Head of FX Strategy
Summary: Coming into this morning, the US dollar had moved sharply lower all week after the Fed launched its howitzer of measures at the start of the week. The USD need to stay weak to support a reflation narrative so we look at the close today as rather important. Elsewhere, the euro may have a hard time rising after a disastrous EU meeting.
Please consult today’s Quick Take for a great news roundup and setting of today’s market and trading agenda and then today’s Saxo Market Call podcast in which our macro strategist Christopher Dembik picks apart the terrible EU meeting yesterday among other topics.
It is a very important session ahead with the weekend and a likely ugly stream of Covid19 news looming after a week that saw a major bottom posted at the beginning of the week in risk sentiment and a high in the USD. If anything, the USD has moved faster and more in many places, relative to its ascent, than other risk appetite measures. Yesterday’s session looked promising for risk sentiment, but we are already retracing that move aggressively overnight and into this morning.
One of the things justifiably weighing on sentiment yesterday was the terrible EU meeting that has put a hold on any “backdoor debt mutualization via EU coronabonds” narrative for the moment as the traditional ex-France core EU countries remain dead set against mutualization. With Covid19 accelerating here into a peak and economic growth collapsing, when is this crisis sufficiently grave for the EU to get its house in order? Listen to Christopher on the podcast link above on the depths of the dysfunction and the irony of Italy getting help from Russia and China while unable to get more aid from fellow EU nations. Only the heavy hand of the ECB is keeping things in check in financial market terms as Italy-Germany spreads remain orderly after yesterday’s meeting. This was a spooky development for Europe and could keep a lid on the euro for now and then some until we see a more coordinated approach to this crisis in the EU – stay tuned.
We can’t neglect the Covid19 crisis news and still are faced with a rampaging growth in cases in the US that may be slower to slow than elsewhere due to the piecemeal response. As well, do any of know how our economies return to normal and on what time scale – this is still the key risk to general sentiment, authorities’ escalating responses notwithstanding.
Chart: EURUSD
The chart below shows the dramatic roller coaster ride in EURUSD that as of now has merely proven a wild series of gyrations, only to return to the same levels prevailing before the crisis. Volatility will stay high here as the jury is still out on whether the Fed’s measures are enough to keep the world ahead of the global funding situation and whether the market starts to judge whether other countries’ policy moves are on the same level as the US’ policy response. For the euro side of the equation, it is about how long EU leaders can afford to dither while the ECB does what it can to keep the ship from leaking. The 200-day moving average and the 1.10-1.1100 area in general is an important pivot zone for now to the upside.
The G-10 rundown
USD – the USD springing back in early European trading today – an important coincident indicator for risk appetite. More policy forthcoming – perhaps with the US Treasury joining in more forcefully – if the USD pulls back to the strong side.
EUR – concerns for the euro and Europe if the EU cant coordinate a more profound fiscal response even if ECB supporting strongly at the margin by having abandoned former rules on purchase allocations across the EU.
JPY – big questions for quarter and Japan financial year-end loom over the end of this month and with JPY crosses providing high beta to the swings in risk appetite. In more normal times, such low long US yields would be more JPY supportive.
GBP – the GBPUSD rally ran all the way to 1.2300 in this epic move off the bottom, but the move may need digestion. The UK government responding strongly on the virus now and has luxury of control over its own money printing!
CHF – the new dip in sentiment weighing on EURCHF again, but with SNB likely leaning against. Down the road – wondering how Switzerland deals with the aftermath of one of the world’s worst housing bubbles – the script could flip suddenly on the CHF down the road.
AUD – the Aussie rally extended all the way above 0.6100 before a sharp reversal this morning. If risk sentiment can’t stage a recovery, AUDUSD and AUDJPY could post an ugly daily candlestick today.
CAD – the correction all the way to 1.4000 looks overaggressive given the state of oil markets – this is perhaps the first pair to lean against for the USD to bounce back given the oil situation.
NZD – the kiwi back to outperforming the AUD as sentiment deteriorates, and the NZDUSD and NZDJPY moves off the lows were enormous and are up against important resistance on respective charts.
SEK – the 10.90-11.00 zone in EURSEK shaping up as the important pivots. Last nights weak EU meeting no help for the SEK, and the uniquely lax Swedish Covid19 policy response is a high stakes gamble.
NOK – the NOK recovery extended very far considering how weak crude oil prices remain. One support may be that increased fiscal response from Norway requires much larger NOK purchases.
Upcoming Economic Calendar Highlights (all times GMT)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
