FX Update: EUR struggling across the board

Trading interest

• Taking profit on EURUSD short around 1.0900, taking profit on GBPUSD shorts on lack of momentum.
• Staying short NZDUSD for test of the sub-0.6300 lows. Stops above 0.6450
• Long USDMXN targeting over 19.00 with stops below 18.60.

Tune into today’s Market Call podcast (also available on your favourite podcast app – just search for Saxo Market Call) – we had a great discussion today across all asset classes.

The US equity markets have stormed back to all-time highs again and the usual rather weak response has fed through to currencies, with the funding currencies JPY and EUR getting the worst of it (interesting to note EURCHF punching down to new lows despite this development) and the USD mixed as riskier and EM currencies found modest bids late yesterday. China is struggling to grapple with when to get back to work, but global equity markets seem convinced that this is increasingly a non-issue even if we remain cautious on the risk of normalcy returning slowly and commodities and shipping markets show that the scale of disruptions are very real and profound. Safe haven bonds continue to underline the market’s level of caution as well, dipping only slightly yesterday.

Today we watch for Fed Chair Powell’s testimony and question and answer before the House Financial Services committee. As we noted, an official letter has been sent from a number of Democratic Senators who will question Powell tomorrow – among them Senator Warren, whose campaign is struggling and she may out looking to make a point. Interesting to see if a pattern emerges of pressure on Powell from the Democratic side to explain why the Fed’s balance sheet expansion has been necessary and to what degree large banks and Trump’s deficits are playing a role – i.e., is Fed policy getting politicized beyond Trump berating the Powell Fed on Twitter? The market will also be looking at how seriously the Fed rates coronavirus concerns in terms of needed policy adjustments.

We are also watching for two developments in the wake of today’s Democratic primary in New Hampshire. First, it is worth noting that the New Hampshire is hardly important in terms of the number of delegates, but there could yet be information to extract: namely whether Biden’s candidacy is stumbling even more than Iowa indicated and two, whether Sanders is outperforming already strong polls and if Buttigieg – a hope for the centrists – is maintaining momentum. A stomping Sanders win could be enough to spook US equity markets even if we really need to wait for March 3 Super Tuesday (34.1% of delegates up for grabs on that date) for a better sense of how this is shaping up.

The forwards for USDTRY have blown out in recent days, with the 1-month USDTRY forward points moving from around +400 as recently as earlier this month to above 800 points. So the forward market is pricing in a notable TRY weakening far in excess of interest rate carry. USDTRY liquidity has been heavily restrained by Turkish moves to limit bank activity in the swaps market and making life difficult for foreign speculators in what amounts to soft capital controls. The lack of liquidity makes the currency difficult to trade, but this big spike in the forward could be interesting to watch for the risk of either an aggravated TRY decline or even more strict measures to prevent the currency from moving.

Chart: AUDUSD
The AUDUSD remains an excellent litmus test for the disconnects across markets as equities try to look beyond the coronavirus interruption, presumably pricing in a strong catch-up phase of intense activity to bring growth back to trend in China. The pair recently visited its lowest levels since emerging from the global financial crisis lows and the important 0.6700 pivot area. Any reversal here will need more force to suggest a rejection of the run lower.