FX Update: ECB and RBA on the move, GBP and NOK collapse

Trading Interest

• Staying on the sidelines – waiting for the big move from the US authorities to get ahead of the USD funding pressures and turn the greenback lower

Forex markets are turning downright disorderly yesterday and overnight, as NOK collapsed on the further collapse in oil prices and as domestic investors there run for cover. The lack of liquidity in NOK saw enormous bid-ask spreads the likes of which I have never seen in my nearly two decades in the market. This is the most drastic sign of the illiquidity and desperation for USD funding and suggests, together with the sterling collapse in recent days, that the US authorities must move incredibly fast now to prevent further devastation . I am looking for something from the Fed as soon as today but hopefully ahead of the weekend – the market needs a turn in the USD at this point to put an end to this firestorm across asset markets. Traders should exercise extreme caution in both directions in sizing positions, if that isn’t already painfully clear.

The Fed is coming up with new facilities daily, with a new MMLF facility announced overnight aimed at backstopping money market funds.  Equity markets stabilized slightly this morning – but everything looks too nervous to rely on price action as an indicator.

The ECB made its move late yesterday with a EUR 750 billion QE move aimed at buying assets public and private and importantly hinted that it might break its own “self-imposed rules” on purchases, meaning likely that it is willing to buy higher percentages of individual bond issues and perhaps tilting toward a higher allotment of peripheral bonds (violating capital key framework of the QE under Draghi.

The RBA likewise moved to support the economy with a rate cut, a new facility to support bank lending and a yield-curve-control measure aimed at stabilizing the three-year Australia yield at 0.25%.

It is all rather hectic and fluid at the moment, as all policymakers are pulling out the stops to get ahead of this raging crisis – they will not give up and at some point the market will turn – we use the USD as the key indicator for this. And on that note – also watching USDCNY nervously as the ultimate indicator of what could go wrong if the world doesn’t get ahead of the USD pressure cooker.

By the way – unbelievable to see Brazil chopping rates another 50 bps to a record low as their currency collapses – this is not what EM’s are supposed to do… SARB up today.

Chart: EURNOK
EURNOK has traded 30% north of its record high from the financial crisis on the collapse in the country’s key exports – oil and gas – and on a scramble for funding. The country is also in a lockdown similar to those elsewhere across Europe and was already running enormous budget deficits (ex petroleum revenues) before this crisis erupted. But for Norway, it is clear that there really is no “ex petroleum” and this crisis is likely seeing a permanent resetting of the Norwegian krone lower even if oil does rebound in coming months, as the fossil fuel sector is suffering a permanent destruction of capital from this move lower in oil that will not return. That being said, this morning’s action looks excessive relative to the strong bounce in oil prices and once some liquidity returns, the price action in EURNOK can fall in the short term as fast as it has risen – but the currency is untradeable at present, although as I am writing this the Norges Bank released a brief statement suggesting it is looking at intervening.