Head of FX Strategy
Summary: Market swings are bordering on the absurd as yesterday saw a massive comeback from local lows in risk appetite, fed in part by the Fed announcing changes to its corporate credit purchase facility and possibly by an expansion of BoJ purchases overnight. The USD and JPY were lower across the board.
Yesterday saw wild gyrations across markets – save for the bond market, where the use of the word “market” perhaps doesn’t entirely apply, given the heavy hand of the central banks. US equity futures rocketed higher from an early funk in Europe to a strong close by the end of the US cash session, initially fed by no identifiable catalyst, but finding a strong one later in US trading when the fed announced changes to its corporate bond purchase facility, the clumsily named SMCCF. The announcement was not an expansion, it should be noted, but a widening of the menu of purchases to include individual bonds in the secondary market to “support market liquidity and the availability of credit for large employers.” This is as opposed to merely purchasing investment grade ETFs. No surprise to see the USD and JPY moving in synch with negative correlation to risk appetite, with the JPY weaker against even a very weak USD into this morning after the BoJ expanded its support for companies to the tune of JPY 110 Trillion (and indications of more if needed) from the former JPY 75 Trillion. Rather than taking yesterday’s move as a sign of strong market health, the volatility in our eyes look distinctly unhealthy and market action is likely to remain erratic.
Elsewhere, sterling firmed smartly yesterday, both on the enormous pivot in risk appetite, but also on positive noises in the wake of the phone call between UK Prime Minister Boris Johnson and his EU counterparts yesterday, though formal negotiations aren’t set to resume until June 29.
Looking at the price action this morning, the speed with which some of the overnight moves are unwinding suggest that two-way volatility remains the prominent risk and we could just as easily erase the move since yesterday as follow through higher – this market feels more than a bit schizophrenic.
Can’t say I am looking forward to today’s semi-annual Powell testimony before a Senate Panel today but in this very political season ahead of the November 3 election, if ever there was a chance for the Democrats to question Fed actions and politicize the Fed, this is it. Also note that the US May Retail Sales report is up later, with expectations for a rather significant rebound of a third to half of April’s record drop.
Chart: AUDUSD
AUDUSD ripped higher from the lows in obvious correlation with equity markets yesterday, but liquidity looks rather poor, given how quickly the pair was to give up a significant portion of its gains this morning. The current level is mid-range between the highs and yesterday’s lows, but across risk-correlated assets, we now have a more clearly etched pivot level to the downside – appropriately here in the 0.6750-0.6800 zone, and we’ll keep an open mind on direction, with a close below 0.6800 opening up downside potential and a close above 0.7000 keeping the chart neutral to positive.
The G-10 rundown
USD – the greenback remains the flip-side of risk appetite, only exceeded in beta terms by the JPY in this market. Reluctant to jump aboard this latest move lower in the USD as a significant one.
EUR – a bit more interested in the status of euro in the crosses than in EURUSD at the moment, as I suspect that EURAUD has more potential for a large move, for example, than the former. Note EURAUD extensive interaction with the 200-day moving average.
JPY – the BoJ announced a sizable expansion of its support for corporates overnight, but the JPY selling more linked to the general risk-on move. Some JPY crosses have rather bearish setups – (GBPJPY, EURJPY, and NZDJPY just to take a few examples besides USDJPY) if we do get another surge of safe haven seeking in bond markets and risk off that drives a bid into JPY.
GBP – sterling stepped away from the abyss yesterday, but another crazy lurch in risk appetite back the other way and too much negative rate talk from the BoE could change the direction once again. Note the 200-day moving average in GBPUSD as the significant resistance there.
CHF – latest SNB data shows ongoing intervention, but this latest surge in risk appetite offers a bit of EURCHF support – pivot zone of 1.0700-1.0650 is technical key for downside risks and EU existential theme the focus through the Friday EU Council meeting.
AUD – the squeeze higher from yesterday’s lows hit an air-pocket this morning – two-way risks abound in this frenetic market.
CAD - little differentiation with other risk-sensitive FX – and willing to bite on the long side prospects on any rally and close above the 21-day moving average from here (currently around 1.3665).
NZD – the kiwi punished overnight on a story that two ex-pats arriving from the UK were discovered to be infected with Covid19 after given dispensation to exit quarantine to go to a funeral. This after the country had been declared “Covid-free” for some 24 days. Nice line in the sand now on the AUDNZD chart at just below 1.0600 for bulls.
SEK – EURSEK reversed back lower from a local high yesterday in sympathy with risk-on rally, but the move feels like it had less conviction and plenty of room for the recent consolidation of the big move lower to continue – first major test at 200-day moving average, now at 10.665.
NOK – the problem here is differentiation with everything else that is going on with NOK and Oil both correlated with one another and with risk appetite. In any case, EURNOK bulls will be under pressure on a close above about 10.90 – but especially on any new move above 11.00.
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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.
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