Chief Macro Strategist
Summary: The US dollar is on the rise once again as risk sentiment looks wobbly and after US Fed Chair Jay Powell spoke out against the use of a negative interest rate policy yesterday. The EURUSD super-major remains poised around the very sticky 1.0800 level as we wonder when, if ever, the broader USD will make its move.
Yesterday, Fed Chair Jay Powell dismissed that the Fed was even considering a negative rates policy as a likely tool, saying “the committee’s view on negative rates has not changed. This is not something we’re looking at.” Powell highlighted instead the need for fiscal tools to deal with the crisis. Of course, believing that the Fed knows where it is going with policy is shaky, given that circumstances have consistently made a mockery of the Fed’s own predictions, from Bernanke’s assessment of the risks of the subprime housing bubble to the 2019 Powell Fed’s about face when It moved to expand its balance sheet and cut rates. Powell’s speech and the negative market action after the speech and later in the day saw the USD and even more so the JPY pulling higher on the day.
The market action has taken the price action back to the precipice of a wider USD breakout to the upside, though several recent teases higher in the USD that never ended up leading anywhere keep our confidence low that “this is the one”. One factor suggesting we should take the risk a bit more seriously, however, is the wobbly risk sentiment in equity markets and the sell-off in corporate bond ETF’s over the last couple of days, which coincide with the start of the Fed’s actual purchases of that debt.
The USD direction here occupies most of our attention at the moment, though there are some interesting subplots developing here and there. We have talked about the massive fiscal surge in Norway and how that could drive NOK strength and the RBNZ clearly . Today, we will watch the Bank of Canada’s Financial System Review release and the ensuing Poloz press conference for signs of whether the Bank of Canada is considering new policy options as well – USDCAD has been caught in a winding, coiling consolidation like a number of USD pairs. In EM, we note the HUF looking wobbly and how USDMXN deals with today’s Bank of Mexico rate (cut) announcement.
Chart: EURUSD
Is waiting for a EURUSD downside break like waiting for Godot? This 1.0800 area has been sticky since even before the Covid19 crisis and the pair needs to find sustained separation in either direction to indicate it is going somewhere. A EURUSD break lower is the major piece needed to argue that a larger USD breakout is afoot and could further aggravate wobbly market sentiment elsewhere in a self-reinforcing loop – also as a USD break higher could set in motion concerns about the critical USDCNY exchange rate as the big 7.20 area would likely come under fire in a broader USD surge.
The G-10 rundown
USD – the dollar firming up as risk sentiment sours – so far nothing broken, but we continue to watch for volatility and momentum to pick up - most notably in EURUSD, the key piece for a broader USD surge.
EUR – as noted above, this 1.0800 level is the key activation level for EURUSD volatility, but we also note that EURJPY is looking heavy once again. EU existential risks not finding major expression in the market, though yesterday’s objection from the German Constitutional Court’s Huber, telling the ECB that it isn’t the “master of the universe”, has registered as we continue to watch that issue as well as the MFF process (EU Budget for next 7 years) and how it will be funded.
JPY – the yen is somewhat quietly stronger than even a strong US dollar and playing its role to the hilt as safe haven – noting the heavy EURJPY pair, but also other JPY crosses as potential proxies for broader risk sentiment, if we are tilting toward a more significant setback. Even USDJPY itself could be at risk of a new breakdown as retracements levels on the latest rally impulse are falling like dominos.
GBP – sterling not the go to currency with a backdrop of weak risk sentiment. With EU political strife over budget issues likely here to stay, how much bandwidth will the EU have for dealing with the post-Brexit transition period UK relationship. In the meantime, we have highlighted our concerns on the UK’s external imbalances. In GBPUSD, 1.2000 is the next focus if this break lower holds.
CHF – we watch the success or failure of the SNB’s defense of the 1.0500 area for now as the chief input on whether paying attention to CHF is worth the effort.
AUD – employment data isn’t very useful, especially the 6.2% unemployment rate, when many people who haven’t worked a single hour recently are classified as employed on Australia’s “JobKeeper” programme, while their pay comes from the state. Still, the RBA seen as the least radical central bank in the neighborhood at the moment, providing support in some crosses.
CAD – important to watch today’s Bank of Canada Financial System Review for clues on whether the bank is considering more radical unconventional policy options to deal with the crisis. The Canadian mortgage and corporate debt markets are the next place to look for possible new measures.
NZD – this latest RBNZ meeting seals the deal for NZD bears as the central bank clearly wants to go to negative rates and keeps us looking lower for NZD versus AUD and the USD and even JPY for variety.
SEK - after the full circle sell-off that has created what looks a major top on the EURSEK chart, we are aware of “throwback rally” risks if broader risk sentiment is tilting lower again, but watch for signs of relative SEK resilience as the currency is extremely cheap. Bears may look to set up shop near the 200-day moving average at 10.69.
NOK – the threat of weaker risk sentiment and/or a fresh sell-off in crude oil is a near term risk, but the massive stimulus announced by Norway’s government will likely drive relative NOK resilience, so we prefer fading EURNOK rallies.
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