USD surging as dollar funding stress continues
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SUMMARY
- Benchmark 3-month EURUSD cross currency basis swap blows out to -124bp.
- Shows yesterday’s global central bank coordination on USD swap lines not working.
- USD now surging across the board as broader risk sentiment remains steady.
- US Treasury Secretary Mnuchin to seek $850bln fiscal stimulus package (Politico).
- German ZEW (Mar) and US Retail Sales (Feb) both miss expectations.
- ONTARIO DECLARES STATE OF EMERGENCY ON COVID-19. No gatherings of 50+ people.
- Today’s White House COVID-19 press briefing to be held at 11:30amET.
ANALYSIS
USDCAD
Dollar/CAD has broken decisively above the 1.4000 mark today as global markets price in a worsening US dollar shortage. The 3-month EURUSD cross currency swap (a popular measure of global demand for USD balance sheet capacity) started to blow out/get more negative last Thursday and, while global central banks alleviated some of this stress early yesterday by way of their coordinated response on USD swap lines, the price of this benchmark swap has blown out considerably to -124bp today. See EURCBS3M=ICAP chart below. This shows very clearly that what central bankers are offering is clearly not what market participants want. Jerome Powell and company will keep telling us that they’re offering ample liquidity for the “plumbing” of the financial system, but what if this is not what commercial banks need in order to feel more comfortable about taking risks on their balance sheets? The funding markets (short term money markets) never really fixed themselves during the 2008 Global Financial Crisis; they got a serious scare during last September’s “repocalyse”, and they’re on life support now as evidenced by the Fed’s move to massively increase the amount of USD offering through overnight and term repo operations. We think FX traders are asking themselves this morning: how the heck is the Fed going to fix this new cross currency basis swap issue? In the meantime, let’s bid up the exchange value of the US dollar that the system is so desperately looking for.
The broader USD rally is stalling a bit now as the 3-month EURUSD cross currency swap bounces to -62bp and this is seeing USDCAD pull off its session high of 1.41635. Key technical chart levels are getting few and far between now though and we’re trading at levels that could see bring about a panicky surge to the 2015 highs near 1.4700. We see mild intra-day chart support in the 1.4060-80 region.
USDCAD DAILY
USDCAD HOURLY
3-MONTH EURUSD CROSS CURRENCY BASIS SWAP HOURLY
EURUSD
Fears of a dollar funding squeeze is seeing the USD surge across the board this morning. No currency seems to be escaping the market’s rush for the world’s reserve currency, not even the euro. To make matters worse, this rush to bid up the USD’s exchange value is not leading to broad risk-off flows (which lately has been EUR supportive). The S&P futures are trading rather steady this morning, as are US bond yields. This is very much a money market driven move this morning in EURUSD and is bringing back memories of the USD liquidity crisis we saw in 2008.
Yesterday’s failure on the part of EURUSD buyers at 1.1200-1.1250 proved eerily foretelling of today’s 1.8% plunge lower. We wouldn’t be surprised to see a bounce off chart support in the 1.0960-80s at some point. The daily chart technicals have become decidedly more negative now however, and so we expect to see sellers on rallies to the high 1.10s – low 1.11s. European bonds also continued to get crushed for the third day in a row this morning, which is quickly becoming another reason to sell EUR. Germany’s ZEW Economic Sentiment survey for March collapsed to -49.5 vs -26.4 in February and this reading will likely get worse seeing as the European Commission has now proposed a 30-day ban on all travel to the European Union.
EURUSD DAILY
EURUSD HOURLY
APRIL GOLD DAILY
GBPUSD
Sterling continues to fall apart today as the world rushes to buy dollars and we think yesterday’s very tepid bounce off the 1.2240-50s into the NY close hasn’t helped with that. This closing technical pattern was far from convincing for any of the dip buyers that are still out there in our opinion, and allowed the GBP shorts to keep piling in. The UK reported a mixed January employment report this morning (details below), but nobody’s really focused on traditional economic data right now because it’s old and likely to get worse. The next major support zones lie in the 1.2020-60 zone, then at the September 2019 lows in the 1.1950s.
UK LFS EMPLOYMENT +184K TO 32.985 MLN IN 3 MONTHS TO JAN (POLL +143K)
UK AVG WEEKLY EARNINGS +3.1% YY IN 3 MONTHS TO JAN (POLL +3.0%)
UK AVG WEEKLY EARNINGS EX-BONUSES +3.1% YY IN 3 MONTHS TO JAN (POLL +3.2%)
UK FEB CLAIMANT COUNT +17.3K M/M TO 1.246 MLN (VS +5.5K IN JAN)
UK UNEMPLOYMENT RATE 3.9% IN 3 MONTHS TO JAN (VS 3.8% IN DEC)
GBPUSD DAILY
GBPUSD HOURLY
EURGBP DAILY
AUDUSD
The Aussie bears remain in control today as everyone scrambles for dollars. AUDUSD dipped below the psychological 0.6000 mark this morning but it has since bounced back a bit as the 3-month EURUSD cross currency swap bounces. We’re also reading rumors now about the Fed potentially bringing back its commercial paper funding facility:
FEDERAL RESERVE SET TO REINSTATE COMMERCIAL PAPER FUNDING FACILITY, ANNOUNCEMENT MAY BE AS EARLY AS TODAY -SOURCES.
AUDUSD HOURLY
USDCNH DAILY
USDJPY
Dollar/yen is trading amazingly steady despite today’s USD funding squeeze. It’s almost as if it wants to trade exclusively off the broader risk tone, which is quite steady at the moment. The US 10yr yield gyrated above and below the 0.80% level in overnight trade, which had USDJPY doing much the same. Trend-line chart resistance appears to be capping prices for the moment just above the 107.00 figure. The chart gap from Sunday’s open is 107.56-107.88, which could be a magnet for USDJPY prices should the 107.10s give way.
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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