Four FX charts: G10 smalls and EM tumble

Forex 4 minutes to read

John Hardy

Head of FX Strategy

Summary:  A fresh intensification of the coronavirus fallout fears is driving another wave of weakness across the most China-exposed currencies within the G10, together with many emerging market currencies as well. USDRUB has squeezed to interesting levels in particular today. Elsewhere, we have a look at whether sterling can sustain the post-BoE kneejerk rally after Carney and company decided not to cut rates.


Within the G3 currencies, the action remains as moribund as ever as EURUSD failed to make waves with a break of the 1.1000 level this week and the FOMC didn’t spark any isolated USD strength. But the general risk off starting overnight in the Asian session has certainly driven a wave of further risk off in the traditionally risk-correlated G10 small currencies, particularly the AUD as we discuss below, as well as general weakness across much of EM. We watch for the risk of a further intensification of risk off after this latest bout, suggesting that many markets look a bit complacent here in pricing how long this situation may take to get sorted out.

EURAUD – AUD under press within G10
AUD is the single G10 currency most at risk from its exposure to China on the fear that a prolonged bout of dealing with the coronavirus outbreak will extend the suspension of economic activity and lead to a further reduction in collapsing prices for key commodity exports like iron ore and coking coal, Australia’s chief China-bound exports. AUDUSD is not the only pair to look at  (but is worth watching as the key 0.6700 area approaches as we discussed in today’s FX Update), but other AUD pairs show the Aussie very much on the defensive, including EURAUD, which is ripping sharply to new highs on the latest developments – worth tracking all AUD pairs for isolated AUD weakness.

Source: Saxo Group

GBPUSD – watching whether BoE no-cut rally sustained
The Bank of England decided not to cut today – a move that was nearly guaranteed to trigger a knee-jerk reaction as the market was very divided on the prospects for a cut. By not cutting, sterling has rushed higher,  but has not yet “broken” anything in GBPUSD. Traditionally not a currency that does well in a backdrop of wobbly global markets, and after a strong speculative build of late in speculative GBP longs, we keep our eyes out for whether this move is sustained higher – with an open mind,  but ready to look for a short bias on a failure back toward the 1.3000 level or lower.

Source: Saxo Group

CHFNOK – intra-European risk-on, risk-off pair extraordinaire
CHFNOK has pulled to new highs for the cycle as the oil- and global growth sensitive NOK is finding itself under intense pressure after long NOK looked like one of the consensus long trades of the year on hopes of a global recovery before the latest coronavirus fears suddenly washed over markets. As well, the recent move by the US Treasury to place Switzerland back on the currency manipulators watchlist likely means the SNB will be far more selective in leaning against further CHF strength as it has done in the past. Speculative positioning may be poorly positioned for more NOK weakness here and traders are advised that ugly spikes can occur in a thinly traded currency like the NOK if this situation gets worse before it gets better.

Source: Saxo Group

USDRUB – squeeze as the plot has changed in recent days
Coming into this year, the Russian ruble was enjoying a fresh surge in strength on the country’s very solid compression in credit spreads, rather strong oil prices and still highly positive real interest rates as the policy rate of 6.50% is still way above the latest inflation figures that have steadily declined over the last 10 months or so to 3.0% in December (some of that, of course, is a natural by-product of currency strength). But now, oil prices have cratered on the coronavirus outbreak and oversupply fears while natural gas prices have been pressured by very mild European weather. Today, Russia is moving to close its entire border with China to contain coronavirus fears and the combination of all of the above has the Russian ruble poking at new local lows versus the USD – 63.25 looks an important pivot area on the way up here.

Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

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

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.