The past week brought with it some calm, as markets have taken some comfort in having backstops and liquidity measures put in place. For now, at least. But there is so much more to the corona saga yet to unfold, and impacts that can’t be accurately forecasted. No one has a good handle on this. Data releases wildly missing analyst estimates is proof of this. Take for example, US initial jobless claims last week, the Bloomberg analyst consensus estimate was for 3.7mm new filings, however, the actual number came in at a staggering 6.65mm. But even as such, the market reaction was small, as much pain has already been baked into the cake.
USD USD shortage will remain a concern. The $12 trillion (and growing) in global dollar-denominated debt continues to be a valid source of angst. Right now, we are seeing dollar fears unfold in emerging market currencies, but the storm isn’t too far removed from development markets. The Canadian economy, for example, hinged to its oil trade, has the Canadian dollar at significant risk. But so are others, the euro and yen are a couple that could quickly find themselves on the wrong end of a dollar-made shillelagh. Sterling isn’t immune, either – the recent double-digit collapse in the span of days highlighted this fact.
GBP Looking forward to better directional cues. While the euro fell by a material amount last week, sterling held up relatively well, and so it was reflected in GBP/EUR stringing together another winning week. The cross sits squarely in the middle of a 3.5-year trading range between 1.05 and 1.21. Trading mid-range means there is about equal probability that it could go to the high or low-end, but we’d lean slightly towards higher at the moment given euro weakness. With FX volatility here to say, at some point, one side of the range will break with a clear, supportive driver. With that said, we continue to reserve judgement at this time for situations we are more confident in. There are UK data points peppered throughout the week, with the bulk of them on Thursday. Big deviations are anticipated, but the market isn’t likely to react too strongly since big misses are the new normal.
GBP/EUR Chart (middle of the range)
Euro weakening again. The price action has turned soft, and the more it presses around the 1.07 price area the higher the likelihood that sellers gain the upper hand. The structurally-challenged euro was weak before the coronavirus, and now its future is about as uncertain as ever. It won’t take much of a shove to see EUR/USD trading at parity, or worse.
JPY clarity lacking. The wild swings of the past two months have left USD/JPY no better or worse off. But the yen joins the euro in its critically weak backdrop; will we see both of these currencies start to fracture here shortly? Above 112 and below 105 USD/JPY things get interesting, especially on the top-side as the dollar could start to inflict harm on a world that doesn’t need dollar strength right now.
AUD may rise near-term, but trend down is clear. Aussie is seeing some buying here today, and that may extend in the near-term. But overall, there isn’t much to cheer about with the Australian economy to fall into a recession for the first time in nearly three decades. Sure, much damage has been recently priced in, but sub-0.50 still looks very much on the cards at some point this year.
CAD looks especially vulnerable in the DM space. The Canadian economy is being hit by both the virus and collapse in oil prices. It is difficult to see how CAD begins to outperform USD even if oil prices stabilize here. Canada employment data due on Thursday, look for the print to be significantly worse than the forecasted -500k for March.