Macro: Sandcastle economics
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FX Update: A pivotal week for sentiment and the USD
John Hardy
Chief Macro Strategist
Summary: We continue to look at the US dollar as a linchpin and coincident indicator for global markets, as the US dollar needs to turn lower to indicate that US policymakers are beginning to get ahead in the race to mitigate the Covid19 crisis fallout. USDJPY is also worth watching for a pivot as we enter the final week of the financial year in Japan.
As usual, please consult today’s Quick Take for a great news roundup and setting of today’s market and trading agenda and then today’s Saxo Market Call podcast for our latest take on what we are looking for to see this market turning the corner (in short, credit, the US dollar and the volatility term structure).
The Friday close was a real disappointment as policymakers’ attempts to get ahead of the crisis and a hopeful start of the day ended with the market closing near the lows of the cycle in the US. Then over the weekend, Germany’s announcement of an enormous stimulus package of some 10% of GDP was promising as that country is finally enacting emergency provisions that allow it to veer away from its balanced budget orthodoxy. Mutualization is another matter, as discussed below.
And then overnight, the inability of Congress to agree on terms for a rescue package worth some $2 trillion saw another chaotic opening to trading this week. A package will be forthcoming, but will it prove enough to bolster confidence?. There is no doubt that policymakers will continue to pull out the stops to get ahead of this and eventually will, but in the meantime, major damage has been done via a resetting of volatility, credit lines and expectations.
Chart: USDJPY
USDJPY is a particularly interesting USD pair to watch into the end of March, which is the end of Japan’s financial year and could be seeing significant USD hedging activity. The past has seen rather dramatic turns in the JPY into the new financial year. The US Federal Reserve opening up standing swap lines with major counterparties like the Bank of Japan has helped to ease signs of USD funding strain, but a higher USDJPY from here continues to suggest USD funding pressure, and the rapid fire price reversal points higher until proven otherwise. A move well back below 107.50 – and really the very far away 105.00 – would be needed to suggest the USD more broadly is turning lower again.
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