FX Update: Policymakers readying their bazookas FX Update: Policymakers readying their bazookas FX Update: Policymakers readying their bazookas

FX Update: Policymakers readying their bazookas

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The Bank of England is the first central bank to fire an impressive policy bazooka today with additional measures aimed at SMEs on top of a surprise 50 basis point rate cut. Sterling initially sells off but stabilizes quickly, likely as the market knows that every other central bank and fiscal authority will be pulling out the stops to support their economy as well.

Trading interest

  • Stopped out of GBPUSD longs – but re-establishing a 1.3200 3-month long call option position (129 pips with spot at 1.2940 this morning)
  • Stopped out of USDJPY shorts – still like lower but holding for now – limit sell interest above 106.00 with stops above 108.00.

Find today’s Saxo Market Call podcast here and remember that you can find the podcast in your favourite podcast app by searching “Saxo Market Call” and have the latest episode pushed to you.

Markets were all over the map yesterday as Trump first teased a stimulus and then failed to deliver – a sign of his administration’s dysfunction. A larger package needs involvement from the US Congress, which holds the power of the purse, and House leader Pelosi indicated. In addition, the discussion of a payroll tax cut is very expensive in fiscal terms and the wrong medicine: any stimulus to deal with the specific risks of the coronavirus outbreak will have to be in the form of cash drops into the economy and credit forbearance to keep people fed and businesses from shuttering their operations and firing employees. The US response is to the coronavirus is an unfolding tragedy that will get far worse.

The Bank of England shot a big and effective bazooka today in cutting rates 50 basis points, but more importantly, ripping open the liquidity taps with a massive four-year funding scheme for banks with special incentives for SME’s, dubbed the TFSME. As well, the countercyclical buffer requirements were sliced to 0% from 1% - the measures together releasing something on the scale of £300 billion of funding. Already before today’s BoE, we saw the announcement of a fiscal stimulus of impressive scale, at £600 billion over the next five years (mid-2025), well north of 25% of current nominal GDP. The BoE and the UK government are going to keep the system liquid – rest assured!

ECB President Lagarde was out with strong language today on the scale of the current crisis, and given the advanced state of the coronavirus, she will need to trot out a very large bazooka at tomorrow’s meeting. Look for something very large along the lines of ensuring the banks stay solvent (buying bank senior debt, massive TLTRO against SME loans, etc.). I hope they avoid more negative policy cuts, which are counterproductive at this point – but this may be forthcoming as well.

The surprise rate cut from the BoE today saw a sharp knee-jerk lower in sterling, with EURGBP trading to almost 0.8850 before reversing sharply lower. The scale of the reversal suggests some underlying strength in sterling here as the UK yield curve steepened on this, perhaps on the news yesterday indicating the very large scale of the fiscal package to come. In other words, the market sees the UK as having the potential to getting ahead of the curve eventually. EURGBP is certainly a risk to trade given the sharp pickup in volatility, and the ECB meeting tomorrow is the first major test of Europe’s response to the crisis, but we will look for ways to short the pair if the ECB fails to inspire the rally to sustain above the 200-day moving average.

Source: Saxo Group

The G-10 rundown

USD – the USD is turning lower is our new strategic conviction – the difficulty in the near term being the risk of back-filling – first we like it lower versus JPY, EUR and then GBP, eventually elsewhere, but possibly too early.

EUR – the ECB will go bigger than we think tomorrow and we will need to see the follow-up from EU politicians for the market to gain some confidence in their efforts. They will prevent a replay of the sovereign debt crisis for now – but the key to watch is not just the ECB’s efforts here, but the longer term willingness of the EU core to allow fiscal expansion across all of the EU.

JPY – the JPY is lower as bond markets have corrected violently after their parabolic ascent. Still see an eventual move to at least 100.00 in USDJPY.

GBP – sterling stabilizes quickly after the surprise cut as the additional BoE measures are the right medicine to bolster UK confidence.  GBPUSD closing back above 1.3000 would be a start for a technical comeback.

CHF – the franc trades like a non-entity in these markets – curious how the market continues to trade the franc as the country’s economic base and therefore current account surplus are at risk of a major impact from the current activity shutdown.

AUD – the talk of the town is QE, but fiscal is the more important signal Down Under and will soon be on its way. Still, it is too early to call a bottom on the risk that the market has yet to absorb the possible scale of the hit to the global growth outlook this year from the coronavirus.

CAD – Further upside risk in USDCAD if oil prices stay low as this will heavily impact Canada’s too oil-dependent economy. The private leverage problem in Canada has to produce a credit crunch that will compound the negative risks for Canada’s outlook.

NZD – AUDNZD pushing to major lows - long term value with no short term technical reason to buy.

SEK – EURSEK is one to watch as the EU transitions to fiscal stimulus and Sweden will have to follow suit – a more bold Swedish fiscal move is needed to jolt the SEK out of its . In favour of cautious long term exposure to downside options strategy – but only perhaps 30% of a full position.

NOK – unwilling to call a bottom in the oil market and therefore in NOK for now on the further risk from the price war together with the rolling demand shock.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0930 – UK Jan. Manufacturing Production
  • 1230 – US Feb. CPI


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.