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
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.
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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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