Global Head of Macro Strategy
Summary: The market trying to get off to a positive start for the week, but concerns remain on the pace of a Covid19 recovery on the other side of the likely imminent peak in the outbreak in the major DM economies. Focus this week on the Eurgroup meeting of finance ministers tomorrow, whether oil can put together a rally, and still fragile EM situation.
Please have a listen to today’s Saxo Market Call podcast – especially useful today for the discussion onoil market dynamics and the difficulty of engineering a sufficiently large production cut to get ahead of the risk for further price declines in the near term.
Covid19 headlines the driver? – many are attributing the strong surge in risk sentiment overnight to the prospects for an imminent peak in Covid19 impact that may prove lower in the US case than many feared recently. US President Trump and Vice President Pence both touting a stabilization narrative overnight. The numbers are already turning in many places in Europe, with the UK and Sweden as the two main spots of concern . Still, no one can tell us how quickly activity can resume as even places like Denmark that will try to roll out an “opening up” programme starting next week will start with baby steps and the damage done in terms of labor market losses will weigh on behavior as well as policy caution on resuming normal activities, large events, etc.
Tomorrow an important test for EUR – the next key test for fiscal solidarity across the EU is the Eurogroup meeting (of EU finance ministers) tomorrow. Yes, the ECB is keeping things orderly by having already abandoned former rules limiting its ability to buy peripheral debt more aggressively and keeping spreads down (just weeks after Lagarde said it wasn’t her job!)Things can go very wrong for all thing euro if we see anything resembling the prior meeting - i.e., a total failure to come to an agreement on any level. The stakes are high for Europe here.
EM strains worsened – some of the major EM currencies suffered weak sessions on Friday and were weaker still overnight before finally bouncing in line with the broader surge in risk sentiment overnight. We continue to keep an eye on EM after somewhat disorderly declines last week and the risk of a credit even setting off wider contagion. Emerging market policymakers do not have the same policy options as elsewhere as many have too much aggregate debt denominated in foreign currency – even if large portions of that debt is in the hands of corporations rather than the sovereign itself. Focus on South Africa and Turkey as the weakest links, but Mexico and Brazil also deserve attention.
Chart: EURJPY
We will continue to watch the cycle lows in EURJPY and EURUSD in coming sessions over the Eurogroup meeting tomorrow and the general sense of whether the EU is pulling together or spinning apart politically. Already, the rally overnight has been significantly backtracked as of this writing – watching the 116.00-25 area closely from here.
The G-10 rundown
USD – the big dollar the flipside of risk sentiment as we all wonder whether the Fed’s move to backstop nearly everything is enough to turn the USD lower – a key component of finding the lows in global markets for the cycle, wherever that point is.
JPY – the yen hit overnight with strong risk sentiment and as Japan suffering a new outbreak of Covid19 that has triggered emergency orders in Tokyo. Will still likely come through stronger almost across the board on any fresh deleveraging move.
EUR – key focus over Eurogroup meeting tomorrow as outlined above and EURUSD and EURJPY downside risks the focus if we don’t see a strong front of solidarity on the fiscal front.
GBP – the market quickly erased the sterling sell-off likely inspired by the news UK PM Boris Johnson has been hospitalized due to persistent Covid19 fever. This quick comeback is encouraging for sterling bulls versus the euro – which found a low around the 200-day moving average.
CHF – even as the JPY weakens and risk sentiment recovers, EURCHF hardly lifts its head. The latest weekly sight deposits out this morning show that the SNB still having to lean heavily against CHF appreciation risk – let’s see if there is any reactivity around the Eurogroup meeting tomorrow along the lines of rising or falling EU existential risk.
AUD – the Aussie bounce rather modest relative to the comeback in risk sentiment – still see a stance of fading strength as long as we trade below recent highs in AUDUSD. No expectations tonight that the RBA brings anything new to the table.
CAD – we have noted our concerns on CAD several times in recent updates – downside risks prevail on oil and in dealing with Canada’s domestic credit crunch.
NZD – what goes for Aussie goes for the kiwi and perhaps more so given the latter’s more elevated valuation.
SEK – Sweden at risk, as we have noted, from a slower response to the Covid19 outbreak – but SEK traders have fallen asleep – reluctant to take a stand in either direction in the important 10.85-11.00 area. Still some SEK downside risk if risk deleveraging and EU existential risks rise – but SEK has gotten very cheap.
NOK – the krone getting a boost from the comeback in crude oil overnight and hopes that a production cut deal can be hammered through, but skeptical on any ability to work back down below 11.00 in EURNOK as long as oil prices haven’t staged a major recovery.
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