spot as investors, trying to ascertain the extent of the hit to global growth from the virus, both in terms of size and, more importantly, duration. This comes at a time when many central banks were already formally rethinking how to meet their own individual inflation-targeting mandates given the persistence of low global inflation alongside tight labor markets (Chart 2). Chart 1Global Bond Yields: Think Globally, Act Locally Chart 2Common Worries For All CBs: China & Global Inflation That all sounds potentially very bond-bullish, but a lot of bad economic news is already discounted in the current low level of global bond yields. More importantly, the underlying stories within each developed market economy – on growth, inflation and potential financial imbalances – suggest that the additional interest rate cuts now discounted globally may not come to fruition if the China shock is contained to the first quarter of the year. In this Weekly Report, we provide a brief synopsis of what we believe are the biggest concerns for each of the major developed economy central banks. This is based on our read of recent policy decisions and central banker statements, as well as our own understanding of the current reaction function of policymakers. Our intention is to provide a short list of indicators to watch for each central bank, to help cut through the noise of data and news during this current period of unusual uncertainty, as well as our own assessment of what policymakers should be focusing on more. We conclude that it is still too soon to expect a new wave of bond-bullish global monetary policy easings in 2020. It will take evidence pointing to an extended shock to global growth from the COVID-19 virus to reverse the bond-bearish signal from other indicators like our global LEI. Federal Reserve Chart 3Federal Reserve: Focus On Financial Conditions & Inflation Expectations Currently, the Fed’s commentary suggests a policy bias that can be described as “neutral-to-dovish”, but it is giving no indication that additional rate cuts are likely in 2020 after the 75bps of cuts last year. Markets remain skeptical, however, with -42bps of cuts over the next twelve months now priced into the USD overnight index swap (OIS) curve according to our Fed Discounter (Chart 3). What the Fed seems most focused on: Fed officials seem focused on measures of market-based inflation expectations, like TIPS breakevens, as the best indication that current policy settings are appropriate (or not) relative to the growth outlook of investors. While FOMC members have expressed concern about TIPS breakevens being persistently below the 2% inflation target, they would not necessarily respond to a further decline in breakevens with more rate cuts without first seeing the US Treasury curve becoming inverted for a prolonged period, just like in 2019 (middle panel). Right now, with the 10-year TIPS breakeven at 1.67% and the 10-year/3-month US Treasury curve now at only -1bp, another decline in longer-term inflation expectations will likely invert the Treasury curve. What the Fed should be more focused on: US financial conditions are highly stimulative, with equity indices back near all-time highs and corporate credit spreads remaining well-contained at tight levels. Given the usual lead times of financial conditions indices to US cyclical growth indicators like the ISM manufacturing index (bottom panel), a continuation of the most recent bounce in the ISM is still the most likely result – even allowing for a near-term hit to global growth from China. While FOMC members have expressed concern about TIPS breakevens being persistently below the 2% inflation target, they would not necessarily respond to a further decline in breakevens with more rate cuts without first seeing the US Treasury curve becoming inverted for a prolonged