FX Update: EM strains, Covid19 exit path questions dominate

Forex 4 minutes to read

John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  The Trump administration is doing its best to talk up the oil price, but we still see CAD at further downside risk here and we are noting considerable signs of strain across EM. Finally, as we head into the weekend, breaking news of Covid19-related shutdowns in Singapore today suggest post-virus outbreak exit paths will prove difficult.


I will continue with the quick FX update for now as our usual morning output takes up all of my bandwidth in the early hours, including our morning QuickTake and the Saxo Market Call podcast. On that note, here are our key focus points for today.

Its not the data right now, it’s the expectations for an exit path. Yesterday’s astonishing 6.6 million in US initial weekly jobless claims showed two things

  • One: the incredible scale of job losses and the fact that the US unemployment rate will spike far higher than its worst level since the global financial crisis, which was 10.8% in 1982 (Interesting to note that during the global financial crisis the top was far more “rounded” than the 1982 episode, peaking at 10.0% but not falling below 8% until almost three years later in 2012. After the late 1982 spike to 10.8%, the 8% level was reached in early 1984  a mere 15 months later – as the US economy at the time had a far different composition and far more factory/production workers relative to service jobs. This time around, with even more generous benefits for the unemployed, the fall in unemployment from an even higher peak could prove even slower – more on that in future updates)
  • Two: It’s not about the data right now. This is the single most horrifying number I have seen in my adult life, and yet elicited no market reaction on release. This shows more than anything that it is about the exit path from Covid19, not about the next month or two of data the market is discounting has already discounted as historic and unprecedented. On that note, it is disconcerting this morning that Singapore is announcing a new lockdown, closing all schools except for distance learning and most workplaces. This is not the “post-Covid19 model” the market was looking for earlier.

Still focusing on CAD: absolutely crazy gyrations in oil markets yesterday as US President Trump tried to talk up the prospects for major output cuts, but as our Ole Hansen points out, shutting in production is a difficult thing to do and can compromise the long term ability to resume production down the road.  This morning, Trump was at it again, and oil prices tried to rally. Regardless, we continue to focus on the damage done and ongoing for CAD in particular from this episode of weak prices and where the Canadian economy was as it entered this crisis, also discussed yesterday. It will take far more to shake us from our bearish conviction on CAD and the risk of further upside in USDCAD before we have reached a cycle top.(By the way, note that after a huge spike yesterday in crude oil futures for the longer term, say December of this year, ended the day in the middle of the range of two days ago – i.e., unchanged).

Next Tuesday next test for EUR – we have discussed the political risks in the EU Rising on its response to the Covid19 crisis in recent days – the next key test is the Eurogroup meeting (of EU finance ministers) next Tuesday.  EURJPY and EURUSD perhaps equally viable options for testing risks of existential cracks opening up again the in euro, even if the ECB is keeping the evident risk in sovereign bond spreads within the EU, etc. very orderly at the moment. The EURJPY pair is a bit closer to the key cycle lows over the past couple of sessions down around 116.00-25.

EM strains are getting grave in places – some of the weaker links across EM are a growing concern, especially ZAR and TRY, where in the former case, the ZAR is suffering an aggressive depreciation and the CDS price (insurance against default on sovereign S. African bonds) has risen sharply to new cycle highs close to 500 bps today from below 200 bps before the Covid19 outbreak dominated market attention. For Turkey, we use the forward implied yields and implied points to show that the market is already pricing in an aggressive further TRY depreciation. Yesterday, USDTRY 1-month forwards hit 35% (annualized). We also note HUF weakness as Hungary’s Orban now rules the country by decree.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Mar. Change in Nonfarm Payrolls
  • 1230 – US Mar. Average Hourly Earnings
  • 1230 – US Mar. Unemployment Rate
  • 1400 – US Mar. ISM Non-manufacturing

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