Head of FX Strategy
Summary: The dramatic oil price war declaration over the weekend set off a raging wildfire across global markets in what is already a new Black Monday of sorts. The JPY absorbed massive safe haven flows and oil-exposed currencies were eviscerated for some of their largest losses in market history. We are watching for the risk of further deleveraging as well as attempts by policymakers to get ahead of the contagion.
Trading interest
Please have a listen to today’s Saxo Market Call podcast, in which we discussed the general lay of the land, running through the oil market drama since Friday and why this has spread to global markets.
Saudi declared an oil price war at the weekend and plunged global markets into chaos, on fears that the destabilizing move will wash over credit markets, triggering defaults and a new credit crunch. In FX, oil-exposed currencies were ripped for staggering losses as USDRUB traded almost 10% higher at one point this morning, and EURNOK almost touched 11.00 before retreating to 10.78 as of this writing – still some 3% clear of the all-time high weekly close on Friday. Elsewhere, the JPY played its traditional role in spades, absorbing massive safe haven flows overnight and touching almost 101.50 in USDJPY as US equity futures hit limit down levels of -5% as the US 10-year treasury yields spiked down to 0.50% and beyond and the 30-benchmark treasury year yields is still below 100 basis points as of this writing. We are clearly in a whirlwind and traders should deleverage accordingly.
Let’s recall where we came from at the end of last week as it is important for the response function from policymakers from here: The market tried to put together a solid rally into the Friday close after the Fed’s Rosengren said that the Fed should be ready to expand the types of assets it is willing to buy in a crisis – which many read as meaning stocks and possibly corporate bonds, although Rosengren also pointed out – very critically – that doing so would require a change to the 1913 Federal Reserve Act – something that would require cooperation in a divisive US political environment, to say the least, in an election season. In other words, the Fed’s room to maneuver, given that need change its mandate, is very limited here, as yield curve control measures are irrelevant unless that means the Fed takes the front end of the curve deeply negative. That leaves the Trump administration as the first responder in the US, and given his desperation to lift confidence, he will be willing to do empower the government to do nearly anything to get ahead of this sudden forest fire.
We can’t underline enough that markets are very dangerous here – and in both directions – as further panic deleveraging is a prominent risk and as the selling inevitably sparks the next, ever escalating panic response from policymakers. I maintain that this can get bad enough for the authorities to actually close markets entirely for trading – maybe for a week or two in order to - something that hasn’t been done in a long time, but something made more possible because of the “excuse” of the coronavirus outbreak. That is not a prediction, just a warning that traders should consider trading lightly and staying reasonably liquid, keeping vastly reduced leverage.
Chart: EURUSD
EURUSD lurched all the way to the 1.1500 area – typical for the pair to find resistance at a round number – before easing back lower in early trading in Europe. I wonder if the pair is on an unsustainable spike at the moment. Yes, the pair has spiked higher for good reasons – first because the entire front end of the US yield curve has been sliced to almost zero at a breathtaking pace and the EU-US yield spread all the way out the curve has been similarly crushed. As well, the market was heavily short the Euro on as a carry trade funding currency just ahead of this crisis. But once the positioning adjustment has been made, we have to consider the difficult time Europe has in responding to crises due to its unwieldy political foundations and the risk of fresh existential concerns rising. In such vicious price action, it is tough to latch onto levels, but the impression of a reversal rises if the price action ends the day close to 1.1300 or lower. Stay tuned.
The G-10 rundown
USD – still a safe haven relative to the very riskiest portions of the market – but interesting to note the AUDUSD price action overnight – need to see another couple of sessions of price action to get a better feel for whether the USD is turning lower here.
EUR – the squeeze makes sense in light of recent speculative positioning levels and on the unwind of carry trades – and there may be more in the tank, but we are increasingly cautious from the angle of a slow EU response to the unfolding crisis and signs of existential strains returning (Italy over Germany 10-year yield spread has spiked back above 200 basis points.)
JPY – playing its classic role as a safe haven, especially versus woefully weak EM currencies as carry trades are thoroughly detonated now. Risk of vicious two-way price action now as volatility spikes and as the risk of MoF intervention rises (the MoF was already verbally checking overnight)
GBP – EURGBP looks interesting overnight, having reversed from the attempt at new highs – does the market feel that sterling looks a safe bet on the risk of a bungled EU response to the new crisis?
CHF – a weak echo of the CHF safe haven effect as EURCHF posts relatively minor new lows. Let’s not forget that Switzerland also has a large export economy that will suffer an ugly impact from this growth slowdown.
AUD – tough, given poor liquidity, to judge the quality of the bullish reversal overnight – is this the market arguing that China seems to be getting back to work while the contagion risks hitting Europe and the US hard now? Note sure I buy this if global market downturn extends.
CAD – CAD suffering an ugly mark-down on the gutting of oil prices – CADJPY briefly set an 8-year low overnight as USDCAD had a look close to the 2017 highs before reversing partially overnight. Canada rates must be marked more aggressively lower from here.
NZD – same as for AUD.
SEK – the krona hurting on the growth outlook on the coronavirus outbreak and weak oil prices – if the EURSEK move holds above 10.62-65, there is no resistance until the 10.90+ top.
NOK – the krone in a world of pain on the oil price plunge, which will require unheard of deficits on top of the economic shutdown from oil prices,
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