COT Update: IMM currency futures

FX Update: USD comes roaring back

Forex 5 minutes to read
Picture of John Hardy
John J. Hardy

Chief Macro Strategist

Summary:  Yesterday saw a blow off extension of the recent rally in risk sentiment on the narrative of endless Fed liquidity provision, a driver that also extended USD weakness. But we have seen quite the spike and now pivot back stronger in the USD into European trading this morning that has quickly changed to tone and drawn an important line in the sand here.


The narrative we are running in this morning’s Market Quick Take and to a large degree in today’s Saxo Market call podcast is the “Wall Street versus Main Street” paradigm. While the big banks and many observers are peddling the “Don’t fight the Fed” narrative. We note that the state of Main Street is the key longer term issue here beyond what we are seeing in the impressive upswing in risk sentiment, in that the Fed’s efforts at massive liquidity provision are mostly only addressing the liquid, listed companies that employ a small fraction of total jobs in the US, while SME’s provide 80% and more of all jobs in the US and are not able to access the same scale of bailouts, nor on the same terms. And while the Fed can wave its magic alphabet soup wand and create a facility that immediately bails out a junk debt issuer, the provisioning of SME support is proving slow, of smaller magnitude, and too often taking the form of loans. In FX, the “don’t fight the Fed” narrative drove the USD weaker over the last few weeks, but judging by today’s price action and the technical situation in many USD pairs, we have just seen quite the pivot in market action which has provided a hook for USD bulls to get involved again.

Beyond the risk-on, risk-off behavior in evidence across markets, a game that FX is also playing here, we would note additional concerns for all oil-linked currencies (it’s tough for the Fed to put oil on its balance sheet, although it probably would if it could figure out how) as the IEA has come up with huge demand drop estimates for the entirety of 2020. The crude oil market is in an epic contango, with Brent spot month crude trading at 28 dollars (was 30 dollars earlier this morning…) while the December. If available storage is filled to capacity over the coming month or two and demand doesn’t snap back as quickly as many hope, we could be in for a far more sustained bout of low prices than the market is pricing, with further risks to CAD, NOK and RUB.

We are more concerned than ever about Europe after Italy’s president Conte has spoken against the deal his own finance minister agree to in the Eurogroup meeting last week, saying that he would never agree to receive funds from the ESM, fearing the kind of “troika treatment” that Greece suffered during the EU debt crisis. Italy BTP’s sold off badly yesterday and to a degree this morning as well. The next meeting of EU heads of states represents the next crunch point for whether existential concerns accelerate. As our CIO Steen Jakobsen points out on this morning’s Saxo Market Call podcast, the agreed sums in the rescue package put together by the Eurogroup meeting last Thursday are in reality a small fraction of the headline half a trillion EUR figures.

Chart: EURUSD
EURUSD is quietly coiling around without much conviction here as the EUR shows far less beta in rising and falling against the US dollar during the recent dramatic swings in USD pairs in correlation with risk sentiment. But we would look here and at EURJPY for the potential for EU existential risks to begin to weigh over coming meetings of heads of state in the EU if the bloc can’t show a more united front – the cost of Italy shedding itself of its commitment to the euro is falling rapidly by the day. Technically, if the pair is taking out the recent sub-1.0800 lows again, it would open up the view to a test of the sub-1.0650 cycle lows.v

15_04_2020_JJH_Update_01
Source: Saxo Group

The G-10 rundown, express edition

USD – big comeback has us marking this week’s lows as important lines in the sand.

EUR – again, watching for more isolated weakness along the lines of existential concerns.

JPY – broadly firm on risk off, but notable that as USD comes back, it does so versus the JPY as well.

GBP – unable to maintain a rally stance as risk appetite softens – a key signal and note that GBPUSD pivoted right at the 200-day moving average. In EURGBP, the Covid19 breakdown level was around 0.8600 in EURGBP.

CHF – EURCHF under pressure and could get worse if EU existential concerns rise further, all while SNB throws full weight behind slowing CHF ascent.

AUD – a perfect test of the 61.8% retracement level in AUDUSD at 0.6450 we mentioned yesterday and the scale of the ensuing sell-off draws a clear line in the sand. Further evidence of breakdown if 0.6215-0.6200 gives way. Watch out for the Australia jobs report overnight after a collapse to a record low consumer confidence number in April.

CAD – concerned that oil prices can collapse further and some Canadian grades could go to zero or worse if storage fills. With sharp rally today, the USDCAD bulls have their hook and risk/reward levels established. Not sure if Bank of Canada is ready with new measures already today – but am sure they won’t be hawkish…

NZD – we think AUDNZD has turned back higher in secular sense, but if global outlook concerns pick up from here, could be some backtracking there. NZD bears should have a look at NZDUSD and NZDJPY here.

SEK – EURSEK never took out the downside pivots that extend as far as 10.70, but looks rather inert here. Valuation is stretched, but SEK needs a positive outlook to thrive.

NOK – oil concerns could mean a test of the ultimate highs in extremis, but suspect Norges Bank will want to keep things more orderly this time around if NOK under heavy pressure.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Mar. Retail Sales
  • 1230 – US Apr. Empire Manufacturing
  • 1315 – US Mar. Industrial Production
  • 1400 – US Apr. NAHB Housing Market Index
  • 1400 – Canada Bank of Canada Rate Decision
  • 1800 – US Fed Beige Book
  • 0130 – Australia Mar. Unemployment Rate / Employment Change

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

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)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

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.