FX Update: Fed bazooka fails to impress. G7 meeting next test.

Forex 5 minutes to read

John Hardy

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

  • This market is largely untradable in terms of spot – but interest in medium to longer term EURGBP downside via options and same for GBPUSD upside if GBPUSD approaches 1.2000.

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.

Source: Saxo Group

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)

  • 1230 – US Mar. Empire Manufacturing Survey
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.