Head of FX Strategy
Summary: Global currencies are largely trading along the usual risk sentiment fault lines, though the euro looks a bit weak after the Eurogroup rescue package agrees late last week. It appears global markets are smoking some fairly strong hopium at these levels, and some rather interesting lines in the sand loom here for the overall status of the USD if the good cheer continues.
We agreed in internal meetings and the Market Quick Take that this produced earlier this morning and on today’s Saxo Market Call podcast that the chief driver at the moment is not the horrific evidence on the ground of the damage the Covid19 crisis is wreaking on economic activity and business sentiment, but whether the market is confident that authorities are doing or will do enough to keep asset price sentiment in good cheer. Additionally, clear evidence that the shutdowns have “flattened the curve” of the Covid19 outbreak have everyone anticipating the shape of the recovery. It’s all a mind game at this point, leaving us very technically oriented in our trading stance – as we note in the AUDUSD chart below.
The Fed reached deep once again last Thursday with another batch of measures to shore up asset prices and limit contagion into the financial markets and the economy. The full list of measures is here, and include more generous access to loans by SME’s, direct access to funds for states, counties and municipalities (very important, as these have seen much of their sales-tax based revenue nearly disappear due to shutdowns), and likely most controversially in the long run for moral hazard implications, the intent to purchase high yield bonds, although with the provision that they achieved high yield status after March 22.
Today is the first real return for European markets after the late Thursday agreement on the shape of the Covid19 rescue package agreed by the Eurogroup of EU finance ministers. The package is to the tune of EUR 540 billion and is a mixture of emergency medical cost-related spending that taps the ESM directly to the tune of 2% of GDP, with additional funds available via loans, but those would come with the “conditionality” of fiscal reforms that were so hotly contested by Italy in particular. Other mechanisms in the overall package were for business loans via the EIB and direct payments to workers via a new programme called SURE which would operate as a kind of temporary EU-wide unemployment insurance. The language on the nature of many of the particulars was kept rather loose, with many noting very different takeaways from the Netherlands and Italy in the wake of the deal. Importantly, there was no talk of mutual “coronabonds” and the group punted the issue of “innovative financial instruments” to “national leaders”. In short, the programme is a stop-gap, but underwhelms in the longer arc of the entire EU existential question.
Chart: AUDUSD
Our favourite proxy for risk sentiment in G10 FX remains the AUDUSD pair, which into this morning came close to testing the most important of Fibo retracements, the 61.8% retracement of the entire sell-off wave from the highs just prior to the calendar year shift to the panic lows that comes in near 0.6450. Arguably, that level and the zone extending up to the prior major cycle lows near 0.6675 is the ultimate pivot zone for this chart in the bigger perspective. Strategic bears will remain committed below, while a rally above 0.6675-0.6700 would argue for a secular focus back higher. Seems too early for the latter, but that is what is at stake here.
The G-10 rundown
USD – the big dollar is down for the count at the moment, but the patterns in recent trading suggest that it is merely the flipside of global risk sentiment and the technical reversal of the prior USD rally is not yet profound enough yet to say that we have reversed course.
EUR – the euro not terribly impressed with the Eurogroup’s agreed rescue package as the single currency is notably lower versus CHF and JPY despite a risk on tone – looking vulnerable even against GBP and would eventually suspect the USD as well if sentiment turns lower.
JPY – the yen rather firm, perhaps as the global yield-curve control is in evidence and prevents. Impressed with the JPY’s resilience here and those looking for a trade to go against the “hopium” tide might have a glance at CADJPY and AUDJPY shorts.
GBP – sterling in an impressive show of strength – some springback possibly from Boris Johnson emerging from his personal Covid19 crisis, but also the weak euro weighing as well as the UK’s easier path to stimulus on all fronts. Next test would be how the pound performs broadly if risk sentiment sours.
CHF – the weekly SNB sight deposits rise another CHF 7 billion – intervention ongoing and makes expressing a CHF long view difficult as EURCHF continues to look heavy.
AUD – the Aussie remains our favourite risk proxy for risk sentimentin G10 – especially via AUDUSD and AUDJPY. Note that Australia’s NAB suffered a catastrophic decline to -66 in March from -2 in February – and that relative to a global financial crisis worst reading of -31.
CAD – one of our favourite ways to express a contrarian view on this bounce would be via CAD shorts, especially if the oil price remains low or lower for the front few months in crude, where the market is pricing an increasingly aggressive price rebound from very low spot prices.
NZD – the AUDNZD pairs showing a firm turning of the corner back higher with this latest move as high as 1.0500. Constructive on strategic long positions here and on dips for a repricing toward 1.10-1.15 to stat.
SEK – not impressed with EURSEK here as the pivot zone below 11.00 hasn’t given way yet despite a rather constructive backdrop. Need to see EURSEK through perhaps 10.75-70 to call a reversal of the long established weak SEK trend.
NOK – difficult to seek EURNOK back through 11.00 until we are firmly on the other side of Covid19 and have normalized crude prices. Barring that, a disappointment in energy markets could lead to another probe back higher, though suspect Norges Bank will leaning against anything disorderly.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
