Head of FX Strategy
Summary: After markets tried to put on a show of stability late Friday, confidence has crumpled to start the week as the narrative points to a second guessing the V-shaped recovery in asset markets and concerns that Covid19 remains hard to tame. Jumpy price action since Friday make this a tactically difficult market to assess and trade.
The market has been all over the shop by early US hours today – from slightly down this morning in very early European hours to then suddenly very down, driven justifiably by the narrative that concerns that a second wave of Covid19 outbreaks are dampening sentiment. And the worst aspect of this fresh round of concerns is that it is global, from Pakistan and a new outbreak in Beijing to record hospitalizations in Texas and even Chilean copper miners. As proved the pattern in March (with notable exceptions like GBP), the FX market volatility offers only a fairly weak echo of the gyrations in equity market futures. Liquidity is poor as we discussed on today’s Saxo Market Call podcast. By later in the day as of this writing, the equity market futures had about halved their worst losses intraday and the USD and JPY were on the retreat slightly after an earlier surge. The price action is jumpy and erratic, to say the least.
We focus again on GBP below, but in most cases, the general pattern in response to this now risk-on, risk-off (RORO) market is that the USD and JPY will view for status as strongest currency, with CHF trailing somewhere behind, while the Euro is middle-of-the-pack or slightly better, and the smaller currencies are all weak with slight differentiation here and there. If this sell-of (But the way, RORO automatically becomes the regime once market volatility levels exhibit the kind of volatility we saw last Thursday and FX traders can do themselves a huge favour in looking at how correlation risks across a portfolio pick up during these regimes.)
Some issues that are keeping us on our toes this week:
EU Council meeting Friday - This is the next key meeting for the heads of EU countries as we look for a sense of solidarity or lack thereof around the plan to expand the EU budget by some EUR 750 billion to fund a Covid19 response. We have seen little noise on expectations heading into this meeting.
US Fed Chair Powell to testify before Congress - we have just heard from Fed Chair Powell at last week’s FOMC meeting press conference, but the interesting angle this week for markets could be the degree to which Democratic members may look to criticize the Fed’s role in driving inequality and criticism that their efforts are rewarding the wealthy via a new market bubble. Loud criticism could affect Fed signaling at the margin as the 2020 election approaches.
Bank of England meeting Thursday – with sterling already under pressure on the risks of a tough stance from the EU on the post-Brexit transition period trade deal uncertainty, the Bank of England meeting this week will be interesting for whether the BoE strengthens guidance on an eventual move to a negative policy rate regime.
Chart: GBPUSD
We could have a volatile week ahead for sterling, as Brexit news could pick up with UK Prime Minister Boris Johnson calling for a trade deal by autumn but the EU not making any friendly noises and Mr. Johnson set to contact various EU leaders today. As well, the BoE is set to meet on Thursday as note above and could represent risks for the currency on any new negative policy rate guidance. Sterling survived an attack on critical levels this morning – above 0.900 in EURGBP and below 1.2500 in GBPUSD and has so far survived. We’ll use those levels as the tactical indicators for whether GBP can make a stand here or risks a bigger meltdown. Note that the 1.2350 area (61.8%) looks the next one lower if GBP suffers another attack, ahead of the sub-1.2100 lows, while a strong close back above 1.2650 looks necessary to rekindle upside hopes again.
The G-10 rundown
USD – the greenback trying to maintain a head of steam here, but not particularly impressed with the rally this morning relative to the size at times of the weakness in risk assets – a possible sign that the Fed has done its job with sufficient liquidity provision until proven otherwise.
EUR – the more liquid euro seeing less volatility than the smaller currencies and the broader Euro could back up higher (EURGBP, EURAUD, etc..) even if EURUSD continues to consolidate lower in the event this risk-off move extends.
JPY – JPY crosses worth watching for whether we suffer total reversal of the recent run-up – pairs like GBPJPY and AUDJPY in particular, as backdrop of lower safe haven bond yields and weak risk appetite are yen’s best friend. Assuming broad JPY correlates positively with USD here as safe haven, with interest in who wins the relative race as well (106.00 area next major one for USDJPY.
GBP – sterling falling out of bed to start this week as we discuss above.
CHF – the 1.0700-1.0650 area in EURCHF is the last pivot zone ahead of the 1.0500 area that the SNB seems dead-set on defending.
AUD – the best basic risk proxy among G10 currencies and positively correlated with the reflation trade in commodities as well, with Aussie weakness recently in line with weakness in industrial commodities and, for example, BHP Billiton equity price. The 0.6675 area in AUDUSD the next important one if 0.6750 zone gives way.
CAD - considerably more upside needed to drive a reversal in USDCAD – starting with 1.3850. That only looks doable if we see a proper rout in equities and oil here.
NZD – kiwi starting to overachieve again – watching the AUDNZD level as 200-day moving average approaches just below 1.0550 and perhaps 1.0500 to see if the NZD bears can corral the move lower in a still structurally bullish chart.
SEK – EURSEK is consolidating back higher and could squeeze higher still if risk appetite suffers another meltdown. First level of importance up at the 200-day moving average around 10.65 but there is plenty of further retracement potential higher without erasing the significance of the huge reversal from the 11.40+ top to the recent lows near 10.30.
NOK – EURNOK touched the ultimate psychological tactical resistance of 11.00 in early trading today on the run lower in risk appetite. The NOK bulls are in control there but are under increasing capitulation threat if we move back above 11.00 or especially the 11.21 level.
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.
