FX Update: Risk correlated currencies bounce on US fiscal hopes

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 in which we discussed the market’s big positive risk sentiment shift and the potential for a nervous stability to shape up here.

After a mixed reaction to the Fed’s enormous move at the start of the week to backstop the markets, we saw far more constructive response to policymakers’ attempts to get ahead of the crisis as the Democrats in Congress and the Trump administration have apparently reached a deal that will be signed as early as late today and mean on the order of $2 trillion in fiscal stimulus.

The EU is the next focus as we await the scale of debt mutualization of “coronabonds” a revolutionary move as these would be funded by the European Stability Mechanism (ESM) and represent real mutual EU debt for the first time. The initial scale looks modest at 2% of member countries’ respective GDP, but it is still a momentous development. Japan also out looking at cash drops for every citizen similar to the scale of the package in the US.

The Covid19 outbreak is seeing shutdowns spreading around the world, with India announcing a three-week lockdown after the UK did so yesterday. The scale of the US outbreak will be critical for seeing whether the rest of the country ends up in total lockdown – certainly the “15 days” that the Trump administration has discussed for a lockdown period looks unrealistically short. I have personally been locked down for two weeks already in Denmark and they have extended the measures here until after Easter, which is over two weeks away.

Looking ahead, there is a lot of chatter about quarter-end rebalancing, especially of bond-equity portfolio allocations completely out of whack and favoring the latter if portfolio holders are to maintain their allocation models after the epic slide from mid-February to the lows this week. If this is true, it would theoretically support the higher risk currencies versus the G3, though my trading stance is one of fading enthusiasm tactically in FX into quarter end now that we have bounced so much already in the likes of AUDUSD and especially AUDJPY even if we are convinced that the authorities will continue to flood the system with stimulus and support until they finally get ahead of the curve over the medium term.

Chart: AUDJPY vs. US 10-year yield
We flashed this chart on the today’s Market Call podcast, and interesting to note that the long US treasury yield (the white line in the chart below) has been leading the price developments for AUDJPY, a classic proxy for risk appetite in G10 FX. The enthusiasm for equities yesterday didn’t see the bid for treasuries fading much – that could in part be due to certainty that the Fed will continue to keep interest rates low with its unlimited QE, but it is a divergence nonetheless. A key resistance level coming up for AUDJPY around 0.7000 as we watch how far this bounce in sentiment can extend.