period, just like in 2019. Bottom Line: The incoming US growth data is critical to determine the Fed’s next move. If there is no follow through from easy financial conditions into faster growth momentum, the odds increase that the Treasury curve will become more deeply inverted for a longer period of time – an outcome that would likely prompt more rate cuts, especially if equity and credit markets also begin to sell off as growth disappoints. European Central Bank Chart 4ECB: Focus On Manufacturing & Inflation Expectations The ECB has been clearly signaling that it still has a dovish bias, although central bank officials have acknowledged that the options available to them to ease further are limited with policy rates already in negative territory. The market agrees, as there are only -7bps of cuts over the next twelve months now priced into the EUR OIS curve according to our ECB Discounter (Chart 4). What the ECB seems most focused on: The ECB has been paying the most attention to the contractions in euro area manufacturing data (like PMIs) and exports seen in 2019. Rightly so, as nearly all of the two percentage point decline in year-over-year euro area real GDP growth since the late-2017 peak has come from weaker net exports. The central bank has also been concerned about the depressed level of inflation expectations, with the 5-year EUR CPI swap rate, 5-years forward, now at only 1.23% - far below the ECB’s inflation target of “at or just below” 2%. What the ECB should be more focused on: We agree that the focus for the ECB should be most concerned about the weakness in manufacturing/exports and low inflation expectations – the latter having not yet responded to extremely stimulative euro area financial conditions (most notably, the weak euro). The euro area economy is highly leveraged to Chinese demand, with exports to China representing 11% of total euro area exports. This makes leading indicators of Chinese economic activity, like the OECD China LEI and the China credit impulse, critically important indicators in determining the future path of European export demand. The COVID-19 outbreak in China could not have come at a worse time for the ECB, as there have been tentative signs of stabilization in cyclical euro area indicators like manufacturing PMIs in recent months. Bottom Line: The COVID-19 outbreak in China could not have come at a worse time for the ECB, as there have been tentative signs of stabilization in cyclical euro area indicators like manufacturing PMIs in recent months. If the China demand shock to euro area exports is large enough, the ECB will likely be forced to deliver a modest interest rate cut – or an expansion of the size of its monthly asset purchases – to try and boost growth. Bank Of England Chart 5Bank Of England: Focus On Business Sentiment & Labor Costs The Bank of England (BoE) has a well-deserved reputation as having an unpredictable policy bias under outgoing Governor Mark Carney, but the central bank does appear to be currently leaning on the moderately dovish side of neutral. Short-term interest rate markets also feel the same way, with -19ps of easing over the next twelve months priced into the GBP OIS curve according to our BoE Discounter (Chart 5). What the BoE seems most focused on: The BoE has been paying a lot of attention to indicators of UK business sentiment, which had been negatively impacted by both Brexit uncertainty and global trade tensions in 2019. The BoE has focused on the link from depressed business sentiment to weak investment spending and anemic productivity growth as an important reason why UK potential GDP growth has been so low and why UK inflation expectations have been relatively high. What the BoE should be more focused on: We agree that business sentiment should be the BoE’s greatest area of focus. Sentiment has