Chief Macro Strategist
Summary: The roll into a new quarter is seeing an apparent hangover from end-of-quarter rebalancing and a fresh surge in the US dollar, which has even come back against a likewise strong Japanese yen overnight. This despite yet another Fed facility announced yesterday, this time to offer repos of treasuries in exchange for USD to global central banks.
Today’s Saxo Market Call podcast is worth a listen as we mull the degree to which the bump in equity prices into month- and quarter-end was down to a huge rebalancing push and has now led to a bit of a hangover risk and dearth of buyers as a new quarter is under way. Certainly we have the risk of binary outcomes here if the market can’t continue to push higher -i.e., a full revisit to market lows. Alongside that is the US dollar outlook, which looks similar – already we have seen another pivot higher in the US dollar this morning, which has even managed to move higher versus a hard charging JPY this morning.
I pushed out an EM FX Update yesterday, with extra focus on the Hungarian forint after the country has given its leader Orban the right to rule by decree indefinitely.
Spotlight on CAD
We shine the spotlight on the Canadian dollar today, where we continue to see risks of further weakness on a triple whammy of impacts. First, coming into this crisis, Canada featured one of the world’s largest private leverage bubbles – mostly in housing – ergo, the Bank of Canada will be busy loading a lot of that debt onto the public balance sheet and saving its huge “world’s safest” banks just as was the case for the US in its financial crisis – although most of the Canadian debt is held domestically and there are no big German banks and funds to absorb big chunks of the losses as was the case because of US investment banks’ shenanigans with “AAA” structured products before the housing crisis. Add to that the enormous whack to the Canadian economy from the freefall in oil prices and weak demand from its export market to the south and the fact that Canadian yields have fallen the most of all G10 countries because of the higher starting policy rate. We see considerable further downside risk for CAD from here.
Chart: USDCAD
Odd price action in USDCAD yesterday, which peaked out well above 1.4300 before getting pushed back almost to 1.4000 in late trading, only to bounce again today – but we ignore the bearish candlestick yesterday from that price action as a possible product of quarter-end flows. We still see the risks of a weaker CAD from here as noted above and the first signal for further upside risk would be a close near or above yesterday’s highs, which could set in motion a test of top and beyond.
EU focus: the first round of floating the idea of coronabonds was firmly rejected by a number of countries around the crisis summit last week, most vocally by the Netherlands’ leader Mark Rutte. But two of the four parties in the government coalition in the Netherlands have come out strongly against his stance and in favour of the bonds to support southern Europe’s struggle. This is an encouraging signal, but Germany-Italy spreads are above 200 basis points this morning: to avoid existential pressure from rising further, the EU needs to attack this crisis with full solidarity and some form of mutualization, whatever the approach, and the clock is ticking loudly.
The G-10 rundown
USD – the killer dollar rises again as risk sentiment sours and despite the Fed’s latest effort – likely only to peak once the crisis in confidence peaks for the cycle – as was the case in March of 2009. Watching ADP payrolls data later - there are so very many jobs in the US services sector that have been heavily impacted by the Covid19 crisis.
EUR – Germany-Italy spreads creeping wider – we need to get better solidarity signals from EU on how the periphery will fund its enormous fiscal needs and fast – next chance the April 7 meeting and the periphery pushing back hard today on using the ESM as opposed to mutual debt. Test of lows risk in EURUSD without stronger signals from EU leaders.
JPY – the yen trying to do its job as safe haven overnight, but showing signs of playing second fiddle versus the killer US dollar we get deeper into the European hours today. Still, note EURJPY downside pressure as a possible theme
GBP – sterling outperforming the EUR, but fading against the strong US dollar. Not sure what to do with the currency tactically, though like it for long term versus the euro – and may outperform commodity dollars further.
CHF – doesn’t look tradable for now as upside pressure contained by increasingly large efforts from SNB to intervene. Longer term question in back of mind: will the end of CHF upside pressure come in the event a domestic housing bubble unwind is set in motion?
AUD – the 0.6200 area saw the air getting thin for AUDUSD – looking for test of lows on global growth outlook and domestic credit crunch in housing.
CAD – as we outline above, there are many ways to dislike the loonie – looking for test of 1.4500 in USDCAD to start, possibly to shift well in excess of 1.5000 eventually before all of this is done.
NZD – the killer USD to be felt in NZDUSD downside if weak conditions prevail for this excessively strong currency. Looking for a retest of lows.
SEK – the Swedish krona hanging in there, perhaps to a degree on quarter end effects yesterday – but backdrop not supportive for SEK if we are tilting back into risk off. Technically eyeing 10.80-11.00 zone for direction.
NOK – EURNOK 11.50 still hanging in there as of this morning – watching the oil prices a year forward for a better indication on NOK prospects than spot – which can go literally anywhere. Fiscal stimulus supportive at the margin as it requires NOK purchases.
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