FX Update: Fed bazooka fails to impress. G7 meeting next test.

Trading Interest

• This market is largely untradable in terms of spot – but interest in medium to longer term EURGBP downside via options and same for GBPUSD upside if GBPUSD approaches 1.2000.

Global central banks pulled everything they could muster out of their hats at the weekend, topped by the Fed’s 100 basis point rate cut late on Sunday, together with another $700 billion in Fed QE (treasuries and mortgage backed securities), and coordinated central bank announcements on expanding USD swap lines on signs of USD funding stress. The S&P futures nearly immediately jolted to limit down, erasing a good portion of Friday’s zany late rally that was likely inspired by anticipation of action over the weekend. European indices are plumbing new depths this morning. The reaction speaks to the severity of the contagion across asset markets amidst this mad dash for cash and stresses in USD funding as so many assets around the world are denominated in USD. We’ll discuss more in the days and weeks ahead, but there is a huge global “redenomination risk” as the problem is vastly larger than anything central banks can bring to the table.

The New York Times argues that as few as 20% of workers would quality in the of the deal struck between Congress and the White House on paid sick leave and other measures – where the onus is on the employer to provide the pay. This is incredibly tone deaf to the scale of the needed response and we can expect US lawmakers to come with ever larger rescue packages from here – taking US deficits to perhaps double or more of their current size (Fed balance sheet set to explode). Take Denmark, where the government is backstopping pay for all employees directly impacted by the crisis up to a certain level of pay. And the shutdown in the US has yet to truly begin. Note that the CDC has issued guidelines discouraging gatherings of more than 50 people for the next eight weeks. Local authorities, whether municipalities or states, will use these guidelines from here and we can’t imagine the numbers that will be incoming for March and April, as the US economy is 70% services based and will be suffering a virtual shutdown.

Chart: EURUSD
The euro and the yen are benefitting in relative terms across the board from the opening up of USD swap lines and EURUSD helpfully found support ahead of the critical 1.1000 level at the 61.8% Fibonacci retracement, but needs to pull back above 1.1400 to suggest that the US authorities are getting ahead of the crush on USD funding issues. If the pair fails back to the lows here – it’s a sign that more must be done to turn back the killer dollar.