FICC Strategy Reports

This is a HUGE week for central banks. Equity futures are up into the start of today, while most of the macro space looks a bit more mixed.

In the US, Reuters poll has the Fed hiking rates by 50 bps next week while the median probability of a recession next year is 60%.

Into the start: In China, major cities - including Shenzhen and Beijing, announce relaxed restrictions including dropping the requirement for negative tests.

Into the start: The theme of USD selling has continued ahead of the main event of the day, namely the US employment report. The JPY continues to be a leader as UST-JGB spreads remain pressured. The USD remains on the defensive despite a modest correction in risk sentiment.

Into the start: 1.) In China: a.) The city of Guangzhou relaxes restrictions despite a surge in the number of cases. CFLP PMIs for November underwhelm. The manufacturing PMI slid to 48.0 (from 49.2 last month), while non-manufacturing dropped to 46.7(from48.7).Key demand sub-indices (domestic and exports orders) fell further. Our take: Covid zero is still taking its toll–but we’re likely closer to the end of this than the beginning.

Equities are finding their footing again, with North American futures set to open up this morning. Chinese stocks are also firmer as concerns with onshore protests are easing at the margin. USD is underperforming in a general sense to start things off. Sub-3w vols are generally bid given proximity to key event risks in the coming weeks.

To state the obvious, Canadian rates underwent significant changes in 2022. And these changes were symptomatic of three forces, including: i) front-loaded rates hikes; ii) QT, and; iii) improving fiscal policy. In aggregate, these governing forces generated extreme levels of curve inversion, exerted significant downward pressure on shorter-dated swap spreads, and produced a half-year long streak of cross-market outperformance. And while QT will linger (and actually strengthen) in 2023, the impact of both monetary and fiscal policies are starting to shift. As they do, it will pave the way for incoming themes to flex their muscles, engendering material impacts across the complex that are quite different compared to this year. In the year-ahead we see three dominant themes that will govern CAD rates. The first is the introduction of the ‘higher for longer’ regime, which reflects a longer transition period between the last BoC hike and the eventual first cut. The impact of this theme is a widening of the differential between medium-term and short-term rate expectations — a key building block of curve steepening. The second theme is reduced sensitivity to US rates, as the BoC ends it’s hiking cycle earlier then the Fed. The immediate impact as the Fed continues hiking will be the preservation of CAD richness in the early part of 2023. However, as the year progresses it will be difficult for CAD rates to maintain current cross-market valuations, particularly as the Fed stops hiking in the early part of 2023. This should generate significant CAD rates underperformance after Q1-23. The third and final theme is a shift in the preferences of structural domestic investors, including bank treasuries, LDI managers, and insurers. This will lead to a much flatter swap spread curve, but less dramatic cash steepening pressure compared to the United States.

The article provides CIBC's latest outlook for the major currencies: USD – Shifting into neutral gear CAD – Chin Up CAD Bulls, Your Time is Coming! EUR – Looking Through the Immediate Headwinds GBP – Another year of policy challenges JPY – Preparing for normalization AUD and NZD – Towards a major base, but not there yet MXN – MXN outperformance against Latam peers to continue in 2023 BRL – Fiscal headlines will keep volatility high but lower USD/BRL bias to remain in place CLP – Political moderation fails to provide enough support to the CLP COP to remain under pressure into 2023 CNY – Recovery will take time

Into the start: The more notable moves overnight were in the FX space, where the USD is again on the defensive. In the rates, the US is outperforming across the curve.

Into the start: Macro concerns related to China are rising and the USD is up large against all G-10.

Midterms: Thus far, results are still being tabulated. In the House, the Republicans are up 199-172 (with 371 out of 435 races called)

In the US: Today's the big day and we don’t see much of a passthrough if the event is in-line with where current polls/odds are...

Core rates are under pressure –with the US under performing in the front-end. US 2s10s curve is back below -53bps.

The ECB is still in the ‘front-loading’ phase which means aggressive hikes to take policy back to neutral.

Into the start: USD/CNY fixes at weakest level since 2008. Both the onshore and offshore rates continue to weaken against the USD.

Elsewhere, USD/JPY is back to the 150 handle despite the MoF’s intervention last Friday.