FX Update: Stuck in a rut. Norway chops to zero. FX Update: Stuck in a rut. Norway chops to zero. FX Update: Stuck in a rut. Norway chops to zero.

FX Update: Stuck in a rut. Norway chops to zero.

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  The latest price action underlines how stuck in a rut most of the G10 currencies remain here, though we have a couple of interesting subplots developing in AUD and the Scandies. It will take some time to get a sense of the shape of the recovery and in the meantime it will be about animal spirits and whether US-China tensions worsen or improve.

Yesterday we mulled signs of the big USD rising, an idea that market technicals can by no means confirm or deny as we still need a jolt higher in greenback upward momentum to serve as a catalyst for a technical view. That will be difficult to come by as long as speculative risk sentiment continues to bounce back at ever turn as it has over the last couple of sessions. Looking forward, we will need at least a full month of May data and maybe more to start drawing conclusions on the shape of the recovery, and until then, besides the very important speculative angle in equity markets we have discussed on the Saxo Market Call podcast, perhaps only something like a deteriorating US-China relationship is a large enough fundamental development to distract this market. On that note, an odd little jolt higher in risk sentiment took place in the early minutes of trading in Europe, with no apparent proximate cause besides a breaking news headline that the US and China trade representatives are set for a phone call on the trade deal as soon as next week amidst a backdrop of rising tensions. Apparently a willingness to talk is seen as a positive sign.

Overnight, Australia reported its largest ever trade surplus of AUD 10.6B for March as the country’s terms of trade have seen a stunning turnaround from years of deficits since mid-2018. Exports to China jumped while imports fell on shutdown measures. This is likely a one-off surge of magnitude, but the trend is clear and does help to offset risks to the country’s economy from the domestic credit crunch and housing bubble. A Bloomberg article this morning suggests that Australia could yet avoid a “technical recession” of two consecutive negative growth quarters – but that looks a stretch. Strategically, our favourite expression of rising AUD external balance fortunes would be relative to NZD in AUDNZD.

While action in G10 currencies is rather pedestrian at the moment for the most part, a couple of EM stories continue to heat up. The most notable of these is the Turkish lira, where the banking regulator’s move late Tuesday to stem speculation in the country’s currency only seems to have turbocharged the lira’s decline, as USDTRY crossed to a new all-time high above the prior crisis high from 2018 and was higher still this morning. Forwards suggest a continued path of devaluation and make trading the pair nigh impossible as it appears the window is closing on Turkey’s financing without outside help. In Brazil, meanwhile, the central bank chopped the Selic rate more than expected by 75 bps to a new record low of 3.00% and took the USDBRL rate to its lowest daily close ever. It is beyond remarkable that Brazil has taken its rate this low and as its currency has fallen some 30% this year versus the US dollar. Notable as well that the latter has occurred despite the US Federal Reserve extending a swap line to Brazil.

Norway surprised consensus with a chop of its policy rate to zero percent, with most expecting no change, though the bank’s guidance is flat from her as it sees that rate will “most likely stay at this level for some time”.  With the recent oil market recovery and gas prices also popping a bit higher and a backdrop of strong risk sentiment, the market is challenging the key 11.00 area supports – not sure we can sustain a significant new move lower much beyond 11.00 here unless we see a more notable recovery in oil prices further out the curve (noting that December 2021 Brent is still stuck near the cycle lows, for example). Also, Norway could run its first budget deficit since 1993 this year.

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