shown a solid improvement of late, after the signing of the “phase one” US-China trade deal in December and the formal exit of the UK from the EU on January 31. The CBI Business Optimism survey (measuring the net balance of optimists versus pessimists) soared from -44 in October to +23 in January – the biggest quarterly jump ever recorded in the series. It remains to be seen if this improvement in confidence can be sustained and begin to arrest the steady decline in UK capital spending and productivity growth, and the associated surge in unit labor costs and inflation expectations, that has taken place since the 2016 Brexit vote. Bottom Line: The BoE’s next move, under the new leadership of incoming Governor Andrew Bailey, is not clear. Inflation expectations remain elevated but the recovery in business sentiment is still fragile. One potential risk to watch: UK Prime Minister Boris Johnson may choose to take a bolder stand on trade negotiations with the EU after his resounding election victory in December, risking an outcome closer to the “no-deal Brexit” scenario that was most feared by UK businesses. Bank Of Japan Chart 6Bank of Japan: Focus On Exports & The Yen The Bank of Japan (BoJ) seems to have had a perpetually dovish bias since the 1990s. Yet the current group of policymakers under Governor Haruhiko Kuroda, realizing that they have run out of realistic policy options after years of extreme stimulus, has not been signaling that fresh easing measures are on the horizon, even with economic growth and inflation remaining very weak in Japan. Markets have taken the hint, with only -6bps of rate cuts over the next twelve months priced into the JPY OIS curve according to our BoJ Discounter (Chart 6). What the BoJ seems most focused on: The BoJ has been vocally concerned about the recent slump in Japanese consumer spending, which declined -2.9% (in real terms) in Q4 after the sales tax hike last October. That blow to consumption was expected, but could not have come at a worse time for a central bank that was already worried about plunging Japanese manufacturing activity and exports – the latter declining by -8% in nominal terms as of December 2019. There is little hope for a near-term rebound given the certain hit to global growth and export demand from virus-stricken China. What the BoJ should be more focused on: Given that Japan is still an economy with a large manufacturing sector that is levered to global growth, the BoJ should remain focused on the path for Japanese exports. A bigger risk, however, comes from the Japanese yen, which has remained very stable over the past year. It has proven very difficult to generate any rise in Japanese inflation without some yen weakness, and with headline CPI inflation now only at +0.2%, a burst of yen strength would likely tip Japan back into outright deflation. Bottom Line: The BoJ is now stuck in a very bad spot, with no real ability to provide a major monetary policy stimulus for the stagnant Japanese economy. At best, all the central bank could do is deliver a small interest rate cut and hope for a quick rebound in global manufacturing activity and/or some yen weakness to boost flagging inflation. Bank Of Canada Chart 7Bank of Canada: Focus On Housing & Capital Spending The Bank of Canada (BoC) surprised many observers by keeping policy on hold last year, even as central banks worldwide engaged in various forms of monetary easing to offset the effects of the global manufacturing downturn. The BoC’s recent messaging has been relatively neutral, in our view, although Governor Stephen Poloz has not completely dismissed the possibility of rate cuts in his speeches. The markets are strongly convinced that the BoC will need to belatedly join the global easing party, with -32bps of rate cuts now priced into the CAD OIS curve according to our