Head of FX Strategy
Summary: A modest wave of risk off washed over markets overnight on a sharp revision of coronavirus cases and deaths in China, with the usual USD and especially JPY strengthening in evidence, though the shift in mood did nothing to lift the euro save for versus the most risk-sensitive currencies as both EURUSD and EURJPY are punching to significant new lows.
Trading interest
A sharp revision higher of the number of coronavirus cases in Hubei province overnight spooked markets, taking safe haven bonds and especially the yen higher and triggering a modest setback for more risk-sensitive currencies, especially in EM. It is tough to get a sense of whether this changes the narrative that markets are trying to look for a resumption of activity on the ground in coming weeks and an acceleration toward normalcy in April. The rise in cases was clearly due to a change of methodology rather than a change in what is happening on the ground. On that note, a resumption of work across China will need to proceed apace very soon to justify the market’s generally positive stance, as well as a cessation in the growth of cases reported outside of China.
The euro’s woes continue, even as European peripheral spreads are utterly benign and major equitiy indices across Europe have blasted to new highs. One macro trade that may be driving the the euro lower is that very strength in European equities as valuations look attractive and purchases can be hedged cheaply. As well, straight up carry trading may also be a contributing factor, with European banks . If that is the case, eventually one would expect the euro to prove an underperformer if a major setback in equity markets ever arrives, though the modest risk off overnight did little to lift the single currency, save versus the most risk-sensitive small currencies and EM.
The pound sterling continues to impress with its resilience versus the US dollar and strength versus a struggling Euro, all while some of the news flow on the progression of talks has proven mostly negative – the latest a rejection from the EU’s Barnier on the UK’s hoped for “permanent equivalence” in financial services that would give UK banks full access to Europe.
Chart: EURJPY
EURUSD has moved to new lows, and EURJPY joined in the euro selling with more enthusiasm overnight after a prior headfake below the 120.00 that was initially rebuffed. The proximate trigger was risk off from coronavirus news overnight, but the euro looks to continue underperforming in this pair as long as global yields remain low – watching for another leg lower on this proper break of 120.00 – perhaps all the way to the prior low of 116.00.
The G-10 rundown
USD – the dollar strength has faded slightly, broadly speaking, as hopes for a bounce-back in the global economy has generated more enthusiasm for risk-correlated EM currencies, but this so far merely looks like a pause in a trend.
EUR – the euro scraping to new lows and broadly weak – interesting test for the single currency if this bout of risk off deepens and shows that the euro has become negatively correlated with risk appetite.
JPY – the yen picking up a solid bid overnight on risk off and safe haven bonds bouncing – the usual stuff. Need far more volatility in global markets to spark more volatility here – but vols are so cheap for longer term JPY calls that owning a bit of longer term vol worth consideration.
GBP – sterling more than firm as the focus on the weak euro keeps sterling well bid versus the single currency – but is there enough here to take GBPUSD back well above 1.3000? The Jan. RICS housing survey for the UK overnight blasted to a much better than expect +17%, suggesting confident consumers.
CHF – the EURCHF pairs shows how profound the weak euro trend is here as CHF thrives in relative terms almost no matter the backdrop. The pair has slipped to new lows since 2015 here, with the sense that there is little to support after the US treasury put Switzerland back on the currency manipulation watchlist.
AUD – to remain extremely sensitive to news on the resumption of activity – or lack thereof – in China. Technically, status of attempt through 0.6700 in AUDUSD dominates the focus.
CAD – USDCAD is in consolidation mode after the steep run higher and bulls in control as long as the pair remains above perhaps 1.3200 (the 200-day SMA a bit above there), although a further recovery in oil could keep the pair rangebound and directionless for a time.
NZD – the kiwi got quite a boost from the RBNZ this week, but overnight action shows how sensitive the currency is to coronavirus news. Key chart point around 65.00 in NZDUSD if the kiwi is to stage a recovery.
SEK – EURSEK breakdown in progress as we await whether there is enough in the mix to take the pair below the important 10.40 area – original thesis being we needed more in the policy mix from the EU and Swse
NOK – EURNOK found support ahead of the key 10.00 as the oil rally found resistance overnight – too early to say NOK is out to of the woods yet.
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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.
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