Head of FX Strategy
Summary: The USD is rising again this morning despite a strong session yesterday on Wall Street as EURUSD wilts after the German Constitutional Court made a fuss over the ECB asset purchase programme. Too early to draw conclusions, but another notch or two higher and the big dollar is showing signs of breaking higher out of its recent consolidation.
The euro was under renewed pressure yesterday in the wake of the German Constitutional Court ruling on the legality under German law of the ECB’s asset purchase programme. The court’s ruling was surprisingly ambitious in declaring the European Court of Justice’s reasoning on its assessment of ECB policy as inadequate. Importantly, it called for the ECB to address its concerns on “balancing” in particular within 3 months (balancing is the idea that the ECB has not sufficiently considered the deleterious effects of its asset purchase programme, like in keeping zombie companies alive, the impact on savers, insurance policy holders, etc.). The ECB issued a dismissive statement in response.
While the particulars here are knotty here and this won’t necessarily lead to any new outright showdown, the most important takeaway is simply that this only piles onto the overarching risk of further EU existential woes when you have the court of the largest EU economy threatening the bloc’s central bank and saying that is own central bank, the Bundesbank, may be required to stop cooperating with the ECB if concerns remain unaddressed or against German law. In the market, the euro sold off rather sharply, with EURJPY to new cycle lows below 115.00 as of this writing and the key EURUSD threatening lower as well, while Germany-Italy yield spreads widened, if modestly.
Elsewhere, markets were in rather good cheer, with a solid bounce overnight in equities after a bit of a stumble from very high levels into the close of equity trading yesterday in the US. With China back online after a holiday since last Thursday, there was perhaps some sigh of relief for risk sentiment as the onshore USDCNY exchange rate on saw a modest bump higher after the large surge in the offshore USDCNH rate on Friday as US-China trade tensions notched significantly higher. Nonetheless, this is an important background factor to watch that can move to the fore at any time. We note in our title and intro that the USD is at risk of rising again – the confirming factors for a larger scale new wave of USD strength would likely be a more pronounced bearish reversal in this equity market, a EURUSD below 1.0750 on a daily close, USDJPY bouncing back above 107.00 on a daily close, and the biggest of all, USDCNY trading above 7.20.
Chart: EURNOK
The EURNOK exchange rate is at the confluence of a number of interesting themes and influences, including crude oil, risk sentiment and EU existential risks – as the latter tend to only play out in the likes of EURUSD and EURJPY and unlike the Yesterday saw a massive surge in the front end of the crude oil futures curve, helping the NOK to firm and taking EURNOK to within hailing distance of the key consolidation lows above 11.00. It is worth noting that the longer term crude oil prices (from June 2021 onwards, Brent crude have yet to reach a new two-week high. To drive a significant NOK recovery, we need stronger sense that the world economy is on the mend and/or a change of attitude on whether the EUR Risks from existential concerns can broaden beyond EURUSD, EURJPY and EURCHF (as was the case during the EU sovereign debt crisis, though oil was above 100 dollars per barrel for much of that crisis, a key difference.)
The G-10 rundown
USD – the greenback looking firm this morning – but broadly speaking neither here nor there. As noted above, watching the pivotal risk sentiment levels and for a breakdown in EURUSD and how USDJPY deals with a sell-off in equities, if one ever develops, for signs that the USD remains king of the mountain. Bloomberg survey has today’s ADP payrolls change at -21 million, but market only cares for shape of future data and the recovery, it seems, not the present tense.
EUR – the euro remains under pressure ahead of an EU leader meeting today (not one that is likely to grapple with the key issues at hand as it is a friendship summit with Western Balkan leaders (former component of Yugoslavia plus Albania) and we continue to watch EURUSD for signs the single currency is going over the edge.
JPY – the grinding strength continues, led by a EURJPY focus, though without any raising of the temperature in options volatility and risk reversals in USDJPY – quite the contrary in the latter as put premiums continue to shrink. Very curious if a risk sell-off (will one ever arrive again in earnest?)sees the USD or JPY coming out on top.
GBP – sterling has been unable to take the key local range support in EURGBP below 0.8700 so far and looks a bit wan against the US dollar despite the surge in risk sentiment. Not an impressive performance, and with UK still in a bit of an earlier stage in the Covid19 crisis than mainland EU countries, it will take some time to get back online with thoughts on the terms for the end of the Brexit transition period, etc.
CHF – less evidence of pressure on the euro in EURCHF – has the market given up on fighting the SNB or is the latter simply making an impressive stand ahead of 1.0500 as the last couple of weeks of sight deposit growth suggest?
AUD – a massive March surge in Australia retail sales, apparently in part driven by hoarding and price gouging for supplies being hoarded as much as added volumes. Essentially a non-factor, and we judge the recent AUDUSD reversal as tactically bearish as long as we remain below 0.6500.
CAD – the lack of reactivity to a huge surge in oil prices and despite a positive risk sentiment backdrop looks CAD bearish until proven otherwise – lack of technical inertia here, however – first sign of something on the move would be a close above 1.4150.
NZD – the NZDUSD chart looks bearish if we remains below around 0.6100-25 after the reversal this week, though likely remains tightly coupled with global market sentiment direction.
SEK – EURSEK is an interesting one to watch as the euro comes under broader pressure and as the Riksbank and the Swedish government are in a scuffle about the legality of the RIksbank’s plans to purchase corporate bonds.
NOK – EURNOK pushing down on local support ahead of Norges Bank tomorrow. Not sure how far the move can extend lower on a break without a more notable recovery in oil prices, unless we are also seeing a broadening EUR weakening.
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