BoC Discounter (Chart 7) What the BoC seems most focused on: The BoC remains highly concerned over the high level of Canadian household debt, especially given how Canadian consumer spending has been highly geared towards trends in house price inflation over the past few years. This is likely why the BoC has been reluctant to cut policy rates as “insurance” against the effects of a prolonged global growth slump, to avoid stoking a new Canadian housing bubble. Interestingly, the commentary from BoC officials has taken on a bit more dovish tone whenever USD/CAD has threatened to break down below 1.30, suggesting some fears of unwanted currency appreciation. What the BoC should be more focused: The BoC should continue to monitor developments in the Canadian housing market, given the implications for consumer spending and, potentially, financial stability if there is another boom in house prices. The central bank should also pay even greater attention than usual to the subdued level of oil prices, which has triggered a deep slump in the oil-rich Alberta province that has weighed on the overall level of Canadian business investment spending. Persistently soft oil prices would also force the BoC to continue resisting strength in the Canadian dollar. It would likely take a breakdown in oil prices, or an outright decline in house prices, for the rate cut expectations currently discounted in the CAD OIS curve to come to fruition. Bottom Line: The BoC appears under no pressure to make any near-term interest rate adjustments, especially with realized inflation now sitting at the midpoint of the BoC’s 1-3% target band. It would likely take a breakdown in oil prices, or an outright decline in house prices, for the rate cut expectations currently discounted in the CAD OIS curve to come to fruition. Reserve Bank Of Australia Chart 8Reserve Bank Of Australia: Focus On Underemployment & Housing The Reserve Bank of Australia (RBA) has been very transparent over the past year, loudly signaling a dovish bias and following through with 75bps of rate cuts that took the Cash Rate to a record low of 0.75%. The latest messaging has been a bit more balanced, while still leaving the door to additional rate cuts if the economy worsens. Markets are expecting at least one more easing, with -24bps of rate cuts over the next twelve months priced into the AUD OIS curve, according to our RBA Discounter (Chart 8). What the RBA seems most focused on: The RBA’s main concerns have centered around the persistent undershoot of Australian inflation, with core inflation remaining below the central bank’s 2-3% target band since the beginning of 2016. The central bank has attributed this to persistent excess capacity in the Australian labor market, as evidenced by the elevated underemployment rate. The RBA is also paying close attention to the Australian housing market and its links to consumer spending, with house prices already responding positively to last year’s RBA rate cuts. The outlook for exports is also on the RBA radar, particularly after the recent surge that lifted the Australia trade balance into surplus but is now at risk from a plunge in Chinese demand. What the RBA should be more focused on: We agree that the labor market should be the main focus for the RBA, particularly the underemployment rate which is still high at 8.3%, signaling that core CPI inflation should remain subdued (bottom panel). We also see the RBA as potentially being more sanguine about the risks of a renewed upturn in the housing market than many observers expect, since that would provide a potential offset to a likely pullback in exports which are now a record 25% of GDP (middle panel). Bottom Line: The RBA still has a clear dovish bias, even though they are currently on hold to assess the impact of last year’s easing. RBA Governor Philip Lowe