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Nothing All That Shocking for a Change

Stephen Innes

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US Senate Majority Leader McConnell has introduced the text of a trillion-dollar coronavirus package, which includes direct payments of $1,200 for individuals and $2,400 for married couples. This will keep the “Readers Digest Prize Draw” style giveaway in focus. Of course, this will be most welcome by everyone who lost their job this week, but it’s merely papering over the recessionary cracks. A USD 1,200/ $2400 check buys lots of toilet paper, but in a Covid19 lockdown, it does not save jobs at restaurants or bars. And what happens about the double-dip demand when this check runs out.

Honestly, I apologize for being a bit cynical; its a great government hand out, but it’s not nearly enough if this virus hits a significant chunk of the US population.

Markets 

Central bank actions appear to have settled nerves for nowLooking across markets this morning, what strikes most of all is there is nothing all that shocking for a change, certainly not compared to the volatility seen over recent weeks. That is, except for oil prices, which rose significantly on the day.

It was a busy 24 hours for central banks. 

Adding to those measures over the past 24 hours, the Fed has introduced a backstop for money market funds; the ECB launched a EUR750bn bond buyback program, while the Bank of England lowered Bank Rate to a record  0.1%. And not to be outdone by their larger counterparts, the RBA has taken monetary stimulus to full-tilt, and the RBNZ has introduced a term lending facility.

Stimulus proving too hard to ignore.

While the markets are still in the autoclave, but after a very dislocated start in Europe, two critical pressure valves sprung overnight as Oils, and the Banking complex finally started to move in a positive direction.

The $1 trillion or larger US stimulus package is proving too large for foreign capital to ignore as it reduces a massive burden on both the financial and credit market. And with the Eurogroup signaling a willingness to further increase the balance sheet as necessary, opposed to leaving the heavy lifting to the ECB, this move was welcomed universally in domestic financial markets at least as long as increase remain manageable. Euro STOXX Bank 30-15 iShares closed nearly 6 % higher on the day.

The bounce in the oil complex was easily digestible and directly attributed to media reports suggesting the Trump administration may intervene in the Saudi-Russian oil-price war to get the two sides to work together. It would pressure the Saudis to cut oil production and threaten sanctions on Russia, in a move to stabilize markets.

US initial jobless claims spike to 281k.

Policymakers have acted decisively, but they can only pillow and not forestall a demand shock at the unemployment window jobless claims increased by 70,000 in the US for the week ended March 14 – the highest level for initial applications since September 2017. And to which has unceremoniously heralded in a chorus of recessionary calls from Wall Street.

The dollar crunch is not solved.

Fed’s new Commercial Paper Funding Facility has done little to ease the distress. The US commercial paper market – dominated by foreign issuers and a key bellwether for offshore dollar demand – 30-day rates have remained at excruciating levels. All the while, “Yankee” markets in Europe, a primary source of short-term USD funding on the continent, are trading at a massive premium.

Oil markets

A fair bit of short covering ensued after President Trump suggested he may tackle the oil crisis by brokering a deal between Moscow and Riyadh. Although usually one of the world’s most prominent proponents of lower oil prices, the President is acknowledging the US shale oil industry is getting caught in the middle of the market share contest between Saudi Arabia and Russia. US job losses and domestic credit concerns are too much to bear, so the US administration will jump in and attempt to resolve this battle of the oil producer behemoths.

With +$35 WTI stamped all over it if Moscow and Riyadh come to terms, Oil traders will likely be less indiscriminate with their sell strategy. But with the prospect of storage facilities filling quickly and the potential endpoint of “worthless crude oil” is increasingly discussed. If an agreement isn’t forthcoming, these talks never happen, or they end in a contentious break-up, oil prices will most certainly head of the bottom in ferocious velocity.

Gold markets

Gold continued to react to financial market sell-offs and, at times, supported as government and monetary authorities’ attempts to manage the economic and financial ramifications of COVID-19.

But it’s a bumpy ride as liquidity and participation continue to fall by the wayside. I’m not so sure this is so much a function of the market, or due to the fact, many Gold traders are working at home.

More concerning for bullion investors is that the USD has also moved sharply higher. The DXY index up as much as 5% from the lows and is trading close to the upper end of multi-decade ranges.

Greenbacks remain the currency of choice, and that demand is shackling any notion of an early gold comeback. The mad dash for the US dollars has gold on the defensive and is now one of the principal reasons for gold selling in the speculative markets.

For gold investors, hopefully, the demand for US dollars from Emerging Market central banks won’t cause them to sell gold to raise dollar and support their economies in this time of economic stress. If that does happen, the trap door will most certainly spring.

Currency Markets

Every currency on the planet remains directly in perils path so long as the USD liquidity squeeze moves like a wrecking ball through the G-10 complex.

USD upside has extended. The move continues to be driven by short-term USD funding stress.

Australian Dollar 

AUD enjoyed a bit of relief rally after RBA Governor Lowe’s press conference, but which was likely due to a questionable intervention rumor that quickly made its way through the street.

Although the RBA is on the list of countries getting new swap lines with the Federal Reserve, they most certainly are not going to waste those lines or current reserves stopping the Aussie falling, which is acting as a tremendous economic shock absorber.

And not least of all, why do they want to sell US dollars to a bank in New York when the local banks around Martin Place are clamoring for the greenbacks.

The Malaysian Ringgit

In addition to the US dollar liquidity squeeze which is ravishing local currency markets., the Ringgit dropped for the 6th consecutive day due to Malaysia’s lockdown measure that will surely have a negative impact on the struggling tourism sector and the more significant negative knock-on effect for the demand of big-ticket items as unemployment rises.

As such, the markets repriced the curve lower, which has been nothing been short of dramatic as the markets except the BNM to drop interest rates to 1.5 % along with SPR by at least 50 bp. This, too, is weighing on sentiment.

The market’s quick reaction suggests trader expect a significant hit to growth, although arguably, it’s difficult to quantify at this point in time. However, this view is getting compounded by China’s high-frequency activity data coming much weaker than expected. The anticipated recovery will start from a much deeper hole than initially expected.

And because the Yuan is holding up against “the basket,” the PBoC may be more inclined to let the Yuan weaken above USDCNH 4.17, which would then put additional pressure on the Ringgit.

 

This article was originally posted on FX Empire

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