FX Update: The killer dollar is on the loose

Forex 5 minutes to read

John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  Markets deleverage badly again yesterday, with FX trading nervously, but volatility in currencies has not accelerated to the degree it has elsewhere. The US dollar continues to rise threateningly despite the coordinated central bank efforts to bring liquidity. The Swedish krona was under the most pressure at one point this morning as policymakers there brought out the big bazooka.


Trading Interest

  • EURUSD looks a sell in spot (or via short term options) if it closes south of 1.1050, but maximum danger with FOMC up tomorrow evening..

See Steen Jakobsen’s thoughts on where we stand and thought on why we may be near the bottom and why we may not yet be close. Also have a listen to today’s Saxo Market Call podcast.

The system is coming under enormous pressure as those who can are tapping the full extent of their credit lines and as banks are running to central banks for support. US large banks tapped the Fed’s lending window yesterday and a number of countries were out with hefty efforts to get ahead of the solvency contagion risk. France moved aggressively on that front with a raft of measures and Sweden blasted an enormous support bazooka at the economy as it has proven tardy in enacting the shutdown measures other EU countries began in previous days.

The chief thing we are looking at over the coming days, besides a general turn in sentiment, is the US dollar and whether it is once again transforming into the killer dollar that is rising across the board rather than merely against the riskier currencies that are all victims of the general deleveraging. In fact, that “general turn in sentiment” may simply require that global policymakers get together and force the USD lower, as it would be one of the easiest ways to provide relief for global asset markets reliant on USD funding. For now, the strong USD threat continues to rise – with the next test tomorrow’s FOMC meeting.

Chart: GBPUSD
The pound sterling has proven a weakling in this environment. Initially, it was easy to write the weakness off as a phenomenon of position squaring as the market was caught on the wrong foot – having put on a large speculative long in anticipation of flood of capital returning back home to the UK to invest and as the UK government was poised for a massive fiscal push. Now, we can see that as long as this risk deleveraging environment persists, the pound remains at risk as an economy that requires a strong inflow of capital to offset its current account deficit. Near term risks point to new modern record lows for GBPUSD below even the 1.2000 level.

Source: Saxo Group

The G-10 rundown

USD – it is troublesome for USD bears to see the currency creeping back higher as risk appetite comes off again today – if long end treasuries are finished in providing a safe haven, the USD will only turn by massive brute, coordinated force. Watching levels like 1.1050 in EURUSD and 108.00 in USDJPY for a sign that the USD becoming the killer dollar once again..

EUR – this is a full bore existential crisis for the EU and the greatest challenge the EU has ever faced from a solidarity perspective as the EU must get together to open the fiscal taps wide. EUR 30 billion for Italy fiscal efforts? Not even a starting point. Germany-Italy 10-year spread at 260 basis points.

JPY – the USDJPY rally found resistance at the ultimate 108.00 area and Bank of Japan printing pressures are running at a furious rate with new asset purchase announcements, but long end sovereign bonds under pressure globally makes us hesitant to continue to call USDJPY back toward 100.00 – and the USD could prove ascendant here if long yields continue to rise – regardless whether risk appetite improves.

GBP – we discussed scaling into sterling trades yesterday – but having a change of heart on the risk that we have to go much lower first – protect for the risk of short term extreme spikes lower in sterling – eventually like fading EURGBP, but it may simply be too early – need to turn the corner in sentiment across markets to start.

CHF – USDCHF uptick may prove that USD are preferred to CHF as the global financial system wrestles to get ahead of the USD funding issue... watching 0.9600+ area in USDCHF like 108.00 area in USDJPY.

AUD – AUDUSD is eyeing the 0.6000 level and set to exceed the lows from the financial crisis around that level as long as the pressure keeps up. The headlines may say that China is normalizing, but Australia looking for its own coronavirus shutdown and its mining giants are under huge pressure.

CAD – 1.4500 is the next target zone for USDCAD having cleared all relevant resistance levels, with more rate chops and likely QE to come from the Bank of Canada to dig the banking system out of its exposure to housing.

NZD – the kiwi proving less cyclically sensitive than AUD to the backdrop, so without currency intervention from RBNZ or NZ, we may see record lower prices for AUDNZD before cycle turns – watching parity next.

SEK – Sweden has mobilized an enormous package to support workers, banks and the economy, worth up to a as much as a third of GDP (though some of it is not net stimulus, such as allowing banks to abandon their countercyclical buffers, which is nearly half of the headline amount..) New QE has arrive as well, to the tune of SEK 300 billion, and the RIksbank will purchase. EURSEK is trading up to new highs on the

NOK – as long as global markets and oil markets are under intense pressure, the situation will likely be the same for NOK – looking next for how the currency behaves once market volatility begins to ease – until then, there is no readily identifiable floor for the currency.

Calendar (times GMT)

  • 1230 – US Feb. Retail Sales
  • 1230 – Canada Jan. Manufacturing Sales
  • 1315 – US Feb. Industrial Production
  • 1400 – Canada Mar. Nanos Confidence

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.