Head of FX Strategy
Summary: While many exchange rates remain clearly driven by buoyant risk appetite, the Japanese yen is quietly strong relative to its normal behavior with the backdrop of strong risk sentiment in global equities, and to a degree in EM in recent days. We continue to watch EURJPY for signs of a more profound breakdown.
Yesterday I penned an article looking at initial thoughts on the upcoming US Presidential Elections and reasonably strong conviction that Trump will lose, and what a Biden presidency would likely mean for asset markets.
Late yesterday, Fitch downgraded Italian debt to BBB-, just a notch above junk, but this only merited some seven basis points of spread widening in early trading today in Europe as we all know that the ECB is all about crushing the spreads until EU and Italian politicians decide that the EMU is to be explicitly reconsidered for Italy. The ECB has made the mistake of putting an amount on its intended asset purchases, something the Fed has abandoned in the case of treasuries and MBS, and the ECB would do well this Thursday to at least dramatically lift the amounts or just come out with the “however much is necessary” rhetoric around sovereign purchases. But even there, the ECB will eventually be treading dangerously deep into political territory once purchases go beyond a certain size. The next key data for the existential angle on the EMU and the euro is the May 6 video meeting of EU leaders.
The Swedish krona jumped higher in the wake of yesterday’s RIksbank meeting as Sweden’s central bank reduced its forecast horizon for policy and kept it at zero rather than shifting to negative as many might have feared, with a minority of observers even looking for a rate cut at yesterday’s meeting. The statement didn’t rule out negative rates in principle. EURSEK slammed lower after the recent bottled-up price action and stopped right on the critical support of the 200-day moving average just below 10.70, a pivotal level to watch from here.
The Hungarian forint was marginally weaker yesterday after the Hungarian central bank announced the start of QE in Hungary – a country that in the past I would have argued was far from able mobilize unconventional monetary policy like large scale asset purchases without collapsing the currency. But with unconventional policy turning conventional, the move looks less shocking. Still, with Hungarian real interest rates having gone steeply negative before the Covid19 outbreak, we will be watching inflation closely for signs that the government is overheating the money printing presses. AS well, we are concerned that the new ECB budgets (the seven year MFF) will leave Hungary out on in the cold due to differences on governance issues, i.e., Hungary having enacted one-man rule by decree.
The FOMC meeting is up later today and the chief focus there will be how the Fed positions and explains its unprecedented actions of the last many weeks and how it sees its role from here. The question and answer session in the press conference may provide the best sense of the Fed’s stance at the moment. Most important in the longer arc of this is that the Fed’s actions cut deep into domestic political implications.
Chart: EURJPY
Despite the skirting of any immediate existential strains after last week’s EU Council meeting and a considerable bounce in the Italian public debt (BTPs), the EURJPY cross remains heavy and below the major support line, and we still consider EU existential questions a clear and present danger for the medium term. The JPY looks remarkably bid given the backdrop and the BoJ’s “unlimited” purchases comments and suggests that capital flows are JPY supportive for now and could become profoundly so if risk sentiment ever rolls over and drives a broader and more intense JPY rally. The next major support level lower comes in around 110.00.
The G-10 rundown
USD – The USD is weak and will remain that way as long as hopes for the outlook on what the other side of this Covid19 crisis looks like remain buoyant and risk sentiment is strong. A key test later today with the FOMC.
EUR – the market is unwilling to draw any longer term conclusions on downside risks from the never-ending concerns that in the long term the EMU is doomed, even if short term strains are constantly averted. Watching EURJPY with interesting on the technical break as discussed above.
JPY – stronger than it looks, given the usually hostile backdrop of strong risk sentiment recently, although bond yields globally have been crushed lower and carry reduced by even the weakest of EMs continuing to chop rates, leaving carry traders in the lurch.
GBP – the 0.8700 area in EURGBP has become the local pivot zone as investors feel reluctant, perhaps, to take a longer term view on Brexit and other factors until the Covid19 crisis has eased more considerably..
CHF – after the signs of massive intervention impressed the market and saw EURCHF spiking higher, the price action has been quick to settle back. Untradeable.
AUD – I am getting uncomfortable with this AUDUSD rally at these levels, although still some technical room to run up to 0.6675, the old cycle low from late 2019. At the margin, perhaps hopes for a Chinese recover and large Chinese stimulus announcement ($600 billion) helping to drive this latest surge. Bears don’t have much of an argument unless we quickly reverse this last leg of rallying price action.
CAD – last local pivot in USDCAD comes in just ahead of 1.3850 – prefer to watch for bullish reversals rather than to expect that we entirely reverse the Covid19-inspired rally from the sub-1.3500 base.
NZD – same comments as for AUDUSD for NZDUSD, although the surprisingly steep AUDNZD rally means that NZDUSD has yet to rally above its local 0.6130 pivot, and the bigger resistance overhead is not until the 0.6200 area.
SEK – as noted above, important that RIksbank signals lack of interesting in going back into negative rates for now – but 10.70 areas is an important nut to crack to get EURSEK lower still and a sustained SEK rally needs an improved economic outlook and fiscal stimulus in Sweden
NOK – EURNOK has likely topped for the cycle as long as the crude debacle fails to pick up any further intensity from here, and Norges Bank is on the watch and government stimulus means NOK purchases must be raised. Still, reluctant to call EURNOK below 11.00 without more profound recovery in oil and gas prices.
Economic Calendar Highlights (times GMT)
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
