The rush for global government bonds goes into overdrive

SUMMARY

• Over $13.4 trillion in global debt now yielding below zero.  German bund yield matches ECB deposit rate, -0.40%.
• LIBOR curve up to 1yr remains inverted.  Entire US treasury curve up to 30yrs now yields less than Fed funds.
• US reports weaker than expected economic data this week.  US & Canadian employment reports for June out tomorrow at 8:30amET.
• Brussels deems Excessive Debt Procedures against Italy no longer necessary.  IMF’s Lagarde nominated to take over ECB in September.
• BOE’s Carney says the “intensification of trade tensions has increased the downside risks to global and U.K. growth”.
• ECB’s Rehn calling for more stimulus “now”.
• US stock and bond markets closed today for the US Independence Day holiday.  Regular hours tomorrow July 5.

ANALYSIS

USDCAD

Dollar/CAD is seeing some sell stop hunting below last Friday’s lows this morning (1.3060s) as FX markets lack liquidity on this US holiday Thursday, but the pressure continues to mount for the market as the relative monetary policy outlooks for the Fed and the Bank of Canada appear to be getting farther and farther apart.  The Fed, for all tense and purposes, has a brewing “money market liquidity / bond market rush for quality collateral” panic thrown onto its lap now that is truly global in nature in our opinion, while the Bank of Canada is eying recent Canadian economic data that has been pretty good.  The Eurodollar interest rate curve is saying the Fed is going to be forced to start a new rate cutting cycle in July that will see the Fed funds target rate drop 50-75bp by years end whereas the overnight interest swap market in Canada is saying there is a mere 30% chance of a 25bp cut occurring in Canada over that same time period.  This swift divergence in the relative outlooks got started on the first trading day of June where something arguably broke in the off-shore dollar markets causing a rush out of USD and into high quality assets (ie. government bonds and gold) and it took a turn for the worse in our opinion when the Fed capitulated on June 19 with its uber dovish forward guidance and its attempt to blame the “re-emergence of cross-currents” on US/China trade uncertainty (which again, we knew about already).  The leveraged funds at CME (something we track very closely) have pretty much abandoned their long USDCAD positions heading into the second half of 2019, the chart technicals for USDCAD have turned swiftly negative over the last two weeks, and we now have a negative turn in US economic data to potentially deal with.  In just this week alone so far, the US has reported weaker than expected June figures for the Markit Manufacturing PMI, ISM Non-Manufacturing PMI, Factory Orders and Employment Growth (according to ADP).  Small business employment is collapsing.  What is more, the Atlanta Fed, widely followed for its GDP Tracker, has lowered its Q2 growth estimate sharply back lower to just +1.3% after revising it higher to 2.1% just weeks ago.  President Trump has not helped the situation in this week by tweeting that the US should play the “big currency manipulation game” that Europe and China are playing, and by seemingly giving the markets a false sense of hope following his post G20 remarks (Huawei still blacklisted according to US Commerce Dept staff).  The swift move lower in August oil prices following the “as expected” production cut extension from OPEC, and the decline in forward curve backwardation in both the WTI and Brent markets are also a notable developments for markets this week, but it hasn’t helped USDCAD recover one bit (which we think is another negative omen for the market here).  The US and Canadian employment reports for June will be out tomorrow at 8:30amET and this will likely be the next catalyst for price movement.  Traders are expecting the US figures to show +160k jobs created last month, +0.3% MoM/+3.2% YoY growth in wages and an unemployment rate of 3.6%.  The consensus estimates for the Canadian numbers are +10k jobs created, +2.6% YoY growth in wages and 5.5% for the unemployment rate.  We think a weaker than expected US report combined with an in-line to mild beat on the Canadian data will be enough to prompt yet more USDCAD selling, potentially down to the 1.3000 figure. 

