FX Update: Fed panics, market not impressed

Trading interest

• Long (Expiry Nov 6 – days after election) 1.1200 EURUSD calls.
• Taking profit on USDJPY shorts early – here below 107.50 – after 110.00+ entry

A great discussion on this morning’s Saxo Market Call podcast, in which we discuss yesterday’s panicky move from the Fed in cutting rates by 50 basis points and what we are looking for from here.

We saw a bit of a revival in animal spirits overnight, a development I’m reluctant to build a narrative around, but it could be the market second guessing the sell-off in the wake of the Fed’s cut yesterday, or it could be a sentiment boost from Sanders seeing poor results in yesterday’s Super Tuesday elections, which suggest Sanders has no chance of scoring an outright majority in the primaries and that Biden has a chance of doing so now, especially if Bloomberg bows out and endorses him. We see Biden as the weakest possible candidate to face Trump, but the market and the US dollar are far less fearful of a Biden outcome than a Sanders one.   

Today we have a Bank of Canada meeting and very difficult to see why the bank doesn’t cut 50 basis points today, with markets leaning that way as well, though not 100% there. We add a USDCAD call trade to the Trading Interest section above with the assumption that Poloz brings a strong dovish message today and notches the caution level significantly higher. The Bank of Canada the last bank with more room to cut than the Fed besides Norges Bank (which is hamstrung by a collapsing currency from providing more easing).

Speaking of being hamstrung, most other central banks have nothing more to offer here in terms of policy accommodation as the future policy mix will have to mean fiscal stimulus –. In an economy affected by widespread shutdown in economic activity and decision-making, the stimulus will have to take the form of credit forbearance and helicopter money, and we fear that Europe will be the slowest to pick up the slack, whereas Trump’s desperation is already palpable and every downtick lower in the major equity indices brings forward the next attempt to empower the Treasury to make unprecedented moves. Initially, fiscal moves are likely currency positive, with effects on real rates and inflation only a secondary consideration (but eventually the dominant one) down the road.

Chart: AUDUSD
The AUDUSD has managed a respectable rally from the fresh lows for the cycle after a solid Q4 GDP print overnight (a secondary consideration given developments since then). It appears that China is increasingly turning to work while the virus outbreak points to the risk that the EU and especially the US are at increasing risk of shutting down on quarantining behavior. This could lead to a surprising resilience in AUD, particularly given rather heavy short speculative positioning. We’re not calling a reversal here, but have an open mind for one as Australia-US rate spreads have rocketed from a negative 70 basis points to start the year to only about negative 20 basis points now. Still, we would want to see the price action pulling sharply above 0.6700 again to build a case for a structural turn here in the pair.