Head of FX Strategy
Summary: Our current risk proxy, the AUDUSD, drifted close to its ultimate local resistance overnight as risk sentiment saw a solid session yesterday and into early European trading today. Our interest in coming days is the degree to which quarter end provides a pivot in sentiment and then how eventual peak Covid19 in coming weeks is treated.
The action in FX yesterday was uninspiring as we note AUDUSD drifting close to its “ultimate” local resistance this morning around 0.6235 (which is the 61.8% retracement of the large recent sell-off wave preceding this rally – the AUDUSD high this morning was 0.6215) as our global risk proxy, the US S&P 500 likewise drifted close to its line in the sand – the first major Fibo retracement of the epic plunge from the all-time highs in February
Stay tuned for an update on EM currencies, including a focus on HUF after yesterday, the Hungarian parliament granted Prime Minister the right to rule by decree indefinitely. The credit spreads for CEE bonds have all blown significantly wider in recent weeks, taking down the currencies and Hungary is the weakest of EU links if EU existential risk worsens from here.
As I discussed on this morning’s Saxo Market Call, it will be interesting to see the size of the March Conference Board Consumer Confidence drop as consumers reflect on their circumstances and job status, as this indicator is usually a coincident one with the unemployment rate. Expectations are running for a 20 point drop to 110 from 130+ in Feb. But let’s have a look back to past episodes of this indicator relative to US recessions and we can see the kind of adjustment that is likely in confidence in the months ahead. We are likely to see the highest unemployment rate in the history of that data series – beyond the post-Depression era spike in 1982 at 10.8%.
In a services economy, there are so many jobs at risk over this incredible exogenous shock to the system. This is not an attempt at doom-and-gloom, but a mere consideration of the pressures on confidence, a very important factor in a heavily services-reliant economy.
In short, we can divide our outlook into the very tactical and then the cyclical. On a tactical note, we are highly curious the degree to which quarter-end considerations on portfolio rebalancing (some suggesting upward of a trillion USD of equity buying necessary according to traditional rules) are a driver, and thus how the beginning of April shapes up over the coming several sessions.
More importantly are the cyclical considerations in coming weeks. We can all see how the lockdowns slow the progress of Covid19, but also know that activity won’t snap back to 100%. Denmark looks set to be one of the first EU countries to try to “slowly open up” its economy after the Easter holiday in two weeks’ time. How does the market treat a slow comeback, one that comes with enormous collateral damage along the way?
After all, this exogenous shock has set off a new credit crunch that can only partially be addressed by policymakers heroic efforts to slow its effects and limit the job losses and insolvencies. The simple fact is that a swath of businesses that were barely staying alive in the most generous of financial conditions before this shock have been pushed irretrievably over the edge, taking millions of jobs with them – as we look at in the table above. How the market treats this reality as well, evidence of the damage done and how behavior changes from the past, as well as the pace of normalization will be the chief focal points once we are clearly “peak virus” in the coming (hopefully) month or slightly more. In FX, we’ll have to sort through the relative policy environment, where funding for current accounts deficits is most difficult to come by and where the credit contagion from the excesses of the cycle prior to this shock were the worst.
Chart: AUDUSD
The AUDUSD got even closer to its “ultimate” resistance overnight and sellers have come back in strongly, even with risk sentiment rather strong in equities today in Europe – is this USD a bit of a leading indicator here or is the rebalancing story in equities into quarter end the driver? Key questions for the session just ahead – for now – this pair showing signs it is making a turn back lower from key levels.
The G-10 rundown
USD – the pressure on the US economy is tremendous and lockdowns will stretch for another month, yet USD remains the flipside of risk sentiment until it doesn’t. Watching whether the USD mounts another surge here after quarter-end if risk sentiment likewise dips.
EUR – EURUSD dipping back to the psychological 1.1000 level and at risk of a setback toward 1.0800. With Italy suggesting it will remain locked down until May 4, the time for mutual fiscal commitments across the Euro Zone has arrived, or else...
JPY – the JPY is weak as we have come well off the global lows in sentiment – setbacks in risk sentiment to support the JPY from here as Japan warms up for a purported JPY 6 trillion stimulus – around 10% of GDP.
GBP – sterling fading even as risk appetite surged – suggesting the bounce may have done about all it can do now – if GBPUSD fades again will focus on a psychological level like 1.2000
CHF – the EURCHF pair looks heavy even with this latest large bounce – still pressure to the downside, with the SNB leaning mightily against.
AUD – again, our risk proxy within the G10 for now. If some of the AUD strength overnight was on the bounce in Chinese official PMI survey numbers, let’s remember that, for example, a Chinese Services PMI of 52.3 in March after one of 29.6 in March means that things are only showing a modest improvement from a historically bad data point.
CAD – risk of a test back toward the highs in USDCAD on the ongoing crunch in oil prices, which is seeing absurdly low prices for many Canadian crude grades. The oil industry in Canada is far larger as a percentage of the economy than the US, so Canadian growth hit will be tremendous from this shock.
NZD – Interest in fading NZDUSD from here for at least a chunky retracement. Continue to look for signs that AUDNZD has bottomed as we see the pair as long term undervalued.
SEK – sideways action in EURSEK – not terribly impressive given the comeback in risk sentiment. EURSEK needs hope on the fiscal front from
NOK – the krone getting some support as longer term crude oil prices have stabilized in recent days even amidst talk of the risk of further collapse in spot prices and as the government stimulus in Norway will require a big dip into the oil fund, which requires NOK buying. If EURNOK 11.50 can fall, the next focus is the big 11.00 area.
Upcoming Economic Calendar Highlights (all times GMT)
2024: The wasted year
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.
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.