noted in a recent speech that more cuts may be necessary “if the unemployment rate deteriorates”, suggesting that the labor market is the main area of focus for the central bank. Reserve Bank Of New Zealand Chart 9Reserve Bank Of New Zealand: Focus On The Terms Of Trade & Non-Tradeables Inflation The Reserve Bank of New Zealand (RBNZ) was one of the more dovish central banks in 2019, cutting the Cash Rate by 75bps to a record low of 1%. The overall tone of the central bank’s recent commentary remains cautious, but has taken on a more balanced tone. Markets are priced appropriately, with only -13bps of rate cuts over the next twelve months discounted in the NZD OIS curve according to our RBNZ Discounter (Chart 9). What the RBNZ seems most focused on: The latest messaging from the RBNZ has highlighted the downside risks to New Zealand from weak global growth, but those are now more manageable since the central bank estimates the economy is operating at full employment. In its latest Monetary Policy Statement (MPS), the RBNZ noted that the economy has been able to weather the weakness in global growth thanks to the positive terms of trade effect from elevated New Zealand export prices – a trend that the central bank expects will persist in 2020 even if external demand remains sluggish (middle panel). The central bank has also expressed some concern over the recent pickup in domestically-driven inflation measures, with core CPI inflation back above 2% (bottom panel). What the RBNZ should be more focused on: The RBNZ is right to focus on global growth, particularly given the coming demand shock from virus-stricken China. While the New Zealand dollar has always been a critical variable for the RBNZ in its policy decisions, the currency now takes on added importance given the central bank’s expectation that export prices and the terms of trade will remain elevated. If the latter turns out to be wrong, the RBNZ will be far more likely to take actions to ensure that the Kiwi dollar stays undervalued. Bottom Line: The RBNZ still has a dovish policy bias, but the hurdle to deliver additional rate cuts after last year’s easing seems a bit higher now. It would likely take a major downturn in global growth, combined with a decline in New Zealand export prices and some cooling of domestic inflation, to get the RBNZ to cut again in 2020. Investment Conclusions Based on our “whirlwind tour” of the major developed market central banks in this report, we can make the following conclusions regarding the expected path of interest rates, and bond yields, in these countries: There are no central banks with anything resembling a hawkish bias – not surprising in the current slow global growth environment with heightened uncertainty. The least dovish central banks are the BoC and the RBNZ, which are not signaling any urgency to cut rates. The most dovish central bank is the RBA, which is indicating a clear willingness to cut again if domestic growth deteriorates. The Fed and the BoE are somewhere in the middle of the “dovishness” spectrum, with both likely willing to ease policy but only under a specific set of circumstances. The ECB and BoJ are clearly boxed in having policy rates already below the zero bound, limiting their ability to ease further if needed. In our view, the rate cut probabilities in the US and Canada seem a bit too aggressive, as we are not anticipating major growth slowdowns in either country over the next 6-12 months.  