FX Update: USA in the coronavirus crosshairs

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  Risk sentiment tried to stage a recovery yesterday, perhaps as the odds for Bernie Sanders to become the US Democratic nominee for president have plummeted since Super Tuesday. But we still see overhanging risks to sentiment on risks of a widespread US economic shutdown from the coronavirus outbreak.


Trading interest

  • Long (Expiry Nov 6 – days after election) 1.1200 EURUSD calls.
  • Short EURJPY with stop above 120.50 for 117.00 or lower
  • Short AUDUSD above 0.6630 with stop above 0.6710, looking to revisit cycle lows

The market tried to find renewed hope yesterday, some would argue on a second-guessing of the buy-the-rumor and sell-the-fact of the Fed’s emergency cut, with others chiming in that the true source of the bounce was Biden’s head-spinning comeback in the US Democratic primaries, which are seeing the odds of a Bernie Sanders win fading to almost nil. The key date on that front appears to be .

I don’t like to wade into the political debate on the coronavirus response, but US President Trump’s response and rhetoric around the coronavirus outbreak are strongly tilting the odds against him in November if the outbreak spreads as badly as I fear it is about to. As recently as overnight he pooh-poohed the symptoms of the virus and suggested that the US cannot afford to indulge in the scale of shutdowns other countries are. Elswhere I have seen anecdotal reports of obvious candidates for Covid19 testing not able to -or not “allowed” to - get a test, suggesting that the disease is spreading largely unchecked in the US. With test kit production set to rise sharply in the days and weeks ahead and new rules from the US CDC allowing more widespread testing, we can expect the number of cases in the US to explode in the coming few weeks and the risk for widespread economic disruption to grow, both from officially motivated- and self-quarantining behavior.  That disruption was certainly nowhere in evidence in February’s US ISM Non-manufacturing survey, which at 57.3 was very much at odds with the Markit Services PMI Survey for the same month (final print for the month unchanged at 49.4). The March numbers likely to be in a very different place.

The Bank of Canada cut rates by 50 basis points – nominally a surprise, though the odds were already tilting more in favour of 50 than 25 going into the meeting yesterday. The market reaction has so far been rather restrained as risk appetite bounced strongly yesterday and oil markets are holding their breath ahead of OPEC and OPEC+ (with Russia) meetings today and tomorrow, respectxively. A further risk deleveraging and downside in the oil price from coronavirus fears could lead to an extension higher in USDCAD.

The market is pricing high odds that the Fed chops another 50 basis points at the March 18 FOMC meeting, an almost guaranteed action if the Covid19 case count starts to take on the expected exponential rise in the US as testing regimes spread. Before we take solace in what that means for stimulating the economy, let’s recall that the last time the Fed was chopping rates this frantically was in early 2001 and early 2008 – well before the worst portions of the market deleveraging that eventually took place. It takes time for the Fed to get ahead of the curve and for the stimulus to work through the system – on the order of 12-18 months.

Chart: EURJPY
EURJPY has been a choppy mess over this episode of market turmoil, and we suspect the euro side of the equation here has been held aloft by unwinding of very large speculative- and carry trade funding shorts. But for the longer term, we are concerned about the outlook for Europe, in particular on the immigration issue which is becoming more pressing at the border with Turkey at the moment, but as well as difficulty in coordinating the scale of fiscal response needed to deal with the coronavirus fallout and the risk that Italy continues to represent as it dips into an ugly recession here. EURJPY is a mess here, but would look for a weak close below perhaps solidly below 119.00 to signal that the market is beginning to fret euro downside risks beyond the positioning adjustment.

Source: Saxo Group

Today’s G-10 rundown

USD – the US dollar is rather weak on this spot of weak risk sentiment to start the day – but does that remain the case in a deeper market deleveraging move?

EUR – EURUSD is bid on the day but we have concerns for Europe on multiple fronts as noted above. Still, likely to do better than most other non-USD and non-JPY FX regardless due to liquidity and positioning in any general deleveraging push.

JPY – we like the JPY here for an extension higher – focusing on EURJPY (perhaps mistakenly) but sad that we took profit early on USDJPY shorts, as we believe US could be focal point for next wave of coronavirus concerns.

GBP – the 200-day moving average provided a relief point for sterling selling in both EURGBP and GBPUSD, but far too early to signal the all clear and general market deleveraging and a widespread coronavirus shutdown in the near term are material risks for sterling.

CHF- watching the next round of risk deleveraging, if any, for the latest colour on CHF.

AUD – the Aussie is trying to extend the bounce here as some key industrial commodity prices have stabilized and Chinese equity market posted a new high for the cycle overnight – we lean against the move as long as AUDUSD stays below 0.6700

CAD – watching oil prices over the next couple of days of OPEC meetings and risk sentiment to see if the rally can extend. Not a major surprise that BoC cut 50 and they will likely track whatever Fed does from here, even if with a delay.

NZD – the kiwi putting in a rally, possibly on the narrative of Chinese normalization versus risks of disruption elsewhere. First major resistance area in NZDUSD looks like current levels (from 0.6325) up to 0.6375.

SEK – given EU concerns on the coronavirus reaction, SEK upside will likely prove tough to come by.

NOK – if oil prices continue lower, EURNOK likely to extend higher to new records – NOK traders should watch oil market reaction to OPEC meetings today and tomorrow.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1300 – UK BoE’s Haldane to Speak
  • 1330 – US Jan. Factory Orders
  • 1330 – US Weekly Initial Jobless Claims
  • 1530 – US Weekly Natural Gas Storage
  • 1700 – UK BoE’s Carney to Speak
  • 1745 – Canada BoC’s Poloz to Speak
  • OPEC Meeting
  • 2330 – US Fed’s Kaplan (Voter) to Speak
  • 0030 – Australia Jan. Retail Sales
  • 0100 – US Fed’s Kashkari (Voter) to Speak
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.