FX Update: EM strains, Covid19 exit path questions dominate
Head of FX Strategy
Summary: The Trump administration is doing its best to talk up the oil price, but we still see CAD at further downside risk here and we are noting considerable signs of strain across EM. Finally, as we head into the weekend, breaking news of Covid19-related shutdowns in Singapore today suggest post-virus outbreak exit paths will prove difficult.
I will continue with the quick FX update for now as our usual morning output takes up all of my bandwidth in the early hours, including our morning QuickTake and the Saxo Market Call podcast. On that note, here are our key focus points for today.
Its not the data right now, it’s the expectations for an exit path. Yesterday’s astonishing 6.6 million in US initial weekly jobless claims showed two things
- One: the incredible scale of job losses and the fact that the US unemployment rate will spike far higher than its worst level since the global financial crisis, which was 10.8% in 1982 (Interesting to note that during the global financial crisis the top was far more “rounded” than the 1982 episode, peaking at 10.0% but not falling below 8% until almost three years later in 2012. After the late 1982 spike to 10.8%, the 8% level was reached in early 1984 a mere 15 months later – as the US economy at the time had a far different composition and far more factory/production workers relative to service jobs. This time around, with even more generous benefits for the unemployed, the fall in unemployment from an even higher peak could prove even slower – more on that in future updates)
- Two: It’s not about the data right now. This is the single most horrifying number I have seen in my adult life, and yet elicited no market reaction on release. This shows more than anything that it is about the exit path from Covid19, not about the next month or two of data the market is discounting has already discounted as historic and unprecedented. On that note, it is disconcerting this morning that Singapore is announcing a new lockdown, closing all schools except for distance learning and most workplaces. This is not the “post-Covid19 model” the market was looking for earlier.
Still focusing on CAD: absolutely crazy gyrations in oil markets yesterday as US President Trump tried to talk up the prospects for major output cuts, but as our Ole Hansen points out, shutting in production is a difficult thing to do and can compromise the long term ability to resume production down the road. This morning, Trump was at it again, and oil prices tried to rally. Regardless, we continue to focus on the damage done and ongoing for CAD in particular from this episode of weak prices and where the Canadian economy was as it entered this crisis, also discussed yesterday. It will take far more to shake us from our bearish conviction on CAD and the risk of further upside in USDCAD before we have reached a cycle top.(By the way, note that after a huge spike yesterday in crude oil futures for the longer term, say December of this year, ended the day in the middle of the range of two days ago – i.e., unchanged).
Next Tuesday next test for EUR – we have discussed the political risks in the EU Rising on its response to the Covid19 crisis in recent days – the next key test is the Eurogroup meeting (of EU finance ministers) next Tuesday. EURJPY and EURUSD perhaps equally viable options for testing risks of existential cracks opening up again the in euro, even if the ECB is keeping the evident risk in sovereign bond spreads within the EU, etc. very orderly at the moment. The EURJPY pair is a bit closer to the key cycle lows over the past couple of sessions down around 116.00-25.
EM strains are getting grave in places – some of the weaker links across EM are a growing concern, especially ZAR and TRY, where in the former case, the ZAR is suffering an aggressive depreciation and the CDS price (insurance against default on sovereign S. African bonds) has risen sharply to new cycle highs close to 500 bps today from below 200 bps before the Covid19 outbreak dominated market attention. For Turkey, we use the forward implied yields and implied points to show that the market is already pricing in an aggressive further TRY depreciation. Yesterday, USDTRY 1-month forwards hit 35% (annualized). We also note HUF weakness as Hungary’s Orban now rules the country by decree.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Mar. Change in Nonfarm Payrolls
- 1230 – US Mar. Average Hourly Earnings
- 1230 – US Mar. Unemployment Rate
- 1400 – US Mar. ISM Non-manufacturing
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.