FX Update: Sentiment bounce boosts EM FX the most
Head of FX Strategy, Saxo Bank Group
Summary: A powerful boost in risk sentiment after the major US equity indices poked above major resistance is setting the tone in a likewise strong European session even after the Asian session was somewhat lackluster. We continue to scratch our heads at the markets enthusiasm here, but the move can extend further in the near term without reversing established trends.
The current narrative is that a the market is finding encouragement in the slowdown in Covid19 numbers and is looking forward to the path toward normalization, with massive liquidity provision from central banks and especially the Fed providing a backstop from any USD funding or credit crunch fears. Certainly this rally looks impressive and must be respected, but we’re still withholding judgment on the risk that the market celebration is premature. The first countries to begin announcing a schedule for opening up again – Denmark and Austria – are on a very slow time schedule for doing so.
UK Prime Minister Boris Johnson has been transferred to the ICU at the hospital after his condition worsened. He is receiving oxygen but not on a respirator and foreign secretary Dominic Raab will deputize for the Prime Minister for now. Sterling trades relatively flat here, but likely would have been higher given the strong risk sentiment backdrop were it not for his precarious condition.
AUDUSD – the Aussie was one of the most beaten down currencies within the G10 versus the US dollar on the deleveraging move into mid-March, but has rebounded smartly, with the RBA even floating the idea this morning of a QE taper if conditions improve (why on earth bring this up now?). A further squeeze on AUD positioning could bring the important 0.6200-50 zone into play once again – deserves watching for the status of both currencies here and the degree to which G10 FX is joining in the US indices attempt to put together a more optimistic stance – see more in the chart below.
EM pain eases suddenly – the EM pain we noted in early trading yesterday eased sharply over the course of yesterday’s session and then some into today’s follow on rally in risk sentiment, whether it was RUB, HUF, ZAR or MXN or otherwise. The Mexican peso is one of the more technically interesting EM’s to track after it weakened to a record low yesterday against the USD after a disappointing stimulus package announced by the President Obrador-led government. But with this comeback in risk sentiment, the USDMXN rejected the new cycle highs above 25.00 and is now a good deal back below. This has set a major line in the sand cross EM currencies after many EM’s appeared caught in a negative spiral until yesterday’s action. The EM sector deserves attention as one of the financial markets’ weakest links if conditions don’t continue to improve
.Japan – the big stimulus – when Japan moves on policy, it moves big. Japan’s Prime Minister Abe announced a JPY 108 trillion yen stimulus package overnight (almost $1 trillion) that is almost 20% of Japan’s GDP. The JPY was hardly moved on the news, as it continues to trade in line with the usual correlation with risk appetite – marginally higher versus the US dollar but weaker elsewhere.
The next session or two in global equity markets looks important for establishing whether this is an ephemeral squeeze or the beginning of a more profound stabilization and FX looks aligned with risk-on and risk-off for now with few exceptions. Tonight’s Eurogroup meeting deserves attention, perhaps more for the political tone than in expectation of any concrete new measures under discussion. We still have overarching concerns even as the ECB has spreads under control for now.
As discussed in this morning’s Saxo Market Call podcast, we look at AUDUSD as a reasonable proxy for the state of play of the US dollar and G10 FX alignment with the bounce in risk appetite. A bit disappointing so far that the local resistance here has not failed even as major US equity indices have pulled above important resistance levels. Assuming the local 0.6200+ highs are breached, however, we will shift the focus to the next major area the 0.6450 Fibo retracement of the entire sell-off sequence and then the more obvious 0.6500 area slightly higher. This still looks rather far away.
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