FX Update: Widening coronavirus fallout sees muted FX impact

Forex 4 minutes to read

John Hardy

Head of FX Strategy

Summary:  This more intense risk off move is hitting currencies more forcefully, though FX is far from leading the charge. Interesting to note that for today, at least, the yen is proving a match for the USD dollar in strengthening against less liquid currencies as a safe haven.


Trading interest

  • Long USDCAD for 1.3500+, stops below 1.3220
  • Buying long term (Nov 6 – days after election) EURUSD calls

The more full-bore risk off move is seeing FX playing more according to the old script as record lows in US 30-year benchmark and S&P futures off over 90 points as of this writing is seeing the USD, and even more so, the JPY trading as safe havens to start the week versus all other currencies, while the Euro is somewhere in between. The hardest hit currencies have been in EM, though still we are talking about mild moves in FX in general relative to traditional sensitivities. The Ruble is off a hefty 200+  basis points versus the USD from Friday’s close as I write but the traditionally more fragile South African rand is off less than 100 bps.

Looking at some of our risk indicators like corporate bond spreads and emerging market credit spreads, they have shown little cause for concern and the latter in particular remains incredibly tight relative to the recent pickup in EM FX volatility. These no longer appear to be good forward indicators of market risk as they were in the past – particularly ahead of the global financial crisis – when they were sending out loud divergence signals well ahead of the big market turn. In all, it leaves us with the feeling of flying a bit blind on the true level of market “potential energy” and risk relative to past market regimes..

To turn the tide here for markets, we need a turn in coronavirus news, one that has so far entirely failed to materialize and may be hard to achieve for a long time if the contagion spreads to countries less able to deal with the outbreak like the strange case of Iran. Until then, we will continue to watch for strain in credit markets from the the disruptions in supply chains and shutdown of activity. This is not a situation where traditional stimulus works very well. Small and medium sized actors in particular who are facing a funding squeeze – but for now, we will look for individual high profile stories and how the authorities and markets deal with these on concerns of a contagion risk (especially from sudden motivation to switch portfolio allocations, important because we suspect that passive portfolio flows into, for example, bond ETFs and funds, are behind the lack of pricing of risks thus far.)

A couple of things to round up from the end of last week and over the weekend. The flash US Feb. Markit PMI was very ugly at 49.7 vs. the prior 53+ reading – a dramatic heads up if there ever was one, though we will need more confirmation than this one data point. Also out on Friday, the Fed’s Lael Brainard delivered an address discussing the Fed’s “new tools” for a coming crisis: basically yield caps and encouraging strong fiscal stimulus (with the yield caps an implicit guarantee to monetize national deficits). This is an important signal – but not absorbed for the moment. Finally, over the weekend, Bernie Sanders won big in Nevada – getting 47% of the votes with 88% of districts reporting – far more than double the closest competitor Biden. Sanders is looking the runaway favourite to become the nominee. More on that later this week.

Chart: USDCAD
USDCAD has not sufficiently absorbed the risks to CAD from both a widening coronavirus contagion and a weakening US and Canadian economy (note Friday’s ). I am astounded that oil prices have held up as well as they have, but if oil plays catchup with the news, new low prices may lie ahead there and feed some catchup downside in CAD relative to some of its peers. With the G10’s highest policy rate, Canada has the most to cut and the economy features an overleveraged private sector relative to a US private sector that has, believe it or not, been deleveraging in aggregate since the financial crisis. Watching for the potential here that a new close above 1.3300+ highs of late leads to a significant extension higher still.

Source: Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1330 – US Jan. Chicago Fed National Activity Index
  • 1530 – US Feb. Dallas Fed Manufacturing Activity
  • 2000 – US Fed’s Mester (Voter) to Speak
  • 2100 - South Korea Feb. Consumer Confidence

 

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.