FX Update: Eurogroup meeting stumbles, risk appetite wobbles

Below a few thoughts on developments that will have a bearing on FX in the coming few sessions. Please note that my next update will be on Tuesday, April 8.

Eurogroup meeting failure…so far. The announcement this morning that the Eurogroup had failed to come to terms on a response to the coronavirus outbreak in the EU briefly spooked markets this morning. But the failure isn’t a case of collapse and a parting of ways as negotiations will continue tomorrow after some of the participants claimed that agreement was near on some half a trillion EUR of measures overnight. As we discussed on today’s Saxo Market Call podcast, if the Eurogroup does come up with something, it may be an ad hoc “fudge” or transfer of assistance that, even of significant magnitude, fails to establish a more permanent framework that would flatten financing conditions across the EU or establish any path toward debt mutualization.

As I stated in a conversation on Twitter this morning, either the EMU moves toward all in and a path to debt mutualization or the EU devolves into a free trade zone with multiple currencies – there is no long term for the status quo. That being the case, the “redenomination risk” is extremely high if the path toward closer union is not established soon and that would have to be expressed as pressure on the currency at some level. In the meantime, it is difficult to assess the potential for existential strains to be realized in the short term as the ECB can keep its heavy hand in the market to keep spreads compressed.

AUDUSD – the S&P ratings agency downgraded the outlook on Australia’s AAA sovereign debt from stable to negative, the first of the major agencies to do so. S&P said that the fiscal and economic risks are tilted toward the downside and that “ we could lower our rating within the next two years if the Covid19 outbreak causes economic damage that is more severe or prolonged than what we currently expect.” The Aussie was only modestly lower on the news as Asian markets were in a fairly positive mood overnight, and there is no real risk to Australia sovereign debt except from a currency angle as the country is the master of its own currency. But we will watch the 0.6000 level closely in AUDUSD, a big psychological level and near where the recent consolidation found support.

Risk appetite in limbo – new lines in the sand. – FX continues to trade in correlation with risk appetite and we watch the key lines in the sand in equity markets now after yesterday’s session took the wind out of the bullish case and saw the average revisiting the key support levels (former resistance lines) of 2641 in the S&P 500 and 8000 in the Nasdaq 100. A failure of these levels on high momentum will likely lead to FX aligning again on risk off – with commodity currencies and EM under pressure against the USD and JPY.

CAD ahead of weekend – we have spilled considerable ink on discussing CAD downside risks. With this late surge in equity markets and stabilization in the price of crude, USDCAD has managed a move all the way back down to 1.4000 and even then some – but we will be watching the pair closely for a fresh upside move if the OPEC+ meeting tomorrow can’t engineer a larger oil price recovery as we discuss below.

Chart: USDCAD
USDCAD has worked its way back to the 1.4000 area and even a bit more over the last couple of sessions. We are not hopeful that the OPEC+ meeting scheduled for tomorrow can do much to curtail production in the near term and the risk remains of a significant further pain for oil prices in coming months. On that note, the deep consolidation in USDCAD looks tough to maintain at these levels and we look for fresh signs that buyers are coming in to take this pair back to the top and even beyond as Canada grapples with a private leverage bubble far worse relative to GDP than anything in the US and as oil prices likely are set to remain under pressure in an economy with a significant energy component.