Head of FX Strategy
Summary: The US Fed dropped rates to zero, announced a massive QE effort and global central banks have coordinated an expansion in USD swaps, helping to ease the pressure on USD funding problem for a brief moment, but the funding challenge may outstrip any traditional measures to deal with it the end. As well, strong risk of market closures ahead if G7 is unable to get ahead of the crisis today.
Trading Interest
Global central banks pulled everything they could muster out of their hats at the weekend, topped by the Fed’s 100 basis point rate cut late on Sunday, together with another $700 billion in Fed QE (treasuries and mortgage backed securities), and coordinated central bank announcements on expanding USD swap lines on signs of USD funding stress. The S&P futures nearly immediately jolted to limit down, erasing a good portion of Friday’s zany late rally that was likely inspired by anticipation of action over the weekend. European indices are plumbing new depths this morning. The reaction speaks to the severity of the contagion across asset markets amidst this mad dash for cash and stresses in USD funding as so many assets around the world are denominated in USD. We’ll discuss more in the days and weeks ahead, but there is a huge global “redenomination risk” as the problem is vastly larger than anything central banks can bring to the table.
The New York Times argues that as few as 20% of workers would quality in the of the deal struck between Congress and the White House on paid sick leave and other measures – where the onus is on the employer to provide the pay. This is incredibly tone deaf to the scale of the needed response and we can expect US lawmakers to come with ever larger rescue packages from here – taking US deficits to perhaps double or more of their current size (Fed balance sheet set to explode). Take Denmark, where the government is backstopping pay for all employees directly impacted by the crisis up to a certain level of pay. And the shutdown in the US has yet to truly begin. Note that the CDC has issued guidelines discouraging gatherings of more than 50 people for the next eight weeks. Local authorities, whether municipalities or states, will use these guidelines from here and we can’t imagine the numbers that will be incoming for March and April, as the US economy is 70% services based and will be suffering a virtual shutdown.
Chart: EURUSD
The euro and the yen are benefitting in relative terms across the board from the opening up of USD swap lines and EURUSD helpfully found support ahead of the critical 1.1000 level at the 61.8% Fibonacci retracement, but needs to pull back above 1.1400 to suggest that the US authorities are getting ahead of the crush on USD funding issues. If the pair fails back to the lows here – it’s a sign that more must be done to turn back the killer dollar.
The G-10 rundown
USD – a key stopper for disorderly USD rise has been put in place with the Fed and other central banks opening up the swap lines, but can the Fed backstop the entire world? Global intervention on the agenda as this is too big for the Fed.
EUR – ECB President Lagarde apparently apologized to the ECB governing council after the disaster of last week’s press conference, but EU peripheral spread are blowing wider again this morning – the next months are critical for proving the viability of the Euro Zone. Cash drops must come and soon…
JPY – the USDJPY found resistance at the ultimate levels around 108.00 with a bit of price action sloshing – we should have stuck to our guns on that one – focus on risk toward 100.00 now as long as the contagion lasts, but there will be some interesting levels to sell JPY at against hard assets and commodities whenever this crazy move bottoms out. Bank of Japan buying up everything in sight overnight – but it’s not working yet…
GBP – sterling is getting a drubbing here and we like the idea of scaling into exposure versus the euro first and eventually the US dollar, although considerable concern that the UK government has done a poor job on handling the virus outbreak, with risk of a more extreme crunch if the country needs to correct sharply.
CHF – doing its job at the moment as safe haven, but a slow mover higher versus a strong euro here.
AUD – the RBA switches to QE and offers repos – we’re already there. Now eyeing the GFC lows around 0.6000 in AUDUSD as the next test
CAD – oil and risk appetite point lower for CAD. Bank of Canada surprised on Friday with a 50 basis point chop but still at +0.75 percent for a policy rate! More chops to come and we continue to look higher in USDCAD.
NZD – the RBNZ chopped 75 basis points just ahead of the Fed overnight, leaving the policy rate at 0.25% and with nowhere to go except into QE and FX intervention if the NZD continues to grind higher versus the AUD.
SEK – the krona needs massive fiscal stimulus and Sweden may be behind the curve with the virus response. Could get disorderly as long as markets remain this dysfunctional.
NOK – the lows in NOK will coincide with the lows in oil, barring Norges Bank intervention. There will be an amazing comeback – but from what level?
Calendar (times GMT)
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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.
