Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: NOK as a microcosm of FX and global markets
John J. Hardy
Chief Macro Strategist
Summary: The Norwegian krone was at the confluence of a number of forces acting on global markets yesterday, and was a kind of microcosm of what is going on across markets. The profound decline and reversal in NOK offers some hope that at least the markets are trying to find some temporary stability at the moment.
A brief update today – 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 at ahead of this weekend.
Yesterday was another day full of wild swings in the market, one that generally saw the USD spiking to new highs across the board – a move that was thankfully reversed overnight as this is our key indicator for the ability of global markets to begin to calm. Yesterday, the Fed opened up swap lines to another long list of countries’ central banks, including, very important Norway.
We pull out Norway in our discussion today as it is the single currency at the confluence of the drivers that have been shaking global markets in recent weeks. The first key that brought NOK back from the brink was the abovementioned USD swap lines opening up and the Norges Bank indicating that it was ready to intervene in the market if necessary. The second key was the oil price vaulting higher from yesterday’s fearsome lows on the news that the US may look to mediate between Saudi Arabia and Russia in its ongoing price war. In short, the Norwegian krone is a kind of microcosm for whether markets can piece together some stabilization and even normalize somewhat, even as the Covid19 news is hardly likely to improve for many countries, including Norway, that are in the exponential upswing portion of their outbreaks.
By the way, after cutting rates by 50 bps just last week, the Norges Bank slashed the policy rate 75 bps further just this morning to take it to 0.25% - still matching the highest policy rate among G10 currencies. NOK hardly blinked as the other factors above dominate the situation for now
Chart: EURNOK
EURNOK has traded in a shocking 10% range over the last couple of sessions and is an excellent barometer of global risk appetite, trading as it does with considerations of global liquidity, the oil price and natural gas prices and the outlook for the global economy. EURNOK has likely put in a top for now if the oil price stabilizes and rises from here and could be set for further gains once the EU Covid19 outbreak fallout begins to bend in the right direction for Europe as a whole. Still, it will likely prove a bumpy ride for NOK traders, with near term risks that US overtures to mediate in the oil price war are rebuffed. It is clear from current and past price action that round price levels (11.00 – 11.50, 13.00, etc.) loom large in traders’ minds.
Across the rest of FX, we continue to watch for signs of further stabilization heading into the weekend, as the world can ill afford another ugly close and long wait for Monday. Besides NOK, we would also pull out the solid sterling rally as a ray of hope that a major low in sterling versus the euro at least may have been found as the market sold EURGBP heavily on the news that the Bank of England was chopping rates to 0.1% and expanding its QE programme by £200 billion.
We will also watch for EU fiscal announcements and debt mutualization as a key sign that the EU will continue to avoid existential risks.
It will be important to watch whether the oil price has stabilized here as well, as we will need to see follow up action from the oil producers on the fearsome risk of demand dropping by as much as 8 million barrels per day or more globally over this Covid19 response. My colleague Ole S. Hansen is the place to go for updates on the outlook for crude oil.
I still tread with extreme caution here – we don’t know where all of the stresses in the system are and credit events are a further risk, even as central banks and governments scramble to contain the damage.
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