Head of FX Strategy
Summary: EURUSD is down pushing on the last support levels after the recent persistent slide in EURUSD, now drawn lower more by euro weakness than USD strength. Elsewhere, another attempt to bounce back from coronavirus fears has offered riskier and commodity currencies.
Trading interest
Tune into today’s Market Call podcast (also available on your favourite podcast app – just search for Saxo Market Call) – we had a great discussion today across all asset classes.
The US equity markets have stormed back to all-time highs again and the usual rather weak response has fed through to currencies, with the funding currencies JPY and EUR getting the worst of it (interesting to note EURCHF punching down to new lows despite this development) and the USD mixed as riskier and EM currencies found modest bids late yesterday. China is struggling to grapple with when to get back to work, but global equity markets seem convinced that this is increasingly a non-issue even if we remain cautious on the risk of normalcy returning slowly and commodities and shipping markets show that the scale of disruptions are very real and profound. Safe haven bonds continue to underline the market’s level of caution as well, dipping only slightly yesterday.
Today we watch for Fed Chair Powell’s testimony and question and answer before the House Financial Services committee. As we noted, an official letter has been sent from a number of Democratic Senators who will question Powell tomorrow – among them Senator Warren, whose campaign is struggling and she may out looking to make a point. Interesting to see if a pattern emerges of pressure on Powell from the Democratic side to explain why the Fed’s balance sheet expansion has been necessary and to what degree large banks and Trump’s deficits are playing a role – i.e., is Fed policy getting politicized beyond Trump berating the Powell Fed on Twitter? The market will also be looking at how seriously the Fed rates coronavirus concerns in terms of needed policy adjustments.
We are also watching for two developments in the wake of today’s Democratic primary in New Hampshire. First, it is worth noting that the New Hampshire is hardly important in terms of the number of delegates, but there could yet be information to extract: namely whether Biden’s candidacy is stumbling even more than Iowa indicated and two, whether Sanders is outperforming already strong polls and if Buttigieg – a hope for the centrists – is maintaining momentum. A stomping Sanders win could be enough to spook US equity markets even if we really need to wait for March 3 Super Tuesday (34.1% of delegates up for grabs on that date) for a better sense of how this is shaping up.
The forwards for USDTRY have blown out in recent days, with the 1-month USDTRY forward points moving from around +400 as recently as earlier this month to above 800 points. So the forward market is pricing in a notable TRY weakening far in excess of interest rate carry. USDTRY liquidity has been heavily restrained by Turkish moves to limit bank activity in the swaps market and making life difficult for foreign speculators in what amounts to soft capital controls. The lack of liquidity makes the currency difficult to trade, but this big spike in the forward could be interesting to watch for the risk of either an aggravated TRY decline or even more strict measures to prevent the currency from moving.
Chart: AUDUSD
The AUDUSD remains an excellent litmus test for the disconnects across markets as equities try to look beyond the coronavirus interruption, presumably pricing in a strong catch-up phase of intense activity to bring growth back to trend in China. The pair recently visited its lowest levels since emerging from the global financial crisis lows and the important 0.6700 pivot area. Any reversal here will need more force to suggest a rejection of the run lower.
The G-10 rundown
USD – the dollar does well against EUR and JPY when risk appetite is strong on the strength of megacap stocks and does well elsewhere (especially against EM) on risk off. Curious to see how EURUSD and USDJPY behave on a real equity market correction (I suspect we would see a weaker USD in these pairs)
EUR – the euro really struggling as the economy is in the dumps and set to remain weak on external demand woes from the coronavirus for now, with little prospect for policymakers ridingg to the rescue as the EU’s largest economy Germany is mired in political disarray
JPY – the JPY still fairly firm in some of the crosses as safe haven yields have not risen much on this attempt to get equity markets back into full rally mode. Watching whether 120.00 breakdown attempt in EURJPY reasserts here tactically.
GBP – sterling maintaining an even keel through this morning’s data as traders are more forward looking – the coronavirus will have an impact on the UK as well from travel activity and on supply chain disruptions as well. The December trade balance was in surplus for the UK for the first time since 1985! Of course, that came after a string of record deficits on stocking up ahead of Brexit.
CHF – EURCHF exceptionally heavy given the backdrop and speaks to the weakness of the euro. The pair is running out of room ahead of the 2017 lows.
AUD – as we note above – the AUD at an interesting inflection point here – plenty more support needed to suggest anything but that the currency remains in the dog house.
CAD – USDCAD may be overdone here in the short term to the upside if we have a further bounce back in oil prices and risk appetite, but still looking for new highs for the cycle on the damage done and a slowing CA economy.
NZD – watching for risks of a dovish tilt from the RBNZ tonight over the RBNZ’s OCR decision – a hint at a cut on the impact of the coronavirus. This could drive NZDUSD to test the cycle lows.
SEK – the weak euro is not help for SEK, although a strong risk appetite backdrop is – the pair should explore lower half of range toward 10.41 if risk-on can maintain a head of steam..
NOK – NOK getting some support from the back-up in short rates after the very hot CPI print yesterday and as oil prices rebound slightly – a lot more work to do to get EURNOK rally neutralized, starting with a sub-10.000 run.
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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.
