FX Update: USD comes roaring back

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  Yesterday saw a blow off extension of the recent rally in risk sentiment on the narrative of endless Fed liquidity provision, a driver that also extended USD weakness. But we have seen quite the spike and now pivot back stronger in the USD into European trading this morning that has quickly changed to tone and drawn an important line in the sand here.


The narrative we are running in this morning’s Market Quick Take and to a large degree in today’s Saxo Market call podcast is the “Wall Street versus Main Street” paradigm. While the big banks and many observers are peddling the “Don’t fight the Fed” narrative. We note that the state of Main Street is the key longer term issue here beyond what we are seeing in the impressive upswing in risk sentiment, in that the Fed’s efforts at massive liquidity provision are mostly only addressing the liquid, listed companies that employ a small fraction of total jobs in the US, while SME’s provide 80% and more of all jobs in the US and are not able to access the same scale of bailouts, nor on the same terms. And while the Fed can wave its magic alphabet soup wand and create a facility that immediately bails out a junk debt issuer, the provisioning of SME support is proving slow, of smaller magnitude, and too often taking the form of loans. In FX, the “don’t fight the Fed” narrative drove the USD weaker over the last few weeks, but judging by today’s price action and the technical situation in many USD pairs, we have just seen quite the pivot in market action which has provided a hook for USD bulls to get involved again.

Beyond the risk-on, risk-off behavior in evidence across markets, a game that FX is also playing here, we would note additional concerns for all oil-linked currencies (it’s tough for the Fed to put oil on its balance sheet, although it probably would if it could figure out how) as the IEA has come up with huge demand drop estimates for the entirety of 2020. The crude oil market is in an epic contango, with Brent spot month crude trading at 28 dollars (was 30 dollars earlier this morning…) while the December. If available storage is filled to capacity over the coming month or two and demand doesn’t snap back as quickly as many hope, we could be in for a far more sustained bout of low prices than the market is pricing, with further risks to CAD, NOK and RUB.

We are more concerned than ever about Europe after Italy’s president Conte has spoken against the deal his own finance minister agree to in the Eurogroup meeting last week, saying that he would never agree to receive funds from the ESM, fearing the kind of “troika treatment” that Greece suffered during the EU debt crisis. Italy BTP’s sold off badly yesterday and to a degree this morning as well. The next meeting of EU heads of states represents the next crunch point for whether existential concerns accelerate. As our CIO Steen Jakobsen points out on this morning’s Saxo Market Call podcast, the agreed sums in the rescue package put together by the Eurogroup meeting last Thursday are in reality a small fraction of the headline half a trillion EUR figures.

Chart: EURUSD
EURUSD is quietly coiling around without much conviction here as the EUR shows far less beta in rising and falling against the US dollar during the recent dramatic swings in USD pairs in correlation with risk sentiment. But we would look here and at EURJPY for the potential for EU existential risks to begin to weigh over coming meetings of heads of state in the EU if the bloc can’t show a more united front – the cost of Italy shedding itself of its commitment to the euro is falling rapidly by the day. Technically, if the pair is taking out the recent sub-1.0800 lows again, it would open up the view to a test of the sub-1.0650 cycle lows.v

Source: Saxo Group

The G-10 rundown, express edition

USD – big comeback has us marking this week’s lows as important lines in the sand.

EUR – again, watching for more isolated weakness along the lines of existential concerns.

JPY – broadly firm on risk off, but notable that as USD comes back, it does so versus the JPY as well.

GBP – unable to maintain a rally stance as risk appetite softens – a key signal and note that GBPUSD pivoted right at the 200-day moving average. In EURGBP, the Covid19 breakdown level was around 0.8600 in EURGBP.

CHF – EURCHF under pressure and could get worse if EU existential concerns rise further, all while SNB throws full weight behind slowing CHF ascent.

AUD – a perfect test of the 61.8% retracement level in AUDUSD at 0.6450 we mentioned yesterday and the scale of the ensuing sell-off draws a clear line in the sand. Further evidence of breakdown if 0.6215-0.6200 gives way. Watch out for the Australia jobs report overnight after a collapse to a record low consumer confidence number in April.

CAD – concerned that oil prices can collapse further and some Canadian grades could go to zero or worse if storage fills. With sharp rally today, the USDCAD bulls have their hook and risk/reward levels established. Not sure if Bank of Canada is ready with new measures already today – but am sure they won’t be hawkish…

NZD – we think AUDNZD has turned back higher in secular sense, but if global outlook concerns pick up from here, could be some backtracking there. NZD bears should have a look at NZDUSD and NZDJPY here.

SEK – EURSEK never took out the downside pivots that extend as far as 10.70, but looks rather inert here. Valuation is stretched, but SEK needs a positive outlook to thrive.

NOK – oil concerns could mean a test of the ultimate highs in extremis, but suspect Norges Bank will want to keep things more orderly this time around if NOK under heavy pressure.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Mar. Retail Sales
  • 1230 – US Apr. Empire Manufacturing
  • 1315 – US Mar. Industrial Production
  • 1400 – US Apr. NAHB Housing Market Index
  • 1400 – Canada Bank of Canada Rate Decision
  • 1800 – US Fed Beige Book
  • 0130 – Australia Mar. Unemployment Rate / Employment Change
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.