Head of FX Strategy
Summary: The EURUSD is perched on the 1.1000 knife edge ahead of the FOMC meeting, where the market will focus on how the Fed signals its intentions around the continued pace of balance sheet growth. As well, the level of concern on the fallout from the coronavirus situation will garner attention, as commodities and some currencies are still in a funk.
Looking at the major US and some other equity indices globally and to a degree the safe haven bonds, we are seeing a relatively robust bounce-back from coronavirus fears as the most liquid markets are trying to erase the two-day slide from Friday and Monday, while many China-linked commodities like copper, iron ore, and to a degree crude oil, are dead in the water as the market. News of virus spread aside, anecdotal reports of activity on the ground across large portions China having ground to a halt are a concern for near term demand of nearly everything, as are announcements of reductions, and even total halts in the case of British Airways, to air travel in and out of China. In short, we remain cautious on risk appetite.
FOMC preview
The chief focus over tonight’s FOMC meeting likely to be in the Powell press conference more than in any alteration to the policy statement as the next critical step for the Fed is to communicate its balance sheet growth plans from here – both its approach to ongoing repos and the purchases of T-bills after indicating that purchases will continue “at least into Q2 2020”. Does that mean April or June and what is the signaling on the pace of purchases after the $60 billion per month? Otherwise, the market will look for how badly the coronavirus outbreak has impacted the Fed’s near term outlook. Not sure the market will be very reactive unless the Fed bring (unlikely) very dovish guidance today, as the Fed’s moves thus far have failed to weaken the USD – so it may continue its march higher after the meeting – watching EURUSD as the most obvious barometer on that account, as USD/EM is as much affected by coronavirus/risk appetite correlations.
BoE preview
The drama around the Bank of England decision tomorrow is more readily easy to perceive as the market is evenly divided between those looking for a rate cut and those looking for the Bank to stand pat to see if some of the strong resurgence in sentiment surveys begins to show up iin other data. The coronavirus offers the perfect excuse for one last dovish flourish from the Carney BoE before the governor retires on Friday – either way, while tactical moves could prove large either way due to the market pricing 50/50 odds, any rally may be held back by ongoing positioning headwinds and the wait for trade deal developments, while downside move might have more room to cut lower if the 1.2900 area fails in GBPUSD, for example. Short term options strategies for EURGBP downside (long 1-month 0.8400 EURGBP puts) for GBP bulls and GBPUSD downside (long 1.2900 2-week puts) for GBP bears (long GBPUSD puts) are one way to trade tactically while limiting downside risk to the options premium risked on the trade.
Chart: EURUSD
We trot out the EURUSD chart once again ahead of the FOMC meeting as the market focus on the status for the USD and for this important pair on the other side of the FOMC meeting over the obvious 1.1000 pivot area. Momentum points to further downside risks, though every major break over the last eighteen months and more has failed to lead to a notable trend extension in either direction. The 1.0900 area and nominal intraday lows just below are the next obvious focus for bears on a break of the big 1.10 level.
The G-10 rundown
USD – the greenback has continue to grind stronger – clearly negatively correlated with tactical risk-on, risk-off behavior in USD/EM pairs – but also within most of the G10 outside of USDJPY. Don’t see any pronounced risks of dovishness from today’s Fed as discussed above, but market not looking for much from this meeting, making a hawkish surprise easier even if unlikely.
EUR – the euro looks weak here, without prospects for immediate fiscal stimulus, with still weak activity levels, and with risks from the coronavirus outbreak from reduced Chinese demand for exports. Not sure how 1.1000 hangs on in EURUSD unless FOMC somehow weakens USD.
JPY – the JPY looks firm relative to the sell-off in safe haven bonds, perhaps as the coronavirus focus a bit more intense in Asia and therefore keeping traders more defensive there. Still like EURJPY lower if we don’t rip to new all time highs in equities and continue to see markets on the defensive
GBP – the GBPUSD chart has been triangulating for weeks and needs to break one way or another – risk is to the downside in the nearest term on USD strength and risk from positioning – but two-way risk over the BoE tomorrow.
CHF – the resurgence in risk appetite sees EURCHF pulling back above 1.0700 – more safe haven seeking needed for new lows, it seems, despite the SNB apparently stepping away from intervention – note the important sub 1.0650 lows from back in 2017 as well.
AUD – market largely brushing off the slight beat on headline CPI overnight as heavy commodity prices and coronavirus fears still weighing on AUD. Watching the 0.6700 area on daily closes post-FOMC and post next Tuesday’s RBA (next cut surprisingly only fully priced beyond May meeting) in AUDUSD for further downside risk as the pair hasn’t closed south off that level since 2009.
CAD – USDCAD consolidates a bit lower in sympathy with risk appetite and crude oil bounce, though the recent rally has neutralized the prior down move – GDP for November up tomorrow at the same time as US Q4 GDP.
NZD – the AUDNZD pair trying to stabilize a bit after new lows for the cycle failed to . Australia seen as more sensitive than NZ in exposure to China, so this pair may continue to struggle in undervalued territory as long as coronavirus fears impact key commodity prices.
SEK – EURSEK entering 9.60-65 swing zone – status of the pair heavily linked to whether risk appetite stabilizes here (if not – squeeze danger higher). Sweden Confidence surveys mixed, with consumers less happy than manufacturers, who saw a huge bounce in January from multi-year lows. Household lending remains pegged near the lows of the cycle.
NOK – EURNOK reversing from an important area above 10.10 yesterday as NOK seems rather reactive to sentiment shifts, even if oil hasn’t seen much of a bounce – no sigh of relief for NOK bulls until we are well back below 10.00 and have put coronavirus fears behind us – too early to make that call.
Today’s 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
