Fed Unveils Massive Backstop, GBP Price Action Dizzying



To say the least, financial markets have been crazy the past several weeks, and while things will eventually simmer down, we continue to err on the side of caution in making any strong directional calls. Longer term clarity is lacking in the face of erratic short-term volatility. Take GBP/USD for instance, it went from 1.32 to under 1.15 in less than two weeks, and now a little over a week since troughing it’s trading at 1.24. It would be equally unsurprising if by mid-April cable is trading 1.35 or as low as 1.10.


Expect the unexpected.


Large gyrations in the FX market will sort themselves out, discernable themes and trends will eventually emerge. But until then, we firmly believe it’s prudent to pitch a tent in the conservative camp, keeping FX policies tilted towards neutral. At the least, taking this stance will be effective in dampening cash-flow volatility. It’s also a remedy for market-induced insomnia, if you ask us.


The unpredictability of the coronavirus is obviously a problem in trying to put together polished outlooks on financial markets. It’s not just the path of the virus itself that is the problem, but how governments are responding to it. In countries where government acted preemptively and aggressively, the curves are being flattened at a faster rate than in those countries where a reactive approach has been taken. Cultural differences make a difference too. On one extreme, Asian culture is more obedient and sensitive to epidemics, and on the opposite end of the spectrum you have the Americans, for as much as we love them, can be far from obedient. Swift and strong action by government coupled with a cooperating society seems to be the best way to battle this bug until we learn how to treat this thing. The question is how long will that be, and once we return to a more normal day-to-day, which is almost surely going to be before we have a vaccine or cure, will we see another resurgence? No one really knows.


USD


The Fed goes ‘unlimited’ with QE. By providing liquidity to the tune of “whatever it takes”, the Fed is backstopping markets and keeping credit from freezing up. More has been done in the past two weeks than was done during the span of 8 or 9 months during the Great Financial Crisis. The government is helping out on the fiscal side, as well, with a $2 trillion stimulus package. The unprecedented measures put the dollar on its back foot as one might expect, but it is unclear how long this will last.


There still remains a massive need for dollars. There is $12 trillion of outstanding debt held globally, and is expected to increase further by year-end. Furthermore, the Fed backstop may reinforce USD’s safe-haven status, causing an in-flow. There are numerous economic releases in the week ahead – it’s not a question of will they be bad, but how bad. Last week, 3.3 million people filed for unemployment, multiples of the record-setting reading in 1982.


Non-farm payrolls are due out on Friday.


GBP


Cable is flying again (for now). Cable blasted off last week by nearly 9%, as some order was restored to financial markets. It’s hard to say if the recent plunge or rise, or both, were an overreaction. Momentum is fierce on the top-side right now, but as we have seen that can change on a dime. The data docket is light in the week ahead.


GBP/USD Chart (Extreme volatility)



EUR


Euro is holding on to long-term support. Last week, EUR/USD rocketed off trend support extending higher since the 1980s, when constructing the euro using its current constituents. This will continue to be a major point of technical interest. What blows the euro higher or lower is still to be determined. There has been a near 2000 pip travel range over the past five weeks. Unless you are focused on very short-term momentum, getting a feel for how things will play out is difficult at this time. The long, long-term view that the euro is structurally challenged hasn’t changed, and in the end it seems inevitable that the dollar, with its stronger foothold, will prevail to a significant degree against the single-currency.


JPY


JPY is all over the map. Early in the month there was a sudden breakage in JPY’s often reliable link to risk assets during times of stress. USD/JPY was selling off with the stock market in-line with expectations, but suddenly found a bid as the focus shifted from the pair trading with risk markets to trading higher with the dollar. As is the case elsewhere, some time is needed to get a better handle on further directional cues. The yen is essentially unchanged on the month, and over the past few years for that matter. That isn’t likely to last, though, as the year progresses and markets start to sort out who will be the winners and losers.


AUD


AUD/USD is recovering strongly at the moment. Aussie sunk below the 2008 lows of 0.60 as anticipated, but has recaptured that low nearly as quickly as it was lost. The panic low at 0.55 may hold for a while, but the multi-year trend feels too entrenched to be seriously threatened at this time.


CAD


USD/CAD retreating from the 2016 high. USD wasn’t spared against CAD this past week. This may only be a transient event, as hardships from oil prices remaining extremely depressed for a period of time will weigh on the Canadian economy. WTI crude oil is trading at a 17-year low. At some point this year it would unsurprising to see USD/CAD trading in the 1.50s, levels not seen since the early 2000s.



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