FX Update: Currencies trading on hopium, too. FX Update: Currencies trading on hopium, too. FX Update: Currencies trading on hopium, too.

FX Update: Currencies trading on hopium, too.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Global currencies are largely trading along the usual risk sentiment fault lines, though the euro looks a bit weak after the Eurogroup rescue package agrees late last week. It appears global markets are smoking some fairly strong hopium at these levels, and some rather interesting lines in the sand loom here for the overall status of the USD if the good cheer continues.

We agreed in internal meetings and the Market Quick Take that this produced earlier this morning and on today’s Saxo Market Call podcast that the chief driver at the moment is not the horrific evidence on the ground of the damage the Covid19 crisis is wreaking on economic activity and business sentiment, but whether the market is confident that authorities are doing or will do enough to keep asset price sentiment in good cheer. Additionally, clear evidence that the shutdowns have “flattened the curve” of the Covid19 outbreak have everyone anticipating the shape of the recovery. It’s all a mind game at this point, leaving us very technically oriented in our trading stance – as we note in the AUDUSD chart below.

The Fed reached deep once again last Thursday with another batch of measures to shore up asset prices and limit contagion into the financial markets and the economy. The full list of measures is here, and include more generous access to loans by SME’s, direct access to funds for states, counties and municipalities (very important, as these have seen much of their sales-tax based revenue nearly disappear due to shutdowns), and likely most controversially in the long run for moral hazard implications, the intent to purchase high yield bonds, although with the provision that they achieved high yield status after March 22.

Today is the first real return for European markets after the late Thursday agreement on the shape of the Covid19 rescue package agreed by the Eurogroup of EU finance ministers. The package is to the tune of EUR 540 billion and is a mixture of emergency medical cost-related spending that taps the ESM directly to the tune of 2% of GDP, with additional funds available via loans, but those would come with the “conditionality” of fiscal reforms that were so hotly contested by Italy in particular. Other mechanisms  in the overall package were for business loans via the EIB and direct payments to workers via a new programme called SURE which would operate as a kind of temporary EU-wide unemployment insurance. The language on the nature of many of the particulars was kept rather loose, with many noting very different takeaways from the Netherlands and Italy in the wake of the deal. Importantly, there was no talk of mutual “coronabonds” and the group punted the issue of “innovative financial instruments” to “national leaders”.  In short, the programme is a stop-gap, but underwhelms in the longer arc of the entire EU existential question.

Our favourite proxy for risk sentiment in G10 FX remains the AUDUSD pair, which into this morning came close to testing the most important of Fibo retracements, the 61.8% retracement of the entire sell-off wave from the highs just prior to the calendar year shift to the panic lows that comes in near 0.6450. Arguably, that level and the zone extending up to the prior major cycle lows near 0.6675 is the ultimate pivot zone for this chart in the bigger perspective. Strategic bears will remain committed below, while a rally above 0.6675-0.6700 would argue for a secular focus back higher. Seems too early for the latter, but that is what is at stake here.

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