FX Update: Waiting game for next shoe to drop. FX Update: Waiting game for next shoe to drop. FX Update: Waiting game for next shoe to drop.

FX Update: Waiting game for next shoe to drop.

Forex
John Hardy

Head of FX Strategy

Summary:  Markets are maintaining a nervous calm, as we avoided banking-system drama at the weekend for the first time in three weeks. But even if we avoid further systemic risks in the financial system for now, tightening credit conditions have brought recession risks sharply forward. FX has navigated the recent market turmoil with considerable churn and little conviction on where this leads. The economic data calendar this week, meanwhile, is a light one.


Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team

FX Trading focus: Systemic pressures remain a focus in near term, but eventual next shoe to drop will be the economy as recent turmoil has brought the recession sharply forward.

Even as the turmoil that US banks and eventually global banks and wider sentiment remains in focus and a soft spot, markets managed to bounce into the close on Friday, with yields pulling back from cycle lows in the US following through into the European morning today, with yields continuing to bounce, but the bank-related assets like Tier1 debt and banks stocks struggling after a rally attempt, as noted in the EURUSD comments below. Looking ahead at the calendar for this week is hardly inspiring, though we do get some timely Germany and EU March inflation data on Thursday and Friday and less timely US inflation data, the February PCE inflation data, on Friday. Tomorrow, we get a look at the March US Consumer Confidence survey, a bit more interesting than usual for a measure on whether the situation is impacting US confidence more broadly, but also as the February Expectations-Present Situation hit its lowest level, at -83.1, for the cycle and since 2001 (in fact, since the initiation of the survey in the 1960’s, it has only been worse than that February reading in a cluster of three months back in early 2001.)

The optimists, and perhaps the USD bears, would point out that we are already seeing vastly easier monetary conditions, as the removal of expectations for Fed hikes and the general mark-down of the entire US treasury yield curve is a net easing of financial conditions, and as the Fed’s recent backstopping moves have seen its balance sheet suddenly balloon nearly $400 billion, wiping away months of QT. On the other hand, the growth in the Fed’s balance sheet is chiefly a reflection of commercial bank balance sheet pressures as banks access the expensive discount window (relative to near zero-interest bearing standard deposits) and BTFP facility. And high yield corporate credit spreads are also at local highs, well above 500 basis points as of Friday’s close. History often shows us (in 2001-02 and then again in 2007-09) that the worst market outcomes are in the phase of the yield curve steepening aggressively as yields are bracing for the incoming recession and as the recession starts to play out, with sentiment usually bottoming long after policymakers have . We’re very early in this process – now better able to get a handle on the recession having now been brought sharply forward by this latest turmoil and tightening credit conditions, but with hardly any signs of a softening economy.

Elsewhere, the lack of the Japanese yen’s ability to catch a firmer bid on the latest interest rate turmoil is noteworthy, but does suggest that we need to see a more determined fall in yields – and one that is combined with broader sentiment hitting the skids – for the JPY to sustain a rally. Still, the JPY bears watching as the Japanese financial year draws to a close those Friday and as Governor Kuroda rides off into the sunset next week, with Kazuo Ueda set to take the reins.

Chart: EURUSD
EURUSD is a decent barometer for where we are with the US dollar. The upside was tamed by the sense that many of the same dynamics that have US banks under pressure also plague European banks, as seen in share prices still under pressure and in very high yields on banks’ Tier 1 bonds after the SNB wiped out Credit Suisse Tier 1 bond debt holders in the USB takeover deal and despite EU assurances that Tier 1 debt ranks higher than common equity in the capital structure. The high yields on Tier 1 bonds suggest that EU banks should be issuing equity, a dilution risk that has investors still treating European bank shares with extreme caution this morning, with a significant morning bounce largely wiped away as of this writing. Alas, for FX investors, the general lack of wider systemic contagion despite the intense focus on banks means that FX is struggling for inspiration. After the sprint higher to 1.0930, the pair traded in the low 1.0700’s on Friday, and it appears the 1.0700-50 is the downside swing zone, with more risk contagion likely needed to get the greenback firmly back on top of the single currency.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Odd companions at the top of the trending table are the yen, which got a solid bump from the recent downshift in global yields and sterling, where got a minor upgrade in BoE rhetoric on defending against inflation risks, but not much else. The laggards are AUD, NZD and CAD as the China re-opening story has struggled for confirmation in markets and as oil prices remain mired near 1-year lows.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Momentum has come out of recent developments like a potential EURSEK downtrend, where there is also concern on Sweden’s financial system. JPY crosses are all in negative trend status, but many are very choppy and not particularly compelling, including the likes of EURJPY and GBPJPY.

Upcoming Economic Calendar Highlights

  • 1430 – US Mar. Dallas Fed Manufacturing Activity
  • 1700 – US 2-year Treasury Auction
  • 1700 – UK Bank of England Governor Bailey to speak
  • 2100 – US Fed’s Jefferson (voter) to speak

Disclaimer

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

Singapore
Singapore

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.