FX Update: Looking for FX themes beyond risk-on, risk-off

Forex 3 minutes to read

John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  Today we look for interesting developments in this market outside of the broader tendency for currencies to trade in knee-jerk reaction to risk-on, risk-off developments. We note in particularly the two-way risks for the euro from here, as well as interesting sterling strength and the difference in a CAD versus a NOK if oil prices are bottoming here.


A brief update today as today I wanted to focus on pulling out a few prominent developments beyond the tendency for many FX pairs to correlate with the risk-on, risk-off swings in equity markets. Of course, the key overriding question remains the same here – whether the risk deleveraging has completed its course for now, and if not, which currencies will be hardest hit by a further deleveraging – but still, there are a few developments that are providing a signal outside of the usual correlations in G10 FX.

Watch out for the US weekly initial jobless claims data today – expected at 3.7 million according to Bloomberg consensus. This data is far more accurate and timely than tomorrow’s Nonfarm Payrolls Change for March, as the latter includes all manner of statistical assumptions because not all of the real-time figures are available at the time of the data release. For perspective, and as we mentioned in today’s Saxo Market Call podcast, if the US economy loses even half of 47 million jobs that the St. Louis Fed’s Bullard said are at risk, the unemployment rate in the US will rise to far beyond the worst-since-the-Great-Depression level of 10.8% from 1982.

Oil currencies – CAD vs. NOK: a peppy bounce in crude oil this morning on the news that China would like to fill up its strategic reserves. Spot prices on the ground for many crude grades have reached absurd levels that are a mere fraction of the major futures prices and the question looms whether we have reached some sort of absolute bottom in oil prices. Well, that ultimate low has to be close, because at these prices, operators need to shut in production as fast as they can. On the FX side, we would suggest that NOK is farther along in adjusting to the oil shock than CAD and that the latter can continue to suffer even if oil prices stabilize from here, on the private debt bubble angle in Canada and the likely need for the Bank of Canada to go very big in keeping the Canadian banking system operational from here and likely loading up a lot of the private debt onto the public balance sheet (rather than allowing massive defaults.). On that note, we still think USDCAD upside risks are a prominent.

EURJPY and EURSEK – we watch both of these from a technical angle, assuming that JPY outperforms in any further deleveraging environment, and with the added twist that EU existential risks are afloat here, even if the market consensus isn’t particularly concerned. But we are in a narrow window of time in which the EU simpæly must show solidarity and, however “fudging” the approach, must move toward mutual debt . EURSEK is rather different in its reaction patterns to the policy response in the EU– it could actually go higher in a general risk deleveraging extension and on concerns for the Swedish economy from an even weaker EU outlook if EU leaders continue to fiddle, but SEK should outperform strongly the euro if the EU takes the steps towards a more common fiscal approach that bolsters the outlook for the EU.

GBP – very impressed with the recent stability and long sterling exposure a theme worth investigating – particularly against the Euro – the UK policymakers are ready to bring whatever support is necessary after the misery of the post Brexit referendum years. This whole Covid19 crisis caught the UK at such an odd time – just in the middle of a huge upswing in confidence and fresh capital flows coming back onshore after the currency had been severely discounted.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Weekly Initial Jobless Claims
  • 1230 – US Jan. Trade Balance
  • 1400 – US Feb. Factory Orders
  • 1430 – US Weekly Natural Gas Storage Change

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.