Head of FX Strategy
Summary: The market looked in sad shape yesterday after the panic 50-basis point rate cut from the Fed was unable to sustain a market rally, but the market is having a second try at bouncing back overnight, perhaps in part due to US political developments. The Fed is rapidly depleting its ammunition in any case and team Trump will soon have to take over.
Trading interest
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.
Today’s G-10 rundown
USD – the Fed and Trump administration will eventually get this USD broadly weaker – looking for signs that it is working and the crush lower in rate spreads helps as Fed if force-marching to zero.
EUR – the euro staying relatively firm here as EURUSD deals with the major 1.1200 resistance that was in play yesterday. One bit of fundamental support is that the ECB has no real bullets left – further negative rates are no help and fiscal is the only answer, the risk being that EU officials prove painfully slow to act on the fiscal front.
JPY – the backdrop about as supportive as possible for JPY since yesterday – not terribly impressed with the action overnight and hence the profit-taking in our USDJPY short.
GBP – sterling rather offered again this morning, perhaps as the market sees the window for the BoE to reduce rates, since it does have a modicum of policy room to work with compared to the ECB. Technically watching the 200-day moving averages in both EURGBP and GBPUSD. Still like EURGBP lower eventually, with little visibility in short term. Maybe a level to establish optionality (long GBP) here.
CHF – EURCHF consolidated back as high as 1.0700. Downtrend feels tired after no major pickup in volatility over the market’s recent wild gyrations.
AUD – see the AUD chart above – if markets calm a bit here, it is fairly easy to string together a positive tactical narrative for AUD.
CAD – the Bank of Canada very likely to chop by fifty basis points today and wax very cautious on the impact from the coronavirus (also in Canada) and plunge in oil prices. May under-perform in the crosses, but if broader sentiments are lifted – USDCAD bulls looking in tactical trouble if USDCAD heads below 1.3300.
NZD – would expect AUD to outperform NZD in an attempt by markets to stabilize here, especially if the China sentiment continues to improve.
SEK – EURSEK looking lower again – but needs a bit of a comeback in global markets and fiscal news to shape up for a major attack through 10.50 to 10.40 in EURSEK
NOK – the krone needs a bullish reversal in crude oil and for global growth fears to fade to push the price action back lower through 10.25-20. Until then, NOK twisting in the breeze.
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.
