Head of FX Strategy
Summary: Last week saw one of the weakest performances for the US dollar in decades, but this move merely retraced a portion of the huge spike in the week prior. The move coincided with a bounce in risk sentiment in global assets and this week sits abridge a huge quarter-end rebalancing and Japanese financial year-end, so it is a pivotal week for all asset markets.
Over the weekend, US President Trump extended the social distancing recommendations until April 30, a blow to those looking for an attempt to resume normal activity levels already after Easter, though that never appeared realistic. And given the Covid19 numbers coming out of the US right now, the concern remains that not only is the US some two to three weeks behind where the hardest hit EU countries are, but that the peak may prove worse in the US due to slower shutdown efforts during the critical phase. Let’s hope not.
On Friday, the Bank of Canada became the final G10 central bank to take its policy rate to near zero or below by chopping the rate 50 bps to the 0.25% and already moving into QE as well with at least CAD 5 billion a week in government securities purchases and a commercial paper purchase facility to boot. Governor Poloz promised that QE can be “unlimited” if needed and indicated that the 0.25% is the lower bound. One of the more frank central bank governors, Poloz admitted that monetary policy is a poor tool for addressing the current crisis. CAD weakness looks a durable theme.
As we discussed on this morning’s Saxo Market Call podcast, this week feels pivotal as we roll over into a new quarter and get a sense of whether the powerful sentiment bounce from an even more powerful sell-off is a mere dead cat with some linkage to technical exhaustion, policymakers frenetic efforts to bring relief and quarterly portfolio rebalancing or whether we have reached a more sustained phase of stability, even if nervous stability. Even the 1929-1930 horror show saw several months of rallying off the shock initial deleveraging before resuming the downswing in the spring of 1930.
Many FX themes are correlated and oil has provided an added twist as it has never recovered with risk appetite and the selling has even deepened there (although as we note below, the impact may be slowing from lower oil prices due if longer term oil prices continue to stabilize). So, in line with risk sentiment, we continue to focus on the USD, equity lines in the sand, bond yields (lower long yields and lower yields in general suggesting risk off) and the JPY and oil-linked currencies here for developments, as well as eyeing the existential angle on the euro after last week’s rejection of an attempt at the first mutual debt issuance via coronabonds.
South Africa’s sovereign debt was downgraded to junk by the long-lasting holdout Moody’s, the only ratings agency that kept an investment grade rating over the last three years. But the rand recovered a bit after USDZAR gapped to an all-time high briefly – suggesting that after the initial adjustment, the pair is going to rise and fall with risk sentiment, but the credit situation for South Africa is getting dire – after trading at a yield well below 6% as recently as late February, the 2049 South African USD sovereign bond yields are now yielding 8.2%.
Chart: AUDUSD
The bounce in the AUDUSD has been profound in percentage terms, yet has merely retraced about half of the damage done by the high momentum wave down from the 0.6500 area. On that note, the pair is working into the last resistance area ahead of an arguable pivot level around the 61.8% retracement of that down-wave and likely trading in high correlation with risk sentiment across asset classes.
The G-10 rundown
USD – until proven otherwise, the US dollar trades as the flipside of risk sentiment, with some nuances depending on the pair – for example whether JPY keeps pace during further deleveraging. The US authorities are not done stimulating yet and the stimulus in the pipeline may be too slow – i.e., that helicopter “cash” is a cumbersome process of sending out physical checks that take longer than Treasury Secretary Mnuchin’s claimed three weeks. The longer the wait, the higher the risk of a aggravating damage from the economic impact of the shutdowns.
EUR – peripheral spreads pushing back wider this morning after last week’s disastrous EU video-summit. How does Europe get on the same page? Euro may languish until it does – especially versus JPY if risk sentiment comes under pressure again.
JPY – the JPY bulling higher again into Japan’s financial year end and with safe haven yields under even more pressure today. Reminder to look out for any change in behavior over quarter end.
GBP – sterling have moved with extreme beta to recent swings in market sentiment, will that remain the case or is it worth it for sterling bulls to set up shop soon in EURGBP – on the argument that sterling is cheap and the UK is more ready and willing on fiscal measures and stabilizers in the needed size.
CHF – the amplitude of the recent EURCHF bounce was not impressive and the existential angle dogging the Euro at the margin and keeping CHF supported. SNB leaning against further CHF upside.
AUD – the Aussie bounce getting a bit ambitious over 0.6100 unless we are headed for a more profound extension of the recent thaw in risk sentiment.
CAD – note the comments on NOK below, even as some grades of Canadian crude have sold for as little as five dollars per barrel, although CAD has not priced as much impact from all of this as NOK and 1.4000 looks an important support area for USDCAD here.
NZD – the RBNZ also moving to support the corporate sector with targeted purchases and milk powder prices are weak – do we have that turn higher yet in AUDNZD – not there technically, yet.
SEK – the RIksbank has relaunched QE – a better SEK bounce comes with the EU turning the corner and better fiscal solidarity in Europe. EURSEK is focused higher as long as 10.85-11.00 zone continues to support.
NOK – we may have reached the point at which the lower oil prices are not impacting NOK any more, as longer dated oil prices have actually risen from last week’s lows even as the front end of the crude oil has collapsed further and could trade down to almost unimaginable prices if demand shortfalls stretch out from here for another few months. Fading more downside from here in NOK, and suspect that the Norges Bank has an eye on things as well.
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