FX Update: A nervous tilt into the weekend, also for the USD

Forex 5 minutes to read

John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  The US is at risk of an exponential breakout moment with coronavirus awareness and shutdown in economic activity over the coming days and weeks, a situation that appears to be finally wearing on the US dollar as the expected Fed policy rate is already at zero and USD traders await QE forever and possibly more in response.


Trading interest

  • Long (Expiry Nov 6 – days after election) 1.1200 EURUSD calls.
  • Short USDJPY for 100.00, stops above 107.50 (or equivalent in option put spreads, etc.)
  • Squaring EURJPY shorts for modest profit
  • Squaring AUDUSD shorts at slightly worse than breakeven (above 0.6630)

 A quick and dirty update today, as time-to-market is more imperative than a lengthy perusal of what is going on here, but the headline is that the USD behavior is changing – and here is possibly why:

US treasury yields are collapsing at breathtaking pace (10-year collapsing to 77 basis points as I write!) – the Markets are already pricing more than 50 basis points of further easing at the FOMC meeting on March 18 and I wouldn’t be surprised at all to see the Fed chopping 100 basis points given the high risk that US economic activity goes into an unprecedented nosedive in coming days and weeks on self-quarantining response to the coronavirus outbreak.

The Fed might even chop 100 bps before the March 18 meeting and tease that it is considering purchasing “other assets” (particularly corporate debt eventually, but also possibly stocks via ETFs a la BoJ?) if the market throws a proper tantrum.

It is interesting to see the patterns in FX changing as the USD struggles here even as risk is off – it appears the market is taking a different approach on the USD – we are keeping an open mind even in AUDUSD on whether further risk selling will see this pair higher or lower. This is a monumental shift, if so, and we prefer to focus on USD shorts now rather than shorting risk currencies (short USDJPY as noted in the Trading Interest above, for example).

EURUSD has cleared a major hurdle above 1.1200 – this opens up the 1.1400+ area.

Keep positioning light ahead of the weekend – news flow over the weekend and the fear of that impending flow ahead of the weekend (in terms of how the market closes today) could keep temperatures very high.

Please have a listen to today’s Saxo Market Call podcast, in which I had a great discussion with my colleague and equity strategist Peter Garnry on these very uneasy markets going into the weekend.

Chart: AUDUSD
The action in AUDUSD here is not particularly remarkable, except in the light of the weak risk sentiment and how that is failing to pressure the pair lower – could we see the AUD outperforming the USD even in a further deleveraging cycle? We keep an open mind and would judge it a very bullish development for the near term already and especially if it clears the 0.6700 area at the as a trigger for a further squeeze higher.

Source: Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1330 – US Jan. Trade Balance
  • 1330 – Canada Jan. Int’l Merchandise Trade
  • 1330 – Canada Feb. Unemployment Rate
  • 1330 – Canada Feb. Employment Change
  • 1330 – US Feb. Change in Nonfarm Payrolls
  • 1330 – US Feb. Unemployment Rate
  • 1330 – US Feb. Average Hourly Earnings
  • 1500 – Canada Feb. Ivey PMI

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.