We’ll begin by saying that at this time the best view, in our view, is to have little to no view at all. That is, it is best to adopt a neutral stance in the FX market and let the chaos shake itself out before leaning too far in one direction or another. The path of least resistance in stocks, bonds, and oil has been pretty straightforward – down, up, and down, respectively. But in FX it has been anything but a straight path outside emerging market currencies and the Canadian dollar.
We remain firm on our outlook that we’ve entered a new regime of higher volatility for some time to come, as markets have been dislodged from their fog of complacency. But there is manageable volatility (not now) and unmanageable volatility (like now). We are confident, though, that clear themes will emerge in the not-too-distant future, and on that, making adjustments to reflect those cleaner outlooks will make more sense at a later time.
The past week has brought with it massive liquidity injections and rate cuts from central banks, along with fiscal efforts as well. So far it is holding little meaning to risk markets as stocks continue to plunge at historical speeds. It is difficult to see how measures taken will matter in a material way right now when the global economy is grinding to a halt. It is unclear what will arrest the decline in global stock markets outside of either the virus spread curtailing (which is not expected to happen for a few more weeks) or markets close for a period of time, an increasingly likely manoeuvre that may soon be made.
USD The dollar down move may have been a head-fake. This is only a potential scenario that will hopefully gain clarity in the weeks ahead as to whether it is correct or not. The sell-off from the February high was largely driven on an overly long market caught leaning the wrong way as the US rate outlook collapsed. Now that the market has reacted, we may be back to looking at the dollar stringing together a run based on the simple idea that there may not be any better place to hide. Again, we will let things clear up a bit before running too hard with a theme. Last week, the Fed provided three rounds of liquidity injections, with a massive one on Thursday by providing up to $1.5 trillion in liquidity, along with another 50-bps cut yesterday.
GBP Easy come, easy go. Cable (GBP/USD) highlights the chaos in FX about as well as any pair out there. Last week it came out of the gates hot, looking poised for a run, but then even more quickly than it rose it eroded into the BoE’s 0.50% cut. It only got worse from there, with GBP/USD ending the week lower by 5.89% –the biggest down week since January 2009. The coronavirus is problematic for everyone and everything, including EU/UK talks which have been put on the back-burner for now. The lows from 2016/2019 just under 1.20 are at risk now. If the real move is higher for the dollar versus not only EM (Emerging Market) currencies but DM (Developed Market), we may be looking at further continuation of the downtrend that began after the 2007 top. We will reserve further judgement for a later date. But to be clear, the support in the 1.19s is very important.
Euro rally jack-knifed. The euro benefited from substantial unwinding of shorts with the carry-trade coming off and interest rate differentials collapsing. But the rally stalled out just shy of 1.15 last week, and beneath the 1.17/20 zone we saw as a potential target. EUR/USD is all over the place, but if push comes to shove will the market want to own the structurally-challenged euro or more strong-footed dollar?
JPY is at the mercy of both risk and dollar flows. One minute the yen is acting as you would expect in a massive global sell-off in risk (flying higher), and then the next minute it is getting knee-capped by a surging dollar. More USD/JPY strength may be underpinned by both a stronger USD and stabilising in risk markets, when they stabilise. This combination could spark some major strength ahead, but that notion could get turned on its head.
AUD/USD is staring at the 2008 lows. This is one area where our outlook, while not without its bumps, has held for the most part, as the Great Financial Crisis lows are only a stone’s throw away at the 0.60-line. The RBA recently cut rates by 25bps to 0.50%, and yesterday the RBNZ slashed rates by 75-bps to 0.25%.
USD/CAD has been a relatively smooth glide higher, in-line with expectations once it broke beyond key thresholds around the 1.34-mark. Right now, we continue to stand firm on our long bias towards 1.47, and potentially higher. Oil weakness is going to continue to be a big headwind along with demand for dollars.