FX Update: EURUSD overdone? Fading the sentiment bounce.

Trading interest

• Long (Expiry Nov 6 – days after election) 1.1200 EURUSD calls.
• Short USDJPY from above 110.00, moving stop down to 109.30 for 106.00 target

Please have a read of a piece I wrote yesterday considering three possible scenarios for financial markets from this coronavirus outbreak – a piece for thought and perspective, not a forecast!

A ripping comeback in risk sentiment yesterday materialized in the wake of a G7 statement declaring the intent to hold a conference call on the coronavirus outbreak (today at 1200 GMT / 1300 CET) and teasing both monetary and fiscal measures. There was some moderation of the move overnight after another statement confused with indications that no coordination of measures should be expected but that the statement is still under discussion. The episode is a prime exhibit for how vicious market moves can be in either direction due to very poor liquidity.

As for further stimulus efforts from here – rate cuts are the weakest of weak medicine and fiscal stimulus is only relevant in the context of credit forbearance – keeping businesses in operation to meet payroll, roll debt, etc.. as long as any extended pandemic . Achieving such stimulus at the necessary scale and in sufficiently short period of time will be difficult if the coronavirus pandemic leads to wide spread reduction in activity.

As for coronavirus news, the US is of most concern at the moment, with cases popping up all across the nation and stories of lack of precautions, lack of testing, and lack of transparency from the CDC which could lead to a vicious public response in the form of hoarding and staying away from public spaces and reducing travel. There are already anecdotal stories of this, but a critical mass of cases or stories could see this kind of behavior notching higher by orders of magnitude. Only some of the February US data is showing signs of the virus impact (yesterday’s ISM Manufacturing was weak as the Import orders component collapsing from a surge to over 50 in January (resumption of trade after US-China phase 1 trade deal?) to a parlous 42.6, the worst since 2009. Despite the G7 attempt to offer support and a likely Fed rate cut today, I am looking for the market to fade this bounce quickly – possibly as early as today.

I have run out of time to cover the US Super Tuesday primaries today – but these are  important and the odds are rising of a “brokered convention” – the most contentious outcome for Democratic voters. As well, has anyone thought about the risk that these very old candidates (maybe even Mr. Trump) may be forced to curtail their campaigning activities due to coronavirus fears at some point?

The RBA cut rates by 25 basis points overnight as widely expected, but with a minority gunning for a 50 basis point cut, the Aussie actually firmed overnight, with the backdrop of a sentiment rebound and promises from Australian Prime Minister Morrison to bring support to the economy to keep Australians in their jobs provided an additional boost. The RBA statement was as positive as optimistic as usual – clearly out of line with the reality on the ground. A collapse in Building Approvals to the lowest level since 2013 was a sign of the profound disruption from the wildfires.

Chart: EURUSD
Until today, EURUSD has been a one-way street to the upside since reaching its lowest levels less than two weeks ago. A glance over at market positioning ahead of this deleveraging episode in risky assets would have made clear that an across the board reduction of positions might see some EUR support – particularly if a sizeable chunk of the euro selling is linked to carry trading or funding for investments reaching for yield in general. An economic activity shutdown like the one from a spreading reaction to the coronavirus outbreak hits surplus/exporting economies far harder than net consumers, so we wouldn’t expect this EUR outperformance to extend notably from here against the US dollar  once a significant positioning adjustment has been made (i.e., already?). 1.1200 looks like a rather major line in the sand and we will watch the backfilling here with interest for how sustainable this move proves – first key support down at 1.1000.