FX Update: Markets picking up the pieces after the deluge

Trading Interest

• USDJPY has worked into our previously declared sell area above 106.00 today, but no interest here in following up as intermarket moves are less supportive now – particularly the real yields spike in the US noted below.

The last couple of sessions have been a watershed moment for global investors, as asset markets melted down across the board, whether equities, corporate bonds of any stripe, government long bonds, or even gold. The phenomenon is a true “Dash for cash” and the only cash the world wants when record panic deleveraging is taking place at a clip that eclipsed the worst single days during the global financial crisis, is US dollars. So many assets around the world are denominated in US dollars that the scramble for USD funding becomes the utmost imperative. In today’s sentiment bounce starting in the Asian session, we are seeing everything turned on its head, however, with USD higher versus the JPY and EUR, but lower versus risky currencies as US equities were limit up ahead of the open of trading.

Making matters worse yesterday after the terrible speech Wednesday night from US President Trump was a shocking press conference from ECB President Lagarde. First was her pointless running through the ECB “staff projections” for how much GDP will “grow” this year rather than tearing up the playbook and saying something along the lines of the bank not attempting to project anything but trying to get on top of how the coronavirus will affect policy decisions and the economy. But the double whammy in the question and answer session was the watershed moment that sent markets into a tailspin, when she said that it isn’t the ECB’s job to “close spreads”  and that her ECB would not be “whatever it takes, part two”. In the wake of her comments, the Italian Bond Futures, BTP, was limit down, and Italian 10-year spreads to Germany blew wider to 250 basis points. Even France-Germany spreads were wider – to 60+ basis points.

Lagardes stance yesterday was overtly market-hostile and either suggests total cluelessness or a political gambit to shock the fiscal authorities into strong action, since the ECB doesn’t have the power of the purse even if it can buy up any level of debt issued by fiscal authorities of Europe if the latter change the deficit rules. She clearly senses that this is an existential crisis moment for Europe and it may turn out a wise move after all to let EU politicians know in stark terms – it isn’t up to us, it is up to you! And the money drops better come quickly, given the profound state of economic shutdown that is only set to tighten further and the parlous state of EU Banks. (As we hinted at in today’s Saxo Market Call podcast, Germany may finally be gearing up for action as ). The Euro was ripped back to key support (see EURUSD comments below) before righting itself later in the session.

The Fed is moving fast to push back against the panic, launching a $500 billion 3-month repo yesterday and promising another $1 trillion of repos (1-month and 3-month) today, while also expanding the menu of treasuries it will purchase with its ongoing “not QE” after signs of market dysfunction in the US treasury market cropped up yesterday. Supposedly, US House Speaker Pelosi and Trump administration officials could be out with a stimulus package today. As I alluded to in a tweet earlier this morning, these measures are necessary, but the bureaucracy and the red tape in figuring out who is owed what may prove too complicated and we may simply be headed toward massive helicopter drops of cash on the economy. So – first step is to ensure markets are functioning properly (Fed pulling out all of the stops and market pricing 94 bps of easing through next Wednesday meeting!). But then it is up to the state of the real economy and whether fiscal authorities can get ahead of the risk of a credit crunch forest fire and avoid a deep growth recession as consumption shuts down – there is far more risk of the latter over the medium to longer term. Very interesting, on that note to watch today’s preliminary US March University of Michigan sentiment survey after the recent months were near all-time highs – the size of the shock lower will point to the risk of weak consumer activity.

Chart: USDJPY
USDJPY is rising fast and was higher on the day yesterday even with a huge deleveraging in equity markets, perhaps as US real yields were suddenly on the move higher yesterday (more below under JPY). The pair has retraced a considerable portion of the lost territory to the downside – but bears will be possibly picking their spots soon, for example around the 200-day moving average or at the important 61.8% retracement level not far from that same 108.00 area.