Head of FX Strategy
Summary: The ECB and RBA fired off respective bazookas overnight with a large ECB QE clearly aimed at supporting peripheral bonds. Yesterday, both GBP and NOK have suffered a collapse in confidence as the market scrambles for USD funding. The Fed and US Treasury must turn this US dollar lower to turn global markets around.
Trading Interest
Forex markets are turning downright disorderly yesterday and overnight, as NOK collapsed on the further collapse in oil prices and as domestic investors there run for cover. The lack of liquidity in NOK saw enormous bid-ask spreads the likes of which I have never seen in my nearly two decades in the market. This is the most drastic sign of the illiquidity and desperation for USD funding and suggests, together with the sterling collapse in recent days, that the US authorities must move incredibly fast now to prevent further devastation . I am looking for something from the Fed as soon as today but hopefully ahead of the weekend – the market needs a turn in the USD at this point to put an end to this firestorm across asset markets. Traders should exercise extreme caution in both directions in sizing positions, if that isn’t already painfully clear.
The Fed is coming up with new facilities daily, with a new MMLF facility announced overnight aimed at backstopping money market funds. Equity markets stabilized slightly this morning – but everything looks too nervous to rely on price action as an indicator.
The ECB made its move late yesterday with a EUR 750 billion QE move aimed at buying assets public and private and importantly hinted that it might break its own “self-imposed rules” on purchases, meaning likely that it is willing to buy higher percentages of individual bond issues and perhaps tilting toward a higher allotment of peripheral bonds (violating capital key framework of the QE under Draghi.
The RBA likewise moved to support the economy with a rate cut, a new facility to support bank lending and a yield-curve-control measure aimed at stabilizing the three-year Australia yield at 0.25%.
It is all rather hectic and fluid at the moment, as all policymakers are pulling out the stops to get ahead of this raging crisis – they will not give up and at some point the market will turn – we use the USD as the key indicator for this. And on that note – also watching USDCNY nervously as the ultimate indicator of what could go wrong if the world doesn’t get ahead of the USD pressure cooker.
By the way – unbelievable to see Brazil chopping rates another 50 bps to a record low as their currency collapses – this is not what EM’s are supposed to do… SARB up today.
Chart: EURNOK
EURNOK has traded 30% north of its record high from the financial crisis on the collapse in the country’s key exports – oil and gas – and on a scramble for funding. The country is also in a lockdown similar to those elsewhere across Europe and was already running enormous budget deficits (ex petroleum revenues) before this crisis erupted. But for Norway, it is clear that there really is no “ex petroleum” and this crisis is likely seeing a permanent resetting of the Norwegian krone lower even if oil does rebound in coming months, as the fossil fuel sector is suffering a permanent destruction of capital from this move lower in oil that will not return. That being said, this morning’s action looks excessive relative to the strong bounce in oil prices and once some liquidity returns, the price action in EURNOK can fall in the short term as fast as it has risen – but the currency is untradeable at present, although as I am writing this the Norges Bank released a brief statement suggesting it is looking at intervening.
The G-10 rundown
USD – the USD is turning the screws on global financial markets and the Fed and US Treasury need to go very large and very soon in turning the currency lower to bring any sustained relief to the contagion across global markets – watch the headlines ahead of the weekend!
EUR – the Merkel speech and the ECB move turning the corner for the EU peripheral spreads and getting ahead of the existential concerns for the moment – a bit surprised that the euro itself has not responded more constructively.
JPY – USDJPY has reversed back above the 108.00 area and likely wont find a top until the US Fed, or the market, puts a lid on the long end of the US yield curve, which has traded with enormous volatility over the last several days – spiking real yields higher and taking USDJPY with it as inflation expectations for the US have collapsed.
GBP – compelling long term value for companies looking to invest in services and manufacturing in the UK – the trouble is that this is not the market’s focus for now – and sterling will only turn and begin to stabilize when the USD funding issue turns as well. In the meantime, there is no identifiable “bottom”.
CHF – the SNB stated today that it has stepped up intervention with the virus outbreak, so buying CHF is fighting against the central bank. Governor Jordan stated that fiscal stimulus is needed to fight the virus.
AUD – A powerful bounce overnight, but from impressive new lows in the wake of the RBA’s aggressive move to bring support. Please listen to our Saxo Market Call podcast from today with more on the RBA from our Australian strategist Eleanor Creagh.
CAD – the USDCAD rally has reached the cycle highs, but may not stop here if the markets can’t piece together a sentiment improvement and turn in the USD. The Canadian grades of oil are practically being given away and production will have to slow, with all of the ugly implications for Canada’s economy. Trudeau’s support package of 3% of GDP is weak beer.
NZD – the AUDNZD pair finding support just ahead of parity after the RBA overnight – but there is no telling where that pair could go if the USD isn’t turned and China chooses to let its currency slip more aggressively.
SEK – the Swedish krona twisting in the wind as well here as less liquid currencies are getting smashed across the board. A further twist for Sweden is its less stern response to coronavirus – a running “experiment” relative to other nations’ reactions.
NOK – the liquidity may improve a bit on the Norges Bank statement on NOK and as Norway can’t afford to have the current total disorder in its foreign exchange markets and has deep pockets to address the situation – still, we think the currency is suffering a permanent re-setting lower even if we see a strong bounce at some point when oil bottoms out and sentiment shifts.
Calendar (times GMT)
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