USDCAD DAILY

USDCAD HOURLY

AUG CRUDE OIL DAILY

EURUSD

Euro/dollar continues to tread water this morning as some neutral chart technicals and some large option expiries (4blnEUR between 1.1265-1.1290) combine to keep the market range-bound.  While yesterday’s better than expected June Services PMI data out of Europe and the decision by Brussels to refrain from sanctioning Italy over EU budget rules was welcome news for everything Italian (BTP bond yields plunging to 1.60%), we think the news that IMF chief Christine Lagarde has been nominated by the EU to take over the presidency of the European Central Bank is weighing on EUR sentiment.  The fear is that the ECB will become more politicized given Lagarde’s connections and that she’ll happily champion negative interest rates and another generation of the same policy failures we’ve seen from the ECB over Mario Draghi’s 8-year tenure.  The rush into global bonds continues this morning, with now over $13.4 trillion in debt yielding less than 0%!  The German 10yr bund is now yielding -0.40%, which is the same rate as the ECB overnight deposit rate!!!  The French 10yr yield is extending to new lows around -0.13%.  Italian yields, while arguably deserving of some weakness following the removal of the Excessive Debt Procedure threat from Brussels, are now yielding 30bp less than US 10s (which makes no sense from a relative credit perspective).  Even Greek 10yr bonds (we all remember the problems from over there) are yielding a mere 9bp over comparable US paper!  We continue to believe that this global surge for bonds is being driven by something more than just falling inflation and growth expectations, but something liquidity related in the off-shore Eurodollar banking system (which funny enough the Fed cannot control).  The inverted LIBOR curve (1M vs 12M) is sounding alarm bells to us, as is the continued inversion of 60% of the US treasury curve, not to mention the litany of other inversions that are occurring worldwide.  Even the 30yr US government bond yields less than Fed funds!  Something is not right here, but we don’t think central bankers will admit it (for fear of causing a panic), but we think what we’re seeing here in government bonds, for the time being, is global banks tripping over themselves for high quality collateral because there is liquidity anxiety in some other part of the global money market.  What this means for EURUSD is a bit uncertain right now as it looks like the Fed and ECB are in the same boat in terms of facing pressure to ease aggressively.  The ECB’s Olli Rehn has just come out with some alarming dovish headlines suggesting more stimulus is “now” needed.  More here from Reuters.  The response so far in EURUSD has been muted to the downside, but we think this might get more attention as US traders return from extended July 4th holidays next week.

EURUSD DAILY

EURUSD HOURLY

AUG GOLD DAILY

GBPUSD

Sterling is having a miserable week and it took a turn for the worse on Tuesday when BOE governor Carney warned that the “intensification of trade tensions has increased the downside risks to global and U.K. growth.”  This saw UK money market traders ramp up bets to 60% odds that the BOE will cut rates by years end, and it also saw a plunge in UK 10yr gilt yields (which now trade inverted to the BOE policy rate, +0.66% vs +0.75%).  GBPUSD attacked support in the low 1.26s afterwards, and then we saw a weaker than expected June Services PMI out of the UK yesterday (the only European country that didn’t beat expectations) take us below trend-line support in the 1.2580s.  EURGBP made another failed attempt to challenge chart resistance in the 0.9890s yesterday, but it continues to hold support in the 0.9850s on this holiday Thursday.  While we’ve been saying the growing GBP fund short position at CME (which clumsily chased the last move lower in GBPUSD) is a mild positive for the market on dips, we think these traders will now feel emboldened so long as we stay below the 1.2700 figure.  Near term support for GBPUSD heading into Friday’s trade is 1.2550-60, while resistance continues to lie in the 1.2580s.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Aussie galloped higher yesterday morning when the better than expected Eurozone Services PMIs came out for June, but we think was move was intensified by technical buying following the market’s ability to regain the important 0.7000 level in the process.  Weak US economic data during NY trade yesterday then appeared to be the impetus for the next buying wave which saw the market breach trend-line chart resistance in the 0.7020s.  Some selling has since come in during overnight trading today as AUDUSD failed to break above the Sunday opening highs (0.7040s).  We think the entrenched fund net short position, which grew to -66.3k contracts in the week ending June 25 needs to be on guard here once again.  The AUDUSD market technicals continue to improve and the RBA has signaled this week that they now appear to be on hold relative to US monetary policy.  We think a weak US jobs report out tomorrow could be the catalyst for the next push higher in AUDUSD.  Australia reported slightly better than expected May Trade Balance and Building Permits data this week, but yesterday’s May Retail Sales data disappointed slightly (+0.1% MoM vs +0.2%).   

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen filled its Sunday opening gap with ease during Tuesday’s NY session and it managed to find buyers yesterday on dips to chart support in the 107.50s.  Today’s trading activity has been confined to a very narrow range as the US bond markets are closed for the Independence Day holiday but we expect USDJPY to perk up tomorrow morning when the US payrolls numbers are released for June.

USDJPY DAILY

USDJPY HOURLY

MAR 2020 3-MONTH EURODOLLARS DAILY

Charts: TWS Workspace

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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