Head of FX Strategy
Summary: The latest price action underlines how stuck in a rut most of the G10 currencies remain here, though we have a couple of interesting subplots developing in AUD and the Scandies. It will take some time to get a sense of the shape of the recovery and in the meantime it will be about animal spirits and whether US-China tensions worsen or improve.
Yesterday we mulled signs of the big USD rising, an idea that market technicals can by no means confirm or deny as we still need a jolt higher in greenback upward momentum to serve as a catalyst for a technical view. That will be difficult to come by as long as speculative risk sentiment continues to bounce back at ever turn as it has over the last couple of sessions. Looking forward, we will need at least a full month of May data and maybe more to start drawing conclusions on the shape of the recovery, and until then, besides the very important speculative angle in equity markets we have discussed on the Saxo Market Call podcast, perhaps only something like a deteriorating US-China relationship is a large enough fundamental development to distract this market. On that note, an odd little jolt higher in risk sentiment took place in the early minutes of trading in Europe, with no apparent proximate cause besides a breaking news headline that the US and China trade representatives are set for a phone call on the trade deal as soon as next week amidst a backdrop of rising tensions. Apparently a willingness to talk is seen as a positive sign.
Overnight, Australia reported its largest ever trade surplus of AUD 10.6B for March as the country’s terms of trade have seen a stunning turnaround from years of deficits since mid-2018. Exports to China jumped while imports fell on shutdown measures. This is likely a one-off surge of magnitude, but the trend is clear and does help to offset risks to the country’s economy from the domestic credit crunch and housing bubble. A Bloomberg article this morning suggests that Australia could yet avoid a “technical recession” of two consecutive negative growth quarters – but that looks a stretch. Strategically, our favourite expression of rising AUD external balance fortunes would be relative to NZD in AUDNZD.
While action in G10 currencies is rather pedestrian at the moment for the most part, a couple of EM stories continue to heat up. The most notable of these is the Turkish lira, where the banking regulator’s move late Tuesday to stem speculation in the country’s currency only seems to have turbocharged the lira’s decline, as USDTRY crossed to a new all-time high above the prior crisis high from 2018 and was higher still this morning. Forwards suggest a continued path of devaluation and make trading the pair nigh impossible as it appears the window is closing on Turkey’s financing without outside help. In Brazil, meanwhile, the central bank chopped the Selic rate more than expected by 75 bps to a new record low of 3.00% and took the USDBRL rate to its lowest daily close ever. It is beyond remarkable that Brazil has taken its rate this low and as its currency has fallen some 30% this year versus the US dollar. Notable as well that the latter has occurred despite the US Federal Reserve extending a swap line to Brazil.
Chart: EURNOK
Norway surprised consensus with a chop of its policy rate to zero percent, with most expecting no change, though the bank’s guidance is flat from her as it sees that rate will “most likely stay at this level for some time”. With the recent oil market recovery and gas prices also popping a bit higher and a backdrop of strong risk sentiment, the market is challenging the key 11.00 area supports – not sure we can sustain a significant new move lower much beyond 11.00 here unless we see a more notable recovery in oil prices further out the curve (noting that December 2021 Brent is still stuck near the cycle lows, for example). Also, Norway could run its first budget deficit since 1993 this year.
The G-10 rundown
USD – weaker against risk currencies, firmer against the yen, the big dollar continues to coil in a range and not sure where it is to find energy unless the market were to lurch into a new risk off phase. It will take some time to gather evidence on the shape of the recovery in the US, so data reactivity is on pause for now. Next week features the first very large US treasury auction as the US Treasury is set to issue a torrent of USD 3 trillion in debt in coming months. That bears watching.
EUR – the pressure on the euro has eased slightly and any EU existential catalyst from the EU MFF budget, etc. may have to wait until June. Until then, any negative catalyst would have to be from Italian politics. EURUSD is languishing near the 1.0800 area and still has a bit of range to work with before we can call a breakdown.
JPY – with equities bobbing back enthusiastically higher and safe haven long bond yields poking higher as well, yen is easing lower again and the volatility is seeping rapidly out of USDJPY, with no signs of downside fear in the options market.
GBP – sterling caught a minor bid this morning as the BoE did not move with any additional measures at today’s meeting, though with its dire outlook of a -14% GDP fall and concerns for “scarring” of the economy from the Covid19 damage, fresh action will be forthcoming.
CHF – the Germany-Italy spreads have nudged higher again today – but EURCHF inert with traders wary of SNB intervention.
AUD – Australia trade data and hopes that the country will avoid the worst of the shock after an ugly Q2 have the Aussie strongly on the bid again after a weak session yesterday. The tactical line in the sand is near 0.6500, but above there perhaps 0.6675 after the local 0.6570 high.
CAD – USDCAD symptomatic of the coiling and coiling nature of this indecisive market – risks to Canada and its currency look somewhat underappreciated as the credit crunch works through the country’s private leverage bubble and the oil industry is in for massive consolidation and production cuts.
NZD – the NZD suffering at the hands of the surging AUD and we like AUDNZD higher strategically – a bit concerned for a medium term setback if the global growth outlook stumbles.
SEK – EURSEK has mostly reversed the panic rally – valuation is finally making its mark, perhaps, but the government’s push against Riksbank intent to purchase corporate bonds suggests that the central bank will be restrained from here – a boost for the currency as we take a sell-on-rallies stance for EURSEK, though a real test for SEK would be how the krona behaves if there is any such thing as a large-scale corrective sell-off in equity markets any more.
NOK – The Norges Bank chopped rates to zero – a bit of a surprise, but by guiding flat for the foreseeable future there isn’t much of an impact. EURNOK looks heavy still and willing to entertain a EURNOK breakdown below 11.00 hear but unwilling to consider a large extension until oil stages a more major recovery or the euro weakens more broadly on fresh existential concerns..
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
