They keep finding more kitchen sinks to throw

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD has been quite volatile since late NY trade yesterday as the funds, who must be net long the market by now, try to resist a raft new monetary intervention headlines.  The first came from White House economic advisor Larry Kudlow, when he suggested the US government may consider taking equity stakes in corporations that want coronavirus aid from taxpayers.  The second came from the ECB last night, with the announcement of its new 750blnEUR Pandemic Emergency Purchase Program.  The third came from the Bank of Korea, which intervened to stop a more than 4% plunge in the won.  None of this worked to shore up broader risk sentiment however and so traders kept hammering on risk currencies.  The Australian dollar cratered another 3% lower after 9pmET, EURUSD resumed lower once again on anticipation of German bunds getting hit again today, and USDCAD shot up to a new swing high for this rally (1.46675).

A surge in Italian bonds at the European open this morning seemed to make everybody feel better for a little while (as beleaguered BTP traders appear to be giving the ECB the benefit of the doubt for now), and this knocked USDCAD lower…but the mood in German bunds has deteriorated once again, which brought back some USDCAD buying into the NY open.  Crude oil prices are bouncing 9% this morning after yesterday’s catastrophic 25% crash, but this is not having much negative effect on USDCAD because these gains could easily evaporate given the lack of support on the April futures contract and given the fact we could see forced liquidation here into the April/May futures rollover (today is First Notice Day for the April crude oil contracts).

The US just released its Philly Fed Business Index report for March (some of the freshest survey data on just how bad things are out there in corporate America right now) and it was even nastier than the already reduced consensus expectation, -12.7 vs +10.0 vs 36.7 in February.  The Fed also just announced that it is establishing dollar swap lines with more central banks.  Full press release here.  The latter headline knocked USDCAD lower during the 9amET hour, but the market has since brushed off the optimism once again. 

USDCAD DAILY

USDCAD HOURLY

3-MONTH EURUSD CROSS CURRENCY BASIS SWAP HOURLY

EURUSD

ECB member Holtzmann caused so much of a PR disaster for the central bank yesterday that Christine Lagarde had to say “there are no limits…” when announcing last night’s new Pandemic Emergency Purchase Program.  Under the new plan, the ECB will buy an additional 750blnEUR in public and private sector securities until at least the end of 2020 and the eligible assets will extend to commercial paper of sufficient credit quality and Greek government bonds.  The ECB said it will also consider raising it self-imposed issuer limits (how much of each country’s debt it can buy).  If we combine this new package with the extra 120blnEUR in QE, that the ECB announced through the end of 2020 last week, and the 20bln/month of QE they’re already doing, this brings the total amount of planned ECB purchases for this year to over 1.1trillionEUR…the biggest annual amount ever! 

While Italian and Greek bonds bounced on the news, the rest of the bond market doesn’t seem to care, nor do EUR traders.  It’s because market participants know it won’t work.  EURUSD has regained trend-line support in the 1.0740s, and is now bouncing back to the 1.08 handle, on the back of the Fed’s new swap line announcement.

EURUSD DAILY

EURUSD HOURLY

APRIL GOLD DAILY

GBPUSD

Nobody listened to Andrew Bailey’s pitiful plea to “just stop” shorting the markets yesterday.  Sterling continued lower after the BOE governor’s remarks and then absolutely went into free fall around the noon hour ET.  New 35-year lows were quickly forged in GBPUSD (1.1449), which made for some great media headlines.  Traders appear to be giving GBPUSD a bit of a break this morning as everything bounces mildly with the most recent swap line announcement from the Fed, but we’re still truly in uncharted territory here, which makes trying to pick a bottom dangerous.

The Bank of England has just cut interests by 15bp to 0.10% and announced an increase its QE program by 200blnGBP to 645blnGBP.  Full press release here.  GBPUSD is now continuing its bounce to trade 1% higher on the session.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

So the Reserve Bank of Australia finally did it.  They launched quantitative easing for the first time ever and they announced it with a Japanese style yield curve target of 0.25% on the 3-year Australian government bond.  Wow…that implies they’ll buy as much as necessary!  In addition, the RBA said they would increase the size of their repo operations and launch a new 3-year funding facility for banks to supply $90blnAUD of cheap credit to affected small and medium sized businesses.  The Reserve Bank of Australia also cut interest rates by 25bp, but this was already priced into markets.

Australian dollar traders seemed to like the open-ended nature of the RBA’s QE announcement and we think this was the fundamental driver for the bounce we saw in AUDUSD overnight.  A positive start to trading for Italian bonds then added more support for risk sentiment.  This optimism faded into the NY open but is recovering now, and then some, after the Fed’s new swap line announcement.

We think traders could be sowing the seeds for a short-term bottom in AUDUSD today, given the fact that the market collapsed 3% lower to new 18 year lows before the RBA announcement and given the fact that the market has now completely reversed higher.

Australia reported a good employment report for February last night (+26.7k new jobs vs +10k expected, and 5.1% for the unemployment rate vs 5.3% expected), but this is old data now.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen continues its rally today after breaking above chart resistance in the 108.50s last night, but it’s certainly not due to risk-on flows again in our opinion.  We think what we continue to see here is a market that’s starting to worry about higher US bond yields and another relapse in the worldwide USD funding squeeze (3 month cross currency EURUSD basis swap has widened back to -62bp this morning).  A worsening of this shortage for dollars will hit every currency, even the yen in our opinion.  USDJPY appears to be struggling now though with some chart resistance in the 110.10s.

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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