Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Fed floods system with liquidity, USD finally responds
John J. Hardy
Chief Macro Strategist
Summary: The US Federal Reserve unleashed its most consequential torrent of liquidity provision yesterday with a raft of measures aimed at backstopping the US financial system. The market has done a double take as we are still awaiting for a US Congress to approve a rescue package, but sentiment has improved this morning and sent the USD lower.
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 Fed’s big move yesterday and much more.
The Fed unleashed The Big One yesterday, a full raft of measures aimed at providing endless liquidity and keeping credit flowing across the board, from unlimited traditional QE to new asset purchases of corporate debt and CMBS, extension of bridge loans and more. More from the Fed will follow for small businesses, but this was the big one. See the spirited take on what the Fed just did from the great wolfstreet.com website. Risk sentiment jumped on the announcement, but quickly faded in subsequent hours as the US Congress continues to struggle with passing a bill to support the economy with cash drops for workers and much more. The market has apparently decided that the latter is forthcoming soon and US equity futures were limit up as of this writing while the US dollar has eased back lower, a bit more so against the less liquid currencies – particularly NOK within the G10 – whew: USDNOK traded as high as 11.93 yesterday and was as low as 10.91 as of this writing.
In the EU, the flash March PMI numbers out this morning were a disaster (France flash March services PMI at 29!) but largely meaningless as markets are operating on a forward expectations basis and know that economies are virtually shut across the EU. Italy may be rounding the corner on the Covid19 outbreak in terms of the spread of the disease, but no one has an answer for the pace at which EU countries and eventually the US can achieve a “de-quarantine” akin to what China and perhaps South Korea have achieved and a return to normalcy again.
Interesting to see US President Trump railing against the public health authorities urging to shutdown economic activity for an extended period to slow the disease. The US may already be on course to suffer a worse outbreak of the disease than some EU countries due to the tardy policy response.
Chart: AUDUSD 4-hourly
The AUDUSD is a decent proxy for the USD vs. risk equation we are presented with here across markets, with a tactical bull-bear line around 0.6000 – close to the prior rally high and a major level stretching all the way back to the financial crisis. If the market has finally got the sense that the contagion across financial markets is contained here, even with significant real economic damage to come, the USD could be in for a tactical drubbing. And in this pair, a break of 0.6000 could point as high as 0.6500 without yet turning the trend that has developed over the global deleveraging in the wake of the Covid19 outbreak.
The G-10 rundown
USD – as noted in yesterday’s note, the US dollar is the key flipside of the global risk deleveraging and its fall here would be a coincident indicator on seeing more stabilization across global markets.
EUR – watching for mutual fiscal measures and “coronabonds” as a potential backdoor to that eventuality as the key development for Europe. The euro may provide low beta to risk appetite relative to smaller currencies. EURUSD has a lot of work to do if it is going to reverse the recent move lower – starting with 1.10, but really 1.1200 needed.
JPY – we are working into the final week of the Japanese financial year and JPY crosses largely reflecting a correlation with risk appetite outside of USDJPY, where the USD liquidity question dominates. Breaking: the Japanese GPIF pension fund is upping its allocation of foreign bonds to 25%, a rise of 10%.
GBP – sterling reaching for stability and likely to see a powerful bounce if broader risk sentiment improves, despite the more comprehensive Covid19 shutdown measures now in effect for the UK. 1.2000 is the first major resistance for GBPUSD.
CHF – stability in global markets and potential for EU fiscal could encourage some consolidation higher in EURCHF, but the pair continues to look heavy – so little visibility here., and weekly sight deposits suggest SNB leaning heavily against CHF upside.
AUD – surprised the AUD rally hasn’t waxed even more aggressive as of this writing – watching the 0.6000 area in AUDUSD for possibly unleashing another significant extension higher.
CAD – plenty of room for USDCAD to consolidate lower here if the mood improves for a spell without changing trend – even something like 1.4000 is within easy reach, especially if oil has found a major low for the moment.
NZD – ditto AUD comments above, with AUD perhaps set to outperform if the mood improves after NZD outperformed during the panic deleveraging.
SEK – Sweden stands to benefit greatly from an EU fiscal push – where is the Swedish government, however – need them to swing into action on top of EU fiscal for a better SEK boost. Risk at the margin for Sweden, however, as the country has run the most lax policy on the Covid19 outbreak in recent days.
NOK – the highest beta currency within G10 at the moment to swings in oil and risk appetite – next levels of note are 11.50 and then 11.00 – hard to see a full reversal of this move without oil achieving the same, however.
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