Looking back at our Central Bank Discounters, the largest amount of rate cuts over the next year are now discounted in the US (-42bps), Canada (-32bps), Australia (-24bps) and the UK (-19bps). At the same time, the fewest cuts are priced in Japan (-6bps), the euro area (-7bps) and New Zealand (-13bps). In our view, the rate cut probabilities in the US and Canada seem a bit too aggressive, as we are not anticipating major growth slowdowns in either country over the next 6-12 months. The odds seem more “fair” in the other countries, in terms of the size of rate cut expectations versus the probability of those cuts actually being delivered because of domestic economic considerations. What does this all mean for global bond investing this year? For that we can turn to our Global Golden Rule framework, which links expected returns of government bonds versus cash to the difference between actual and expected rate cuts.1 US Treasuries and Canadian government bond yields are most at risk of underperforming their global peers in 2020 as the Fed and BoC disappoint the current dovish rate cut expectations discounted in interest rate markets.   Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com Footnotes 1 Please see BCA Research Global Fixed Income Strategy Special Report, "The Global Golden Rule Of Bond Investing", dated September 25th 2018, 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

ハイライト ほとんどの中央銀行は依然として経済リスクを下方リスクに偏ったものと見なしている。 これは、世界的な成長が本格的に回復したとしても、今後3〜6か月は政策が据え置かれる可能性が高いことを意味する。 結論としては、今後数か月の為替の値動きは中央銀行の政策というよりも相対的な成長ファンダメンタルズが主導する可能性が高い。 我々のバイアスは、今年前半は米国以外で成長の勢いが最も強くなるというものだ。DXY指数はショートで構える。 今週の日銀の不作為は、為替ボラティリティの上昇に対する円ロングを安価な保険にしている。USD/JPYはショートを維持し、CHF/JPYはショートを取る。 ポンドは押し目買いだが、今後数か月はユーロに対してやや劣後する公算が大きい。EUR/GBPは0.88に達するはずだ。 カナダ銀行は利率を据え置いたが、我々の期待通りタカ派寄りではなくハト派寄りの判断を示した。CAD/NOKはショート、AUD/CADはロングを維持する。 我々のロングNOK/SEKポジションは1.8%の利益でストップにかかって決済された。より低い水準でこのクロスを買い戻すことを検討する。 特集 チャート I-1 為替市場は穏やかな回復を織り込んでいる 為替市場は穏やかな回復を織り込んでいる 為替市場は穏やかな回復を織り込んでいる 8月の安値以降の世界株式市場の強い反発は、多くの株価指数を買われ過ぎ領域に押し上げた。チャート I-1 は、世界株の上昇が既にグローバル製造業の改善を2012年や2016年の局面と同程度の規模で織り込んでいることを示している。一方で為替市場ははるかに穏やかな結果を織り込んでいる（下段）。 為替と株式のパフォーマンスの乖離は、過去のサイクルで見られたものとは大きく異なる。例えば、ボトムからピークにかけて、為替市場における強欲と恐怖の重要なバロメーターであるAUD/JPYは2012年の局面で40％、2016〜2017年で25％上昇し、株価も上昇した。RUB/JPY、ZAR/JPY、BRL/JPYのようなよりハイオクタンな通貨ペアのパフォーマンスは爆発的だった。今回のように通貨の動きが抑制されていることは、この回復の持続性に疑問符を付ける。 株式は長期資産であるため、2019年の金利低下が相対的な魅力を高め名目価値を押し上げたというのはもっともらしい説明だ。しかし、多くの債券市場でもここ数か月で利回りが上昇しており、この説明だけでは不十分とも言える。別の可能性としては、貿易緊張の緩和やFRBの流動性注入が国内投資家の動物的精神を呼び起こしたのかもしれない。あるいは、世界的な同期化した回復がG10の成長差を縮め、通貨の動きを抑えつつ株価を押し上げたのかもしれない。 世界株の上昇は既にグローバル製造業の改善を織り込んでいる。しかし、為替市場ははるかに穏やかな結末を織り込んでいる。 いずれにせよ、この不協和音の解決は、今後数か月で世界の経済データが著しく改善してプロシクリカル通貨を支持するか、株式市場の消化不良期（ボラティリティ上昇）を迎えるか、あるいはその両方の組み合わせによってもたらされるだろう。少なくとも、これらのダイナミクスを見越して通貨ポートフォリオを調整することを示唆している。 ボラティリティとドルについて 為替市場は相対的なトレンドに関するものだということは誰もが理解している。したがって、世界成長が加速すればドルが弱くなるという暗黙の前提は、この回復の震源地が米国外にあるということを意味する。チャート I-2 は、米国外で経済指標がまだ上振れを示しているわけではないことを示しているが、変化率ベースでは著しい改善が見られる。表面下では、最も強いデータサプライズはユーロ圏、スイス、ニュージーランド、オーストラリアで見られ、カナダと英国は予想外の失望があった。振り返れば、このチャートはカナダドルが2019年にG10で最も好調だった理由、スウェーデンクローナが最も弱かった理由も浮き彫りにしている。 チャート I-2 成長のばらつきは縮小した グロースの分散が減少した グロースの分散が減少した 経済の分散の低下は通貨ボラティリティをほぼ史上最低水準に押し下げている（チャート I-3）。経験豊富な投資家は低ボラティリティに注目し、注目すべきだ。なぜなら、ポートフォリオを破壊するのは熱狂ではなく慢心だからである。これは自明の理に聞こえるかもしれないが、過去3回ボラティリティがこれほど低下した局面ではドルは急騰し、プロシクリカル通貨は大きな損失を被った。誰もが1997〜1998年、2007〜2008年、2014〜2015年を覚えている。今回は同じだろうか？ 通常、ボラティリティの上昇はドル高と結びつくが、今回は3つの重要な相違点がある。 第一に、実質金利は2014年に米国がG10の同業国に対してプラスに転じた（チャート I-4）。これは、通常は資金調達通貨であった米ドル（準備通貨でもある）がキャリートレードの対象になったことを意味する。米国債に資金を振り向けたい資本は5年以上にわたり正の実質キャリーを享受してきたと言ってよい。現在米国の実質相対利回りが頭打ちになっている中で、資本はどちらに向かうだろうか？ チャート I-3 ボラティリティは史上最低水準付近 ボラティリティが記録的低水準に近い ボラティリティが記録的低水準に近い チャート I-4 米国の実質金利は低下 米国で実質金利が低下 米国で実質金利が低下 ドルは2011年以降ブル相場にあり、評価は高い四分位にシフトしている。これは、ドルが前の低ボラティリティ局面でより早い段階でブル相場にあった時とは大きく異なる（チャート I-5）。ドルは長いサイクルで動く傾向があり、ボラティリティの急騰はサイクルの始まりか終わりのいずれかを示すことがある。 以前のレポートで繰り返し強調してきたように、米ドルロングはコンセンサストレードである。我々の主な根拠はCFTCのポジショニングデータだ。しかし、よりタイムリーな先行指標として注視すべきは金と債券の比率だ。通貨は信認に関するものであり、米ドルへの信認の重要な尺度は米10年国債の総リターンと金地金の比率であり、これは崩れている（チャート I-6）。米国の財政赤字はこれから急拡大する見込みであり、過去のドル高の局面では赤字は低く減少傾向にあった。 チャート I-5 ドルは割高である ドルは高い ドルは高い チャート I-6 米国債と金の綱引き 米国債と金の綱引き 米国債と金の綱引き より重要なのは、通貨市場は相対的なファンダメンタルズに合わせて変動する可能性が高いということだ。世界経済の減速は製造業が主因であったため、平均回帰が期待できるのはこの分野だと考えるのが妥当だ。