USD funding pressures ease, but European bond rout raising new fears
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SUMMARY
- ECB’s Holzmann admits monetary policy has reached its limits. European bonds plunge.
- Bank of Italy intervenes in BTP market to curb panic selling, but broader risk sentiment now hit.
- Cash S&Ps set to trigger trading curbs once again. April crude oil -12%. USDCAD through 1.4400.
- Bank of England watching the plunge in sterling. Bailey says "EVERYTHING IS ON THE TABLE THAT IS REASONABLE”.
- AUDUSD continues fall amid broad risk-off, lack of chart support, RBA QE to come.
- Canada’s Poloz and Morneau to speak at 11:15amET. Trump says “money will soon be coming to you”
ANALYSIS
USDCAD
Dollar/CAD continues its surge today on the back of an extremely positive NY close above 1.4080 yesterday. US dollar funding pressures have eased somewhat today after European banks took up $112bln in funding via a special ECB auction and while this was the biggest use of international USD swap lines since the 2008 global financial crisis and has led to a contraction in 3-month EURUSD cross currency basis swap pricing to just -12bp, traders are now finding new reasons to keep buying the USD…the continued plunge in European bonds.
Europe’s bond rout continued for a the third day this morning and seems to have reached a fever pitch after ECB governing council member Holzmann admitted that monetary policy had reached its limits: "when markets saw that Lagarde meant it, and that the ECB was unanimous about it, they realized that overvalued equity levels couldn't be maintained"; "it was impossible to meet market expectations anyway”. The German 10yr bund yield shot all the way to -0.20% and the Italian 10yr BTP yield briefly went above 3%! US 10yr yields went for the ride higher as well, but global bonds have since recovered somewhat after Holzmann corrected himself and after reports circulated about the Bank of Italy intervening to buy BTPs.
Broader risk sentiment doesn’t appear to be recovering however as the S&P futures remain locked limit down at -3.7% and as the April oil futures plunge 12% to new contract lows. All this is adding even more fuel to the fire for USDCAD, which has just crossed the 1.4400 mark. The Canadian CPI numbers for February were just reported in-line with expectations of +0.4% MoM vs +0.3% for January. Bank of Canada governor Stephen Poloz and Finance Minister Bill Morneau are now expected to make a statement at 11:15amET.
USDCAD DAILY
USDCAD HOURLY
3-MONTH EURUSD CROSS CURRENCY BASIS SWAP HOURLY
EURUSD
Euro/dollar is holding up relatively well amidst today’s bond rout in Europe and we think this is mainly because of the deterioration in the broader risk tone. Yesterday’s chart support zone in the 1.0960-80s continues to hold. A break below this region would open up further decline to the 1.0880s in our opinion. We think how US stocks trade today will be key for EURUSD. The US administration is now pushing for a $1trillion dollar stimulus plan and President Trump said this morning that “money will soon be coming to you”. “For the people that are now out of work because of the important and necessary containment policies, for instance the shutting down of hotels, bars and restaurants, money will soon be coming to you. The onslaught of the Chinese Virus is not your fault! Will be stronger than ever!”.
EURUSD DAILY
EURUSD HOURLY
APRIL GOLD DAILY
GBPUSD
It’s getting worse and worse for sterling after today’s Eurobond-driven move lower in risk sentiment knocked GBPUSD below chart support in the 1.2020-60 zone. It’s been downhill ever since and not even the September 2019 lows in the 1.1950s could stem the selling. The market is now entering an extremely precarious spot technically where we could see a panicky fall to the 2016 post-Brexit lows in the 1.14s and you can tell that even the new Bank of England governor knows this. Speaking to reporters just now, Andrew Bailey said:
BOE'S BAILEY SAYS WE WATCH STERLING VERY CAREFULLY, WE WILL TAKE NOTE OF RECENT FALL AND CONSIDER EFFECTS CLOSELY AT NEXT MPC MEETING
BOE'S BAILEY SAYS HE HAS NO "SINGLE STORY" ON LATEST STERLING FALL
BOE'S BAILEY SAYS KEEPING MARKETS OPEN IS IMPORTANT, UK MARKETS ARE NOT OUT OF CONTROL
BOE'S BAILEY SAYS GLOBAL CENTRAL BANK LIQUIDITY STEPS ON SUNDAY HAVE HELPED CALM SOME MARKETS
BOE'S BAILEY SAYS MEASURES SUCH AS 'HELICOPTER MONEY' ARE FISCAL, FOR GOVERNMENT TO DECIDE
BANK OF ENGLAND'S BAILEY SAYS "EVERYTHING IS ON THE TABLE THAT IS REASONABLE, WITHIN THE POLICY TOOL SET" - SKY NEWS
BOE'S BAILEY , ASKED ABOUT PRINTING MONEY TO GIVE TO INDIVIDUALS, SAYS: "I DON'T RULE ANYTHING OUT, FRANKLY, BUT PLEASE DON'T THEREFORE INTERPRET IT THAT WE'RE ABOUT TO DO IT EITHER"
BANK OF ENGLAND GOVERNOR BAILEY SAYS INVESTORS WHO ARE MAKING MONEY BY SHORTING, AGAINST INTEREST OF UK ECONOMY, SHOULD "JUST STOP" – BBC
GBPUSD DAILY
GBPUSD HOURLY
EURGBP DAILY
AUDUSD
The Australian continues its plunge this morning as there’s very little to stop it. We can throw technicals out the window because there are no support levels on most trader’s charting packages any more. Broad risk sentiment continues to deteriorate with trading in the S&P cash expected to be halted again at the start of trade this morning. April crude oil prices are now extending their losses to -12% for the day. Talk on the street is that the RBA will cut rates to zero on Thursday and finally launch quantitative easing. There are no reasons to try and pick a bottom here in AUDUSD right now.
AUDUSD HOURLY
USDCNH DAILY
USDJPY
Dollar/yen indeed filled its Sunday opening chart gap yesterday (107.56-107.88) after the 107.10s gave way and while this led to “ok, what’s next” type of pullback in Asia today, we think the market’s renewed bid since the European open has been US yield driven. The rise in yields we’re seeing today is definitely not risk-on driven, which we think is generating some new pause for concern here in global markets. Are market participants going to get so panicked over the coronavirus pandemic that they literally sell everything in an effort to generate cash…even bonds?
USDJPY DAILY
USDJPY HOURLY
US 10YR BOND YIELD DAILY
Charts: Reuters Eikon
About the Author
Erik Bregar - Director, Head of FX Strategy
Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.
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