FX Update: A new Black Monday

Trading interest

• Taking profit on EURUSD 1.1200 call (expiry Nov 6 – established near 120 pips – currently (with spot trading 1.1410 this morning) near 470 pips)
• Halving USDJPY short – taking approx. +300 pips profit and staying short remainder for 100.00 target lowering stop to breakeven 105.30

Please have a listen to today’s Saxo Market Call podcast, in which we discussed the general lay of the land, running through the oil market drama since Friday and why this has spread to global markets.

Saudi declared an oil price war at the weekend and plunged global markets into chaos, on fears that the destabilizing move will wash over credit markets, triggering defaults and a new credit crunch. In FX, oil-exposed currencies were ripped for staggering losses as USDRUB traded almost 10% higher at one point this morning, and EURNOK almost touched 11.00 before retreating to  10.78 as of this writing – still some 3% clear of the all-time high weekly close on Friday.  Elsewhere, the JPY played its traditional role in spades, absorbing massive safe haven flows overnight and touching almost 101.50 in USDJPY as US equity futures hit limit down levels of -5% as the US 10-year treasury yields spiked down to 0.50% and beyond and the 30-benchmark treasury year yields is still below 100 basis points as of this writing. We are clearly in a whirlwind and traders should deleverage accordingly.

Let’s recall where we came from at the end of last week as it is important for the response function from policymakers from here: The market tried to put together a solid rally into the Friday close after the Fed’s Rosengren said that the Fed should be ready to expand the types of assets it is willing to buy in a crisis – which many read as meaning stocks and possibly corporate bonds, although Rosengren also pointed out – very critically – that doing so would require a change to the 1913 Federal Reserve Act – something that would require cooperation in a divisive US political environment, to say the least, in an election season. In other words, the Fed’s room to maneuver, given that need change its mandate, is very limited here, as yield curve control measures are irrelevant unless that means the Fed takes the front end of the curve deeply negative. That leaves the Trump administration as the first responder in the US, and given his desperation to lift confidence, he will be willing to do empower the government to do nearly anything to get ahead of this sudden forest fire.

We can’t underline enough that markets are very dangerous here – and in both directions – as further panic deleveraging is a prominent risk and as the selling inevitably sparks the next, ever escalating panic response from policymakers. I maintain that this can get bad enough for the authorities to actually close markets entirely for trading – maybe for a week or two in order to - something that hasn’t been done in a long time, but something made more possible because of the “excuse” of the coronavirus outbreak. That is not a prediction, just a warning that traders should consider trading lightly and staying reasonably liquid, keeping vastly reduced leverage.

Chart: EURUSD
EURUSD lurched all the way to the 1.1500 area – typical for the pair to find resistance at a round number – before easing back lower in early trading in Europe. I wonder if the pair is on an unsustainable spike at the moment. Yes, the pair has spiked higher for good reasons – first because the entire front end of the US yield curve has been sliced to almost zero at a breathtaking pace and the EU-US yield spread all the way out the curve has been similarly crushed. As well, the market was heavily short the Euro on as a carry trade funding currency just ahead of this crisis. But once the positioning adjustment has been made, we have to consider the difficult time Europe has in responding to crises due to its unwieldy political foundations and the risk of fresh existential concerns rising. In such vicious price action, it is tough to latch onto levels, but the impression of a reversal rises if the price action ends the day close to 1.1300 or lower. Stay tuned.