Head of FX Strategy, Saxo Bank Group
Summary: Currencies are taking their lead from a surge in risk appetite overnight as Chinese markets bounced back from the tremendous gap lower on Monday. The RBA decided not to chop rates despite bushfire and coronavirus fears driving a modest bounce in AUD. In the US, we still await the result of the Democratic Iowa caucuses after a glitch prevented a result overnight.
A number of pivotal levels have been reached across commodity and fixed income markets recently on the fallout from the coronavirus crisis, even if the impact into major equity markets has been limited. Levels like the 1.50% yield point for the US 10-year T-note and the 2.00% 30-year bond have both been reached and crude oil has slipped to major psychological and chart price points as well. These are the kinds of levels . Among currencies, the AUDUSD has reached the major 0.6700 area and looks very similar to the action in the crude oil and other commodities charts as we discuss below.
The RBA refrained from hiking rates, as most expected (though I thought they might go for a cut). The AUD bounced modestly in reaction as the RBA cited hopes that the economy is still on a solid footing, noting strong employment and real estate prices. I suspect that the RBA is simply reversing what little policy easing room it has left before launching QE to wait for conditions on the ground to be outright recessionary before cutting rates again.
Yesterday’s US ISM Manufacturing Survey for January bounced back above 50.0, a surprisingly strong result, but one marred by the fact that coronavirus situation was only impacting in the final days of the month. As well, the employment sub-index. Pessimists were hasty to point out that back in early 2008, the ISM Manufacturing never got as low as it did during this recent episode and bounced back above 50 for a couple of months before lurching into a nasty slide as the global financial crisis entered its critical phase.
We were meant to find out the results from the very first Democratic primary in Iowa yesterday, but some sort of technical glitch has prevented those results from emerging, with plenty of conspiracy theories afoot that this may have been about preventing a strong result for Sanders emerging. We’ll refrain from rumor and wait for the facts – but this could be a sign of a bitter and divided process as the populist progressive wing of the party is an existential threat to the centrist core that doesn’t understand what the Trump phenomenon and direct democracy are weakening the influence of traditional party structures.
We are taken aback at the market’s confidence that we will quickly get over this coronavirus situation with little lasting impact – preferring a cautious stance here until more is known on further risk of the disease spreading. In the meantime, consider the next leg of the US response to perceived currency manipulators as the US Commerce Department is mobilizing for potential duties on countries labeled as currency manipulators.
Chart: AUDUSD
After the RBA no-cut decision, the AUDUSD price action was rather muted even if AUD was a bit more firm in some of the crosses. The key here for AUDUSD is the 0.6700 area and whether commodity prices and the Chinese growth outlook can stabilize and improve from here. We’re not hopeful for the AUD outlook and would lean against rallies for further downside risks into 0.6500 and lower.
The G-10 rundown
USD – the US dollar is lower against EM currencies, which are enjoying a snapback rally on the bounce in risk appetite overnight, but is still neutral within the G10 – watching for the next important US data tomorrow (ISM Non-manufacturing and Friday’s jobs data) but also the Democratic primary results through the huge March 3 Super Tuesday, which gets us well over a third of the nation having voted in the primaries.
EUR – the EURUSD supermajor has shied back away from the 1.1000 level after the recent approach, and interesting to note that Friday’s ugly risk off correlated with a spike higher in EUR – suggesting that the currency may do well in carry-trade unwinding situations/risk off.
JPY – the yen serving its purpose as the highest beta currency to both risk appetite and safe haven yields as USDJPY slips back above 109.00 after bouncing off the 200-day moving average area below 108.50.
GBP – under heavy pressure as we enter the post-Brexit era on the uncertainty of the shape of the eventual EU trade deal and the delays this will mean for major manufacturers.
CHF – the franc rather modestly offered on the strong resurgence in risk appetite – rather lower beta to the ups and downs in risk sentiment swings than is the case for the JPY.
AUD – the RBA no cut shores up the downside risk in a heavily oversold currency, but a lot of heavy lifting needed to get our hopes up for the beleaguered Aussie…
CAD – USDCAD has more or less explored the full extent of the medium term range to the upside into 1.3300+, and oil prices and the Canadian and US economic outlooks need to show sustained promise for the pair to avoid slipping higher still.
NZD – kiwi traders are watching for the Q4 jobs and wages data tonight for relative strength trades like AUDNZD, which tried to turn the corner on the RBA meeting overnight.
SEK – a surprisingly strong Swedish PMI survey yesterday offers modest support, but EURSEK needs to plunge well back through the 9.60-65 area pivot zone to prove that it has turned the corner.
NOK – the trading ranges expanding in EURNOK recently and the consolidation back lower looks impressive on the day until we have a look at how far the squeeze higher has taken the pair – to its highest close ever. NOK likely to continue trading in correlation with oil prices here.
Today’s Economic Calendar Highlights (all times GMT)
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Steen Jakobsen,
Chief Investment Officer
A political switch in China towards less tough control of its people and companies may kick things back into gear.
Redmond Wong,
Market Strategist
While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.
Chris Dembik,
Head of Macroeconomic Research
As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.
Peter Garnry,
Head of Equity Strategy
New alliances and collaborations outside of China may lead to prosperous times in Asia.
Charu Chanana,
Market Strategist
For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.
Peter Siks,
Investment Coach
Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.
Ole S. Hansen,
Head of Commodity Strategy
2023 could be a tough year for currencies but EUR and JPY may have some upside.
John J. Hardy,
Head of FX Strategy
The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.
Jessica Amir,
Market Strategist
From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.
Mads Eberhardt,
Cryptocurrency Analyst
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