Head of FX Strategy
Summary: The market is starting off this holiday week in a very different place from where it closed last week, as Covid mutation fears and an isolated UK are pounding sterling, while the US dollar has suddenly gone vertical, with no compelling narrative to latch onto other than thin trading and perhaps a sudden hangover from global speculative energy that had simply become very stretched.
Today’s FX Trading focus:
The USD goes vertical after stimulus package agreed.
Not sure that there is really any sell-the-fact linkage as hinted at in the headline above, but agreement among key Congressional players was reached on the $900 billion US stimulus package at the weekend, and the market promptly shrugged its shoulders from the get-go, whether overwhelmed by ominous Covid-19 developments or by profit-taking across the risk spectrum in increasingly thin trading conditions. Another argument is that this stimulus package is simply too modest to cut the mustard, given the slowing risks in the US economy. Regardless, the sudden pulling of the plug for USD bears is seeing remarkable expansions of trading ranges for USD pairs this morning, with for example AUDUSD, taking out all of last week’s gains and then some before lunch here in Europe before lunch on a Monday.
We discussed the news at the weekend of new Covid-19 mutations in the UK resulting in travel bans there and our general concerns on the implications in this morning’s Saxo Market Call podcast. Initially, this has been spun as a UK story, but our fear is that this could well be a new global risk, given that it is unlikely that this strain of the virus is contained in the UK if it has slipped out at all, which some reports suggest it has (cases found in Australia, Denmark and Netherlands). If the strain is as contagious as feared, the best case is that it complicates and slows the path to opening up from lockdown as it runs ahead of vaccine efforts until these catch up and inoculate a significant portion of the population. Worst case, the mutations to the spike protein reduce the effectiveness of the vaccines and demonstrate that further mutations of the virus are a risk, meaning that the virus become endemic and seasonal and resets the global economy for a longer period of time than currently anticipated.
Chart: AUDUSD
One of the leaders in USD pairs on the way up, scary trade disruptions with China notwithstanding, the correction in AUDUSD is one of the largest among USD pairs this morning, with the notable exception of USDNOK. Don’t want to read too much into this move yet, given time of year and risk of poor liquidity into the end of the year, but the scale of some of the reversals elsewhere and the suddenness with which volatility has been injected back into the market are a significant cause for concern. Strictly technically speaking, we need to see AUDUSD remaining above 0.7400 to maintain the upside focus, while something more like 0.7250 needed to start to really signal significant breakdown risk.
The G-10 + CNH rundown
USD – Was this a “buy the fact” on the US stimulus finally moving forward? Or is this simply an overdue consolidation as the last marginal buyer of risky assets was finally found late last week before any excuse (Covid mutations in particular) was good enough to trigger profit-taking and a backup in an oversold dollar?
EUR – the EURUSD pair likely suffering stop-loss order flow on the failure of the important tactical 1.2175 area, with perhaps 10% of Brexit concerns wearing off on the single currency. The 1.2000 level is key to maintain for an upside focus, and we likely need to see trading conditions in early January before having a better feel for the market.
JPY – a safe haven bid coming in for US treasuries and risk sentiment on the defensive is seeing JPY higher in most pair, but lower against King Dollar.
CNH – Some warning for USD bears was already partially in place late last week as USDCNY entirely sat out the further extension in USD weakness. China seems to have made the point that it didn’t want the broad CNY to strengthen beyond the range highs established since 2018.
GBP – lower in part as the UK extremely isolated by this latest Covid-19 mutation new and the cutting off of travel links to the UK, but also as no progress being made on Brexit. After an enormous correction in GBPUSD, the hill to climb for sterling optimists looks suddenly very steep and tall.
CHF – very minor strength coming in here – a disappointment given nearly perfect storm of developments (Brexit, virus, risk-off) if CHF is supposed to be a safe haven. Gold and Nasdaq-100 “barbell” trade (SNB’s reserves) is to be kept in mind as a possible mover of CHF – with both sharpy lower from this morning’s highs.
AUD – as a leader on the way up versus the USD, not a major surprise to see it leading on the way down. And because of the deepening trade policy showdown with China, the massive further spike in iron ore overnight not helping
CAD – mentioned in my most recent update last week that I would like to “eventually “ get contrarian on AUDCAD upside – eventually may have already arrived if this reversal sticks – the mood shift looks pretty profound here.
NZD – the AUDNZD pair still contending with the 200-day moving average after not able to consistently take it out last week. Risk of consolidation back lower there, but still looking for signs that the pair is turning for a structural move higher.
SEK – no surprise that the ugly reversal in the mood for risk sentiment is taking the krona down with it. If the ugly mood continues in thing trading conditions here into the end of the year, the sudden risk of a squeeze could return – watch behaviour in EURSEK if 10.30 falls.
NOK – with fresh Covid concerns taking down oil prices six notches, the NOK goes from outperformance to weakest of the lot suddenly – look out below on end-of-year effects and thin holiday markets setting in motion a squeeze above 10.75-80 in EURNOK.
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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.
