FX Daily: Dollar dealing with an ineffective antidote

Markets may need to recalibrate their notion of a 'bottom', for equities, for rates and for the dollar.

USD: Too early to call the bottom

The combination of Joe Biden’s Super Tuesday comeback, hopes of a coordinated monetary effort to counter the virus disruption (Bank of Canada “piggyback” cut may have been a case in point) and the $8 billion US fiscal plan gave equity markets a breather yesterday. Incidentally, such a combination allowed markets to turn a deaf ear to the rise in Covid-19 cases, especially within the US, where California called a state of emergency. Moving ahead, an additional flow of good news will likely be needed to cushion virus-related fears, especially considering how markets seem to fully acknowledge the limited ability of monetary policy to work as an effective “antidote” to the Covid-19 impact. FX markets mirror this: the jump in equities (Asian markets have followed this morning) has only marginally helped the battered dollar and blatantly failed to ruffle the yen. All this means that markets may once again need to recalibrate their notion of a 'bottom', for equities, for rates (0.75% in 10y UST may be the next level to watch) and for the dollar (we eye 95 for DXY). This equally implies that USD (UDN) weakness will hardly move in tandem with more resilience in pro-cyclical currencies but rather offer additional support to low-yielders.

EUR: No material impact from Italian school closure

The Italian government’s decision to close all schools and universities is alarming to the extent that it is seen as a framework of what lies ahead for other European countries hit by the virus. The rise in cases in France (285), Germany (240) and Spain (193) may well endorse such fears, but this does not seem to have a material effect on the euro, which can still benefit from a fairly solid floor due to its funding characteristics. An empty calendar today should leave some room for a recovery in EUR/USD (FXE/UUP) after yesterday’s mild correction.

GBP: Bailey’s dilemma

It will hardly be an easy start for Andrew Bailey as he takes over the role of Bank of England Governor this month. Markets are fully pricing in a 25 basis point cut in the UK at the first meeting chaired by Bailey (26 March) and speculation that a Fed-style impromptu move in the next few days has also risen. We do not completely rule out this second option, but we think a cut at the meeting still looks more likely. Today’s speeches by Mark Carney (1700 GMT) and Andy Haldane (BoE Chief Economist, 1300 GMT) may tell us more. Meanwhile, Covid-19 cases in the UK have jumped to 85: still less than other major economies, but possibly suggesting some fragility in the GBP's (FXB) recent outperformance.

CAD: BoC piggybacking the Fed

Today, Bank of Canada Governor Stephen Poloz will speak (1745 GMT) after a 50bp cut yesterday. The policy statement clearly indicated openness to adjust rates further and the similarity in terms of size and timing with the Fed cut earlier this week has led many to expect the BoC to mirror the Fed's moves from here on. The OPEC+ meeting kicks off today and expectations in terms of cuts are high, leaving sizeable room for disappointment. All this makes us believe there is still some upside room for USD/CAD (FXC) and we target the 1.36/1.37 area for coming days.