歴史的に見て、多くの経済における景気循環の振幅はサービス（消費）よりも製造業や輸出に牽引される傾向がある。 より具体的には、製造業の減速で最も痛手を被った通貨が最も早いリバーサルを経験する論理的な候補となる。これは既に、対米国での債券利回りの急上昇として現れているvis-à-vis 米国の利回りに対してである。例えば、ノルウェー、スウェーデン、スイス、日本の利回りはボトム以降、対米で大幅に上昇している。世界的な成長の同期回復は米国の利回り優位をさらに削ぐだろう。 通貨は信認に関するものであり、米ドルへの信認の重要な尺度は米10年国債の総リターンと金地金の比較である。 結論： DXY指数はショートを維持、当面のターゲットを90、ストップロスを100に設定する。 ポートフォリオ保険としての円 もし我々の2020年のドルに対する下落トレンドという仮説が正しければ、それは一直線には進まないだろう。したがって、ポートフォリオ保険を持つことが理にかなっている。 今週の日銀の不作為は気を逸らすためのものだった可能性がある。なぜなら近月の資産市場で最も強力な動きの一つは日本の利回りに有利な+130ベーシスポイントの動きだったからだ（チャート I-7）。USD/JPYと実質金利のギャップは希少な裁定機会を生んでいる。世界的なリスク資産の売りが顕在化すれば円は強くなるだろう。一方で、世界成長が最終的に加速すれば円は通貨クロスで弱含む可能性があるが、対ドルでは強まる可能性がある。これによりUSD/JPYのショートは「勝てば大きく勝つ、負けてもそれほど失わない」という好ましい構図になる。 日本の利回り上昇は、次の3つの重要な転換点で駆動されている： 過去5年間の大半で、日銀は資産買入れの点で最も積極的な中央銀行の一つだった。これは貿易加重の円安の大きな要因だった（チャート I-8）。FRBのバランスシートの再拡大により、日本との相対的な金融政策は引き締まりつつある。日銀の年間総資産買入れは現在約20兆円、JGB買入れは約15兆円の水準で推移している。これは目標の80兆円という緩やかな目標からはほど遠く、当面変わる見込みはない。 チャート I-7 日本の国債利回りは急騰した 日本の債券利回りが急騰している 日本の債券利回りが急騰している チャート I-8 円と量的緩和（QE） 円と量的緩和 円と量的緩和 円の動きは日本の巨大小売輸出セクターを考慮すると、国内要因と同様に外部環境の影響も大きい。景気循環的なセクターのクレジット・デフォルト・スワップスプレッドは新たな安値へと収縮しており、収益見通しの改善を示唆している（チャート I-9）。これは成長要因が日本の利回りを押し上げていることを示唆する（日本のCPIスワップは実際には横ばい）。これはアジアの景気循環セクターが防御的セクターに対して最近アウトパフォームしている動きとも一致する。 安倍政権は昨年、大規模な財政パッケージを発表した。これは壊滅的だった台風被害と来たる五輪に部分的に起因する。これにより日銀は最新の政策分科会で成長見通しを上方修正した。建設・エンジニアリング株の相対パフォーマンスは、資金が経済に流入しているかどうかの重要なバロメーターである（チャート I-10）。 チャート I-9 日本のデフォルトリスク緩和 日本でデフォルト・リスクが緩和 日本でデフォルト・リスクが緩和 チャート I-10 財政刺激と建設株 財政刺激策と建設株 財政刺激策と建設株 防御通貨としての円は、グローバル成長が改善すると資金調達通貨として使われるため通常は弱含む傾向がある。とはいえ我々の主張は、円はクロスでは確かに弱まるだろうが、対ドルではなお強くなり得るということだ。前述したように、その触媒の一つは実質金利との従来の関係からの乖離である。 より重要なのは、USD/JPYとDXYは正の相関を持つ傾向があることで、なぜならドルが多くの場合円を動かすからだ。一方で、円に対するネットショートポジションは逆張りの観点から魅力的に見える（チャート I-11）。極めて低いボラティリティを考えると、USD/JPYのショートはボラティリティ上昇をプレイする魅力的な手段となる。 チャート I-11 投資家は円をショートしている 投資家は円をショートしている 投資家は円をショートしている より保守的な投資家はCHF/JPYをショートすることもできる。最近のスイスフラン高はインフレ回復の芽を脅かしており（チャート I-12）、一方で円安は国内でのトレード可能財の価格を押し上げるだろう。これにより日銀よりもスイス国立銀行に対するプレッシャーが強まる。また、セーフヘイブンとして円はフランよりも割安である。これは当社の多数の社内モデルでも確認されている。 簡単に言えば、過去数十年で米国に対する相対的インフレは日本の方が低かったが、フランの方が強かった。 簡単に言えば、過去数十年で米国に対する相対的インフレは日本の方が低かったが、フランの方が強かった（チャート I-13）。一方で、過去2年間ではボラティリティ上昇はフランよりも円に有利に働いている。 チャート I-12 強いフランはスイスのインフレにとって逆風である 強いスイスフランはスイスのインフレにとって逆風だ 強いスイスフランはスイスのインフレにとって逆風だ チャート I-13 円はより割安 ##br##保険 円はより安い保険 円はより安い保険 結論： 現時点では円が最も魅力的なセーフヘイブン通貨である。USD/JPYはショートを維持し、CHF/JPYを売る。 ハウスキーピング 我々のロングNOK/SEKポジションは1.8%の利益でストップにかかって決済された。より低い水準でこのクロスを買い戻すつもりだ。このトレードは主にキャリーに関するものであり、我々はNOKとSEKの両方に対してポジティブである。したがってマーケットタイミングが重要になる。NOK/SEKが1.04なら魅力的だ。今週の各中央銀行会合の文脈ではノルゲス銀行からの新たな示唆はなかった。 我々はポンドを押し目買いで仕込む機会も探るが、EURまたはGBPのボラティリティを買う方が良い賭けかもしれない。今のところ、堅調な雇用報告にもかかわらず英国の経済サプライズは依然としてマイナスである（チャート I-14）。続報を注目してほしい。 チャート I-14 GBPは脆弱である 英ポンドは弱含み 英ポンドは弱含み Chester Ntonifor 外国為替ストラテジスト chestern@bcaresearch.com 通貨 米ドル チャート II-1 USD テクニカル 1 米ドルのテクニカル（1） 米ドルのテクニカル（1） チャート II-2 USD テクニカル 2 米ドルのテクニカル分析 2 米ドルのテクニカル分析 2 最近の米国のデータは混在している： 鉱工業生産は12月に前年同月比で1%減少した。 ミシガン大学消費者信頼感の速報値は1月に99.1へやや低下した。 MBA住宅ローン申請件数は1月17日までの週で1.2%減少した。しかし既存住宅販売は12月に月次で3.6%増加し予想を上回った。 シカゴ地区連銀の全国活動指数は12月に0.41から-0.35へ低下した。 新規失業保険申請件数は1月17日までの週で211Kに増加し、予想より良かった。 DXY指数は今週0.4%上昇した。中国のコロナウイルスが世界成長を大幅に押し下げるのではないかという懸念が高まっている。これは短期的にはつまずきに過ぎないが、我々は依然としてポジティブで、金融条件の緩和と貿易戦争リスクの後退により今年は世界成長が加速すると考えている。 レポートリンク： On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 ユーロ チャート II-3 EUR テクニカル 1 EURのテクニカル指標 1 EURのテクニカル指標 1 チャート 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概ねポジティブである： 経常収支は11月に339億ユーロとなった。 ヘッドラインとコアのインフレ率はともに12月に前年比1.3%で横ばいだった。 ZEW景況感調査は1月に11.2から25.6へ急上昇した。 ユーロは今週対米ドルで0.8%下落した。木曜日にECBは政策金利を-0.5%で据え置いた。ECBの最大の示唆は、彼らが金融政策目標の見直しに取り組んでおり、それがより緩和的な姿勢の増加につながる可能性があるという点だ。明示的な2%インフレ目標への切り替えや量的緩和の判断に気候変動目標を組み入れることは、はるかにハト派的なECBの到来を告げる。長期のEUR/CADのストップを1.42へ引き締めている。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 A Few Trade Ideas - Sept. 27, 2019 日本円 チャート II-5 JPY テクニカル 1 JPYのテクニカル1 JPYのテクニカル1 チャート II-6 JPY テクニカル 2 JPY テクニカル分析 2 JPY テクニカル分析 2 日本の最近のデータは軟調である： 鉱工業生産は11月に前年同月比で8.2%減少した。 