080419 DollarM

FX Update: ECB and RBA on the move, GBP and NOK collapse

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The ECB and RBA fired off respective bazookas overnight with a large ECB QE clearly aimed at supporting peripheral bonds. Yesterday, both GBP and NOK have suffered a collapse in confidence as the market scrambles for USD funding. The Fed and US Treasury must turn this US dollar lower to turn global markets around.


Trading Interest

  • Staying on the sidelines – waiting for the big move from the US authorities to get ahead of the USD funding pressures and turn the greenback lower

Forex markets are turning downright disorderly yesterday and overnight, as NOK collapsed on the further collapse in oil prices and as domestic investors there run for cover. The lack of liquidity in NOK saw enormous bid-ask spreads the likes of which I have never seen in my nearly two decades in the market. This is the most drastic sign of the illiquidity and desperation for USD funding and suggests, together with the sterling collapse in recent days, that the US authorities must move incredibly fast now to prevent further devastation . I am looking for something from the Fed as soon as today but hopefully ahead of the weekend – the market needs a turn in the USD at this point to put an end to this firestorm across asset markets. Traders should exercise extreme caution in both directions in sizing positions, if that isn’t already painfully clear.

The Fed is coming up with new facilities daily, with a new MMLF facility announced overnight aimed at backstopping money market funds.  Equity markets stabilized slightly this morning – but everything looks too nervous to rely on price action as an indicator.

The ECB made its move late yesterday with a EUR 750 billion QE move aimed at buying assets public and private and importantly hinted that it might break its own “self-imposed rules” on purchases, meaning likely that it is willing to buy higher percentages of individual bond issues and perhaps tilting toward a higher allotment of peripheral bonds (violating capital key framework of the QE under Draghi.

The RBA likewise moved to support the economy with a rate cut, a new facility to support bank lending and a yield-curve-control measure aimed at stabilizing the three-year Australia yield at 0.25%.

It is all rather hectic and fluid at the moment, as all policymakers are pulling out the stops to get ahead of this raging crisis – they will not give up and at some point the market will turn – we use the USD as the key indicator for this. And on that note – also watching USDCNY nervously as the ultimate indicator of what could go wrong if the world doesn’t get ahead of the USD pressure cooker.

By the way – unbelievable to see Brazil chopping rates another 50 bps to a record low as their currency collapses – this is not what EM’s are supposed to do… SARB up today.

Chart: EURNOK
EURNOK has traded 30% north of its record high from the financial crisis on the collapse in the country’s key exports – oil and gas – and on a scramble for funding. The country is also in a lockdown similar to those elsewhere across Europe and was already running enormous budget deficits (ex petroleum revenues) before this crisis erupted. But for Norway, it is clear that there really is no “ex petroleum” and this crisis is likely seeing a permanent resetting of the Norwegian krone lower even if oil does rebound in coming months, as the fossil fuel sector is suffering a permanent destruction of capital from this move lower in oil that will not return. That being said, this morning’s action looks excessive relative to the strong bounce in oil prices and once some liquidity returns, the price action in EURNOK can fall in the short term as fast as it has risen – but the currency is untradeable at present, although as I am writing this the Norges Bank released a brief statement suggesting it is looking at intervening.

19_03_2020_JJH_Update_01
Source: Saxo Group

The G-10 rundown

USD – the USD is turning the screws on global financial markets and the Fed and US Treasury need to go very large and very soon in turning the currency lower to bring any sustained relief to the contagion across global markets – watch the headlines ahead of the weekend!

EUR – the Merkel speech and the ECB move turning the corner for the EU peripheral spreads and getting ahead of the existential concerns for the moment – a bit surprised that the euro itself has not responded more constructively.

JPY – USDJPY has reversed back above the 108.00 area and likely wont find a top until the US Fed, or the market, puts a lid on the long end of the US yield curve, which has traded with enormous volatility over the last several days – spiking real yields higher and taking USDJPY with it as inflation expectations for the US have collapsed.

GBP – compelling long term value for companies looking to invest in services and manufacturing in the UK – the trouble is that this is not the market’s focus for now – and sterling will only turn and begin to stabilize when the USD funding issue turns as well. In the meantime, there is no identifiable “bottom”.

CHF – the SNB stated today that it has stepped up intervention with the virus outbreak, so buying CHF is fighting against the central bank. Governor Jordan stated that fiscal stimulus is needed to fight the virus.

AUD – A powerful bounce overnight, but from impressive new lows in the wake of the RBA’s aggressive move to bring support. Please listen to our Saxo Market Call podcast from today with more on the RBA from our Australian strategist Eleanor Creagh.

CAD – the USDCAD rally has reached the cycle highs, but may not stop here if the markets can’t piece together a sentiment improvement and turn in the USD. The Canadian grades of oil are practically being given away and production will have to slow, with all of the ugly implications for Canada’s economy. Trudeau’s support package of 3% of GDP is weak beer.

NZD – the AUDNZD pair finding support just ahead of parity after the RBA overnight – but there is no telling where that pair could go if the USD isn’t turned and China chooses to let its currency slip more aggressively.

SEK – the Swedish krona twisting in the wind as well here as less liquid currencies are getting smashed across the board. A further twist for Sweden is its less stern response to coronavirus – a running “experiment” relative to other nations’ reactions.

NOK – the liquidity may improve a bit on the Norges Bank statement on NOK and as Norway can’t afford to have the current total disorder in its foreign exchange markets and has deep pockets to address the situation – still, we think the currency is suffering a permanent re-setting lower even if we see a strong bounce at some point when oil bottoms out and sentiment shifts.

Calendar (times GMT)

  • 1230 – US Weekly Initial Jobless Claims
  • South Africa Reserve Bank Rate Announcement
  • China Rate Announcement

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.