FX Update: Widening coronavirus fallout sees muted FX impact
Head of FX Strategy
Summary: This more intense risk off move is hitting currencies more forcefully, though FX is far from leading the charge. Interesting to note that for today, at least, the yen is proving a match for the USD dollar in strengthening against less liquid currencies as a safe haven.
- Long USDCAD for 1.3500+, stops below 1.3220
- Buying long term (Nov 6 – days after election) EURUSD calls
The more full-bore risk off move is seeing FX playing more according to the old script as record lows in US 30-year benchmark and S&P futures off over 90 points as of this writing is seeing the USD, and even more so, the JPY trading as safe havens to start the week versus all other currencies, while the Euro is somewhere in between. The hardest hit currencies have been in EM, though still we are talking about mild moves in FX in general relative to traditional sensitivities. The Ruble is off a hefty 200+ basis points versus the USD from Friday’s close as I write but the traditionally more fragile South African rand is off less than 100 bps.
Looking at some of our risk indicators like corporate bond spreads and emerging market credit spreads, they have shown little cause for concern and the latter in particular remains incredibly tight relative to the recent pickup in EM FX volatility. These no longer appear to be good forward indicators of market risk as they were in the past – particularly ahead of the global financial crisis – when they were sending out loud divergence signals well ahead of the big market turn. In all, it leaves us with the feeling of flying a bit blind on the true level of market “potential energy” and risk relative to past market regimes..
To turn the tide here for markets, we need a turn in coronavirus news, one that has so far entirely failed to materialize and may be hard to achieve for a long time if the contagion spreads to countries less able to deal with the outbreak like the strange case of Iran. Until then, we will continue to watch for strain in credit markets from the the disruptions in supply chains and shutdown of activity. This is not a situation where traditional stimulus works very well. Small and medium sized actors in particular who are facing a funding squeeze – but for now, we will look for individual high profile stories and how the authorities and markets deal with these on concerns of a contagion risk (especially from sudden motivation to switch portfolio allocations, important because we suspect that passive portfolio flows into, for example, bond ETFs and funds, are behind the lack of pricing of risks thus far.)
A couple of things to round up from the end of last week and over the weekend. The flash US Feb. Markit PMI was very ugly at 49.7 vs. the prior 53+ reading – a dramatic heads up if there ever was one, though we will need more confirmation than this one data point. Also out on Friday, the Fed’s Lael Brainard delivered an address discussing the Fed’s “new tools” for a coming crisis: basically yield caps and encouraging strong fiscal stimulus (with the yield caps an implicit guarantee to monetize national deficits). This is an important signal – but not absorbed for the moment. Finally, over the weekend, Bernie Sanders won big in Nevada – getting 47% of the votes with 88% of districts reporting – far more than double the closest competitor Biden. Sanders is looking the runaway favourite to become the nominee. More on that later this week.
USDCAD has not sufficiently absorbed the risks to CAD from both a widening coronavirus contagion and a weakening US and Canadian economy (note Friday’s ). I am astounded that oil prices have held up as well as they have, but if oil plays catchup with the news, new low prices may lie ahead there and feed some catchup downside in CAD relative to some of its peers. With the G10’s highest policy rate, Canada has the most to cut and the economy features an overleveraged private sector relative to a US private sector that has, believe it or not, been deleveraging in aggregate since the financial crisis. Watching for the potential here that a new close above 1.3300+ highs of late leads to a significant extension higher still.
Upcoming Economic Calendar Highlights (all times GMT)
- 1330 – US Jan. Chicago Fed National Activity Index
- 1530 – US Feb. Dallas Fed Manufacturing Activity
- 2000 – US Fed’s Mester (Voter) to Speak
- 2100 - South Korea Feb. Consumer Confidence
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.