Head of FX Strategy
Summary: Risk sentiment tried to stage a recovery yesterday, perhaps as the odds for Bernie Sanders to become the US Democratic nominee for president have plummeted since Super Tuesday. But we still see overhanging risks to sentiment on risks of a widespread US economic shutdown from the coronavirus outbreak.
Trading interest
The market tried to find renewed hope yesterday, some would argue on a second-guessing of the buy-the-rumor and sell-the-fact of the Fed’s emergency cut, with others chiming in that the true source of the bounce was Biden’s head-spinning comeback in the US Democratic primaries, which are seeing the odds of a Bernie Sanders win fading to almost nil. The key date on that front appears to be .
I don’t like to wade into the political debate on the coronavirus response, but US President Trump’s response and rhetoric around the coronavirus outbreak are strongly tilting the odds against him in November if the outbreak spreads as badly as I fear it is about to. As recently as overnight he pooh-poohed the symptoms of the virus and suggested that the US cannot afford to indulge in the scale of shutdowns other countries are. Elswhere I have seen anecdotal reports of obvious candidates for Covid19 testing not able to -or not “allowed” to - get a test, suggesting that the disease is spreading largely unchecked in the US. With test kit production set to rise sharply in the days and weeks ahead and new rules from the US CDC allowing more widespread testing, we can expect the number of cases in the US to explode in the coming few weeks and the risk for widespread economic disruption to grow, both from officially motivated- and self-quarantining behavior. That disruption was certainly nowhere in evidence in February’s US ISM Non-manufacturing survey, which at 57.3 was very much at odds with the Markit Services PMI Survey for the same month (final print for the month unchanged at 49.4). The March numbers likely to be in a very different place.
The Bank of Canada cut rates by 50 basis points – nominally a surprise, though the odds were already tilting more in favour of 50 than 25 going into the meeting yesterday. The market reaction has so far been rather restrained as risk appetite bounced strongly yesterday and oil markets are holding their breath ahead of OPEC and OPEC+ (with Russia) meetings today and tomorrow, respectxively. A further risk deleveraging and downside in the oil price from coronavirus fears could lead to an extension higher in USDCAD.
The market is pricing high odds that the Fed chops another 50 basis points at the March 18 FOMC meeting, an almost guaranteed action if the Covid19 case count starts to take on the expected exponential rise in the US as testing regimes spread. Before we take solace in what that means for stimulating the economy, let’s recall that the last time the Fed was chopping rates this frantically was in early 2001 and early 2008 – well before the worst portions of the market deleveraging that eventually took place. It takes time for the Fed to get ahead of the curve and for the stimulus to work through the system – on the order of 12-18 months.
Chart: EURJPY
EURJPY has been a choppy mess over this episode of market turmoil, and we suspect the euro side of the equation here has been held aloft by unwinding of very large speculative- and carry trade funding shorts. But for the longer term, we are concerned about the outlook for Europe, in particular on the immigration issue which is becoming more pressing at the border with Turkey at the moment, but as well as difficulty in coordinating the scale of fiscal response needed to deal with the coronavirus fallout and the risk that Italy continues to represent as it dips into an ugly recession here. EURJPY is a mess here, but would look for a weak close below perhaps solidly below 119.00 to signal that the market is beginning to fret euro downside risks beyond the positioning adjustment.
Today’s G-10 rundown
USD – the US dollar is rather weak on this spot of weak risk sentiment to start the day – but does that remain the case in a deeper market deleveraging move?
EUR – EURUSD is bid on the day but we have concerns for Europe on multiple fronts as noted above. Still, likely to do better than most other non-USD and non-JPY FX regardless due to liquidity and positioning in any general deleveraging push.
JPY – we like the JPY here for an extension higher – focusing on EURJPY (perhaps mistakenly) but sad that we took profit early on USDJPY shorts, as we believe US could be focal point for next wave of coronavirus concerns.
GBP – the 200-day moving average provided a relief point for sterling selling in both EURGBP and GBPUSD, but far too early to signal the all clear and general market deleveraging and a widespread coronavirus shutdown in the near term are material risks for sterling.
CHF- watching the next round of risk deleveraging, if any, for the latest colour on CHF.
AUD – the Aussie is trying to extend the bounce here as some key industrial commodity prices have stabilized and Chinese equity market posted a new high for the cycle overnight – we lean against the move as long as AUDUSD stays below 0.6700
CAD – watching oil prices over the next couple of days of OPEC meetings and risk sentiment to see if the rally can extend. Not a major surprise that BoC cut 50 and they will likely track whatever Fed does from here, even if with a delay.
NZD – the kiwi putting in a rally, possibly on the narrative of Chinese normalization versus risks of disruption elsewhere. First major resistance area in NZDUSD looks like current levels (from 0.6325) up to 0.6375.
SEK – given EU concerns on the coronavirus reaction, SEK upside will likely prove tough to come by.
NOK – if oil prices continue lower, EURNOK likely to extend higher to new records – NOK traders should watch oil market reaction to OPEC meetings today and tomorrow.
Upcoming Economic Calendar Highlights (all times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
