Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 05 February 2018 at 14:51 GMT

House View: Switching to negative US shares — #SaxoStrats

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Volatility risks changing the recent simple 'weak USD' plot

  • USD: weaker dollar seemed to correlate with strong risk appetite... if risk appetite remains wobbly, USD may not be the main story. 
  • AUD: weak recent CPI print and risk-off has seen sharp weakness. Reserve Bank of Australia to recycle cautious optimism with no rate hike urgency at Tuesday's meeting? 
  • GBP: recent Bank of England hawkishness means more if risk aversion eases and BoE guides for more hiking at this Thursday's meeting.
  • JPY: Positioning risk points higher for the yen, and it would be hard for JPY not to rally if global risk appetite weakens further. 
  • JPY: the yen was very weak last week on higher global yields and recent BoJ guidance, but yield fundamentals seem to matter little elsewhere. 
  • CNH: China is allowing RMB to rise to new highs versus the official basket since 2016. USDCNY next levels 6.10 and then 6.00 (modern low was 6.04). 
  • RUB: Rate meeting on Friday where a 25 basis point cut is expected. It will be interesting to see guidance after USDRUB recently tested range lows.  
  • EM FX: EM assets have been the slowest to pick up on global risk off worries but will play catchup if ugly situation for risk continues.

Tech levels on watch for developments

  • USDJPY: poked above first resistance area 110.00-20, but hasn't really posted a bullish reversal unless it closes above 111.00- 
  • EURUSD: 1.2500-plus remains the key to unlocking range to 1.3000 after last week's attempts didn't build upside momentum. 
  • AUDNZD:  The 1.0850 area has been pivotal for more than 6 months as both the RBA and the Reserve Bank of New Zealand meet this week 

Trade themes

  • Short GBPCHF via put spreads as market reassesses CHF and GBP; Brexit woes to continue. 
  • Short USDJPY for breakdown toward 105.00, stops above 110.50. 
  • Long EURUSD, but only on strong close above 1.2500 with tight stops as risk/reward poor within lower range. 
  • Alternatively, short EURUSD if it closes below 1.2335 with tight risk for a bigger consolidation toward 1.2100.
Rising interest rates spook investors 


  • Switch to negative on US equities as selloff could extend driven by technical forces. Around a 7-10% correction is expected from the peak. 
  • Switch to neutral on EM equities as last week's selloff was not enough to strengthen USD. 
  • Switch to neutral as UK equities seem to have found support; macro still supports energy and mining.
  • Remain positive on European equities as earnings season has surprised to the upside; around a 30% valuation discount to US equities. 
  • Switch to neutral on Hong Kong equities as the rebound in today's session is a sign of strength. 
  • Remain neutral on Japanese equities unless the 22,000 level in Nikkei is broken. 


  • Capital-intensive industries are in focus this week with interest rates concerns as the driving theme.
  • Preferred industries: semiconductors, software, retailing, technology hardware, consumer services. 
  • Least preferred industries: media, telecom, energy, utilities, real estate. 
  • A sharp short-term correction in global equities could see utilities bid as a safe-haven. 


  • US technology earnings last week were mostly neutral for equity markets. 
  • European and US earnings have been very strong but investors are more worried about interest rates.
  • US hourly earnings figures Friday spooked markets as their strength placed a US 10-year yield of 3% in sight.
  • The G10 Economic Surprise Index slowdown has halted as recent data have been strong versus expectations. 
  • The correction in global equity markets could easily extent if the VIX remains around 18 and the US 10-year yield continues to climb. 
US Treasury curve starting to steepen, junk debt starting to show signs of weakness


  • US Treasuries continue to slide and 10-year yields topped 2.84% on Friday. 
  • The US Treasury curve is starting to steepen with yields dropping up to 1.5bps in the front end while on the long end yields are up 2.5bps .

High Yield

  • BB yields rose to a 10-month high on Friday. 
  • For the second consecutive week, CCC bond issues have not been priced as investors prefer higher-quality junk bonds. 
  • The volume of junk debt issued is up compared to last January, however the number of deals has decreased. Thirty per cent of this year's junk bonds have been issued by the utility and energy sectors.

Investment Grade

  • Shorter maturities in US corporate bonds are starting to look ripe for portfolio allocation.  

Emerging Markets

  • While US Treasury yields are rising, emerging markets continue to be well-bid. This may change soon as investors will see the spread against Treasuries squeezed to a minimum.  
  • Local bonds are preferred over USD-denominated bonds .
Short term direction dictated by stocks and bonds


  • We see fading oil momentum after retracing 50% of the 2014-16 selloff; risk aversion from stocks and bonds is the short-term focus.  
  • A record long above 1.1 billion barrels and a pickup in US shale production are the biggest risks to bullish sentiment.
  • Higher prices are raising the non-Opec supply while potentially negatively impacting demand growth. 
  • We maintain the view that the short-term risk is being skewed to the downside. 
  • Focus: Short Term Energy Outlook from Energy Information Administration due February 6 followed by weekly US stock, production and trade data on February 7.


  • Gold maintains support from the stock and bond market wobble and a relatively stable dollar.
  • Rising inflation concerns look likely to prevent a major correction despite rising real yields. 
  • Political and economic news out of Washington continues to provide a key source of support.
  • Silver is struggling to keep up with gold with XAUXAG hitting a 22-month high. 
  • The fund long in HG copper has reached an eight-week low as the belief in higher prices pauses. 
  • China growth concerns into 2018 risk capping the market; HG range: $2.95 to $3.30/lb.


  • The short covering surge in key crops has run out of steam with ample supply capping the upside.
  • Sugar shorts (record) risk getting squeezed after holding support at 13 cts/lb (SBH8). Focus on a 13.75 cts/lb break. 


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