Macro: Sandcastle economics
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FX Update: FX mostly trading on the axis of liquidity
John Hardy
Head of FX Strategy
Summary: The most obvious China-linked commodities and currencies are still suffering from the coronavirus dread while other markets try to look beyond the situation, a still painful dissonance for traders ahead of a nervous weekend. Next week sees a busy macro calendar and a test of whether sterling can continue to spread its post-Brexit wings.
The WHO officially declared the coronavirus as a PHEIC, or public health emergency of international concern, but bent over backwards to encourage people not to change their behavior – huh? The WHO press conference may have been behind the US equity market pumping into the close and treasuries also weakening after local new lows in yield across the US yield curve were posted. We don’t take solace from the WHO press conference, which looked rather politically motivated to avoid being behind any disruption in economic activity rather than offering the best advice on how countries should deal with this disease outbreak.
We should have rather nervous markets here ahead of the weekend on the risk of further travel restrictions into China and other disruptions, or announcements of market closures in China being extended, etc, not to mention the risk of signs of virus spread. We continue to argue for a very defensive posture.
The biggest mover over the last couple of sessions within the G10 is sterling, as the market has taken the BoE no-cut and run with it. Today marks the official date that the UK leaves the EU, even if conditions on the ground are essentially unchanged under the transition agreement through the end of this year. As we write, EURGBP is poking at the January lows – more below.
Note that next week’s calendar offers the usual busy first-of-the week macro data from the US, including the two ISM’s on Monday (Manufacturing) and Wednesday (Non-manufacturing) and jobs report on Friday. Also, on Monday, we kick off the 2020 election season in earnest with the Monday Iowa Caucuses, the first Democratic primary. The market may actually react to that on a sufficiently strong result for Bernie Sanders. We have seen anecdotally that there is a very strong consensus in the market that Trump will win re-election – something we believe is very unlikely.
Chart: EURGBP
Sterling is surging to new local highs in some of the crosses, and EURGBP is looking at the January lows this morning. Carney’s swan song failed to bring the rate cut that was perhaps a bit more favoured than reflected in recent expectations surveys due to the coronavirus outbreak. The MPCs hold out hope that the recent surge in surveys is a sign of better things to come. We are a bit taken aback by sterling’s ability to power higher despite all of the uncertainty elsewhere, but respect the move at face value as we watch whether the key benchmark EURGBP can poke and hold below the prior lows and go on to challenge the post-December election spike lows.
The G-10 rundown
USD – the greenback is lost in the desert and at a loss for a volatility catalyst. A heavy calendar next week – both macro and political – could see a bit more action on any particularly pointed data surprises. The key EURUSD pair needs to show more dynamism to gin up an isolated USD view – either south of 1.1000 or north of 1.1200.
EUR – there is little to like in Europe in economic or policy outlook terms, but the euro is possibly resilient here on carry trades unwinding as all risk-correlated currencies are under pressure and position squaring may be keeping the Euro aloft at the moment. Italy and France both printed negative GDP in Q4: -0.3% and -0.1%, respectively.
JPY – without a consistent risk-off picture across both fixed income and equties, yen simply languishes without direction within the G3.
GBP – we respect the sterling surge on the back of the BoE’s non-cut here but wonder how long it can continue if the backdrop remains pessimistic on coronavirus concerns.
CHF – the CHFJPY pair one of the more interesting technical setups here as the late reversal looks bearish – EURCHF seems to have low beta to the market’s gyrations from a safe haven perspective.
AUD – the AUD under severe pressure here and for good reason as key commodities prices are under extreme pressure and Australia’s economy is so leveraged to Chinese demand. AUDUSD is trading below the lowest daily close since 2009 as it looks below 0.6700. An RBA cut next Tuesday could deepen the slide if virus concerns continue next week.
CAD – the commodity currencies all on the defensive and USDCAD looks ready to challenge the top of the range above 1.3300 if this drags on any longer, and even the trend line currently coming in around 1.3400. The latest monthly Canadian GDP print up later today.
NZD – the kiwi is more forcefully breaking down against the safe haven currencies and in danger of a full downdraft into the cycle lows below 0.6300 if the backdrop remains hostile on fears for Chinese demand for NZ exports/risk off.
SEK – EURSEK looks in danger of a full squeeze back into the upper range to 10.90+ here after weak EU growth figures this morning if it holds above 10.65 and if risk aversion deepens.
NOK – a worrisome December Credit Growth Indicator released this morning, which shows credit growth slowing sharply to a cycle low of 5.1% YoY and underlining the Norges Bank comments that it sees some domestic softness. New lows in short Norwegian rates this morning – and EURNOK has broken up.
Today’s Economic Calendar Highlights (all times GMT)
- 1000 – Euro Zone Q4 GDP Estimate
- 1000 – Euro Zone Jan. Flash CPI
- 1330 – US Dec. PCE Inflation
- 1330 – Canada Nov. GDP
- 1445 – US Jan. Chicago PMI
- 1500 – US University of Michigan Jan. Sentiment
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