貿易収支は12月に1525億円の赤字に拡大した。輸出入はそれぞれ前年同月比で4.9%および6.3%減少した。 全産業活動指数は11月に前月比0.9%上昇した。 一致指数と先行指数は11月にそれぞれ94.7と90.8に低下した。 日本円は今週対米ドルで0.3%上昇した。日銀は予想通り政策金利を据え置いた。より重要なのは、見通し報告が2020会計年度の成長見通しを0.7%から0.9%に上方修正したことだ。さらに日銀は原油安を受けてインフレ見通しを10ベーシスポイント下方修正した。日本円に関する詳しい分析は本号の前半を参照されたい。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Signposts For A Reversal In The Dollar Bull Market - November 1, 2019 A Few Trade Ideas - Sept. 27, 2019 英ポンド チャート II-7 GBP テクニカル 1 GBP テクニカル 1 GBP テクニカル 1 チャート 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ポジティブである： 小売売上高は12月に前年同月比で0.9%増加した。 Rightmoveの住宅価格指数は1月に前年同月比で2.7%上昇した。 ILO方式の失業率は11月に3.8%で横ばいだった。 平均賃金は11月に前年同月比で3.2%増加した。これは2019年の大半で低迷していた雇用報告の後、3か月で就業者が20.8万人改善したことに続く。 英ポンドは今週対米ドルで0.7%上昇した。今後数週間で欧州通貨の最大のボラティリティはEUR/GBPクロスで生じる可能性が高い。欧州の経済データはベース効果もあってここ数週間で最も良いポジティブサプライズを示している。しかし今週のECB議事録は通貨の強さに対して牽制する姿勢を示唆している。英国では当面ポンドは政治の影響を部分的に受けるだろう。GBPおよびEURのボラティリティを買うのは良い賭けに見える。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 オーストラリアドル チャート II-9 AUD テクニカル 1 AUD テクニカル分析 1 AUD テクニカル分析 1 チャート II-10 AUD テクニカル 2 AUDのテクニカル分析 2 AUDのテクニカル分析 2 オーストラリアの最近のデータはポジティブである： Westpac消費者信頼感指数は1月に1.8%低下した。 消費者のインフレ期待は1月に4%から4.7%へ上昇した。 12月には28.9Kの雇用が創出され、コンセンサスを上回った。これは29.2Kのパートタイム雇用増だがフルタイムは0.3K減少した。 参加率は12月に66%で横ばい、失業率はさらに低下して5.1%となった。 オーストラリアドルは今週対米ドルで0.6%下落した。ポジティブな雇用報告はAUDを支えたが、コロナウイルスの懸念がヘッドラインを支配し始めるとすぐに薄れた。我々は先週AUDを詳述し、68セントで買い手だ。主な根拠は強力な逆張りの賭けであるためだ。 レポートリンク： On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 ニュージーランドドル チャート II-11 NZD テクニカル 1 NZDテクニカル 1 NZDテクニカル 1 チャート II-12 NZD テクニカル 2 NZDテクニカル分析 2 NZDテクニカル分析 2 ニュージーランドの最近のデータは弱含みである： 訪問者数は11月に前年同月比で3.5%減少した。 純移民は11月に3400から2610へ減少した。 パフォーマンスサービス指数は12月に52.9から51.9へ低下した。 ニュージーランドドルは今週対米ドルで0.5%下落した。我々はキウイが世界成長の改善の中で今年は米ドルをアウトパフォームすると考えているが、純移民の減少など国内制約が上昇余地を制限する可能性がある。AUD/NZDとSEK/NZDはロングを維持する。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 カナダドル チャート 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 チャート II-14 CAD テクニカル 2 CADのテクニカル指標 2 CADのテクニカル指標 2 カナダの最近のデータは軟調である： 製造業売上高は11月に前月比で0.6%減少した。 ヘッドラインのインフレ率は12月に前年比2.2%で横ばいだった。コアインフレは12月に1.9%から1.7%へ低下した。 新築住宅価格は12月に前年同月比で0.1%上昇した。 カナダドルは今週対米ドルで0.8%下落した。水曜日にカナダ銀行は利率を据え置くことを決めたが、カナダのデータが失望すれば今年後半に利下げの可能性を開く余地を残した。要するに他の多くの中央銀行と同様に、カナダ銀行もデータ依存だ。我々のCADに関するストーリーは単純で、成長リバウンドの震源地が米国外にあるならCADは対極の通貨に対して下振れするということだ。AUD/CADはロングを維持する。 レポートリンク： The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 スイスフラン チャート II-15 CHF テクニカル 1 CHF テクニカル 1 CHF テクニカル 1 チャート II-16 CHF テクニカル 2 CHF テクニカルズ 2 CHF テクニカルズ 2 今週スイスからのデータは乏しかった： 生産者物価は12月に前年同月比で1.7%下落し、前月の2.5%減から改善した。 マネーサプライ（M3）は12月に前年同月比で0.7%増加した。 スイスフランは今週対米ドルでほぼ横ばいだった。我々は世界的リスクが持続する限りスイスフランを支持し続ける、コロナウイルスへの懸念を含めて。しかし、本レポート前半で議論したように、現時点では円の方がフランよりも優れたヘッジである。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Notes On The SNB - October 4, 2019 What To Do About The Swiss Franc? - May 17, 2019 ノルウェークローネ チャート II-17 NOK テクニカル 1 NOK テクニカル指標 1 NOK テクニカル指標 1 チャート II-18 NOK テクニカル 2 NOK テクニカルズ 2 NOK テクニカルズ 2 今週ノルウェーからのデータは乏しかった： 労働力調査は11月に失業率が4%に上昇したと記録した。 ノルウェークローネは今週エネルギー価格の下落を受けて対米ドルで1.3%下落した。木曜日にノルゲス銀行は政策金利を1.5%で据え置き、広く予想されていたとおりだった。さらにオイステイン・オルセン総裁は「委員会の現在の見通しとリスクのバランス評価は、政策金利が当面現在の水準のままである可能性が高いことを示している」と述べ、短期的な政策変更の可能性を示唆しなかった。これは今後は政策決定よりも相対的なファンダメンタルズがNOKの進路を決めることを示唆している。我々のバイアスはバリュエーションのクッションがロングNOKの安全マージンを提供しているというものだ。USD/NOKとCAD/NOKはショートを維持する。 レポートリンク： On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 スウェーデンクローナ チャート II-19 SEK テクニカル 1 SEKのテクニカル1 SEKのテクニカル1 チャート II-20 SEK テクニカル 2 SEK テクニカル指標 2 SEK テクニカル指標 2 今週スウェーデンからのデータは乏しかった： 11月に6%から6.8%へ上昇した後、失業率は12月に6%へ戻った。 スウェーデンクローナは今週対米ドルで0.2%下落した。今後は世界成長の改善、貿易緊張の緩和、短期的な景気後退懸念の後退がスウェーデン経済とクローナを下支えする。SEKは世界的な製造業のリバウンドをプレイするための最も有力なG10クロスである。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 トレードと予想 予想サマリー コアポートフォリオ タクティカルトレード 指値注文 決済済みトレード

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