FX Update: Fed floods system with liquidity, USD finally responds

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.