Central banks are focused on providing liquidity to the battered markets, but the lack of a coordinated fiscal response may still lead investors to take their money and run at the first sign of rebound. We expect a 100 basis point cut by the Federal Reserve, while the Bank of Japan, Swiss Central Bank, and Norges Bank may stick to their already-announced plans.
 

DXY: Fed to undermine the dollar rally

• DXY has rallied strongly – largely on the back of de-leveraging back into dollars triggered in part by dislocation in the USD money market. There are no winners in this Covid-19 pandemic, but we suspect that when the dust settles, the dollar could end up a little lower. This assumes that the Fed responds to the dislocation with a 100bp rate cut on March 18 and restarts quantitative easing – at perhaps US$50 billion per month. This is an aggressive call, but faced with the zero lower bound, there is no point in the Fed hanging around.
• The week starts with a G7 video conference call on Monday. French President Emmanuel Macron seems to be showing some leadership here and will hope to coerce G7 partners into a coordinated fiscal response. It is unclear whether US Congress is ready to play ball, however. President Trump wants a payroll tax freeze – that could be worth US$300 billion over a three-month period. The Democrats want more targeted measures to support those most affected. Equity markets should stay volatile through the week, however, and we are unlikely to see a base built before Covid-19 cases start to plateau – probably not until April at the earliest.

EUR: Europe doesn’t look pretty, but Fed story may win out

• EUR/USD has been on a wild ride. European Central Bank President Christine Lagarde’s press conference did not help the euro and Italy’s debt sustainability challenges are now very much in focus. However, we think aggressive money printing from the Fed can potentially turn the EUR/USD trend, as a new round in the global currency war explodes. Beyond the G7 meetings, let’s see what the Eurogroup meeting of Finance Ministers has to say on Monday. Italy has delivered the most fiscal stimulus so far, but Lagarde is goading European politicians into doing a lot more.
• Sub 1.10 levels in EUR/USD would be a surprise. We think now President Trump will expect stimulus from all areas of the economy, including the dollar. Overall, we still like EUR/USD at 1.15 later this month and despite a European recession in the first half of the year, we believe the bigger story is US growth converging on that of the rest of the world and the concept of US ‘exceptionalism’, in rates and FX markets, evaporating.

JPY: Has the GPIF been busy?

• One week USD/JPY volatility has traded up to 30%, perhaps higher than the Great Financial Crisis. Monday’s low of 101.50 would have triggered a lot of stops and came after Japanese residents had bought US$40 billion of foreign bonds in the prior week. Here, the suggestion is that semi-official institutions like the Government Pension Investment Fund are aggressively buying foreign bonds (Treasuries) as a proxy for BoJ intervention.
• We can’t see the G7 undertaking any co-ordinated FX intervention, as what would they target? In the past, if USD/JPY fell too fast and was the source of the instability the G7 might sell JPY in a co-ordinated fashion. But they won’t do that today. The BoJ meets on Thursday. It still has plenty of room to increase its JGB and ETF buying within existing mandates, but may focus its attention on liquidity measures and will hope that the government’s $10 billion stimulus will buy some time.

GBP: Immune to brief periods of good news

• Sterling support stemming from the UK government budget announcement was fairly short-lived this week and GBP has been one the main losers in the G10 FX space this week. It looks as though the current account deficit is weighing on the currency. With the UK-EU scheduled trade talks for next week cancelled due to Covid-19, the main driver of GBP/USD should be global sentiment. With the Fed likely to deliver a powerful 100bp cut at next week’s FOMC meeting and possibly hint at quantitative easing, this could lead to higher GBP/USD. However, the move should be primarily driven by possible US dollar weakness rather than GBP strength.

AUD: Unorthodox fall

• A disastrous week for the Australian dollar (-5.7%) was not only a function of the extra-bearish risk environment, but also related to mounting speculation about quantitative easing by the Reserve Bank of Australia. Deputy Governor Guy Debelle outlined the possible shape of what now appears an inevitable move into unorthodox monetary policy: a BoJ-style bond yield targeting, aiming to control the 3- to 5-year segment of the curve.
• Such a prospect may indicate that AUD/USD is bound to explore sub-0.60 levels in the coming months. The fiscal stimulus package deployed by the Australian government (around 1% of GDP) may not be enough to offset the significant downside risks to the economy, which should keep rate expectations depressed at least through the second quarter. Next week, employment data will be in focus, but will likely have a limited effect compared to the impact of more equity volatility. If anything, another rise in unemployment may well endorse market expectations about QE. Aggressive easing from the Fed may partly mitigate the downtrend in the AUD/USD.

NZD: Finally, the fall in AUD/NZD

• Despite falling 3.6% this week versus the USD, the Kiwi dollar has largely outperformed its closest peer, AUD. Markets are still not convinced how much of the RBA easing will be followed by the Reserve Bank of New Zealand. We think the latter will not need to embark on QE, which suggests more downside to the AUD/NZD, and this may start to flirt with parity sooner than later.
• Next week’s calendar includes the 4Q GDP data, which is largely expected to show some slowdown in growth towards the end of the year. Expect a limited impact on NZD compared to the global equities story, but the data may still provide some color on how the economy entered the first quarter of this year.

CAD: Levels above 1.40 to be the new normal

• The slump in oil prices will likely have a highly negative effect on the Canadian economy, which will already have to deal with the headwinds of the Covid-19 outbreak. The self-quarantined Prime Minister Justin Trudeau will unveil the fiscal response plan soon, despite the parliament now being shut due to the virus. Most likely, the country will need to get more help from the Bank of Canada, especially considering the relatively large room for additional easing.
• Expectations on Bank of Canada easing will likely rise if – as we expect – the Fed delivers a heavy monetary stimulus package on Wednesday, as markets now see the BoC and the Fed moving hand-in-hand in the face of a financial downturn. This means that any USD weakness stemming from the Fed meeting may quickly be offset by such expectations and the loonie may be set for another grim week. Next week’s CPI numbers may be simply disregarded by the market. We expect USD/CAD to keep moving towards the 1.45 area in the coming weeks.

CHF: SNB will try to avoid cutting

• ​​​​​EUR/CHF has held up very well despite the collapse in equities and the blowout in BTP-Bund spreads. That may be due to the Swiss National Bank's FX intervention, but it’s hard to know. On Thursday, the SNB will meet to set monetary policy. The SNB has very limited room to cut rates from -0.75% and will be desperate to avoid cutting. It may argue that the ECB did not cut rates and that the SNB’s balance sheet expansion from FX intervention matches that of the proposed APP increases from the ECB.
• Switzerland’s current account surplus and large net foreign asset position leaves the Swiss franc as one of our preferred currencies through March. We suspect risk assets stay pressured this month, EUR/CHF presses 1.05 and USD/CHF reverses to 0.91/92.

NOK: Leading the Swings

• The Norwegian krone is currently the most sensitive G10 currency to global drivers, namely the direction of the stock markets and the oil prices (see The FX winners and losers from the oil price collapse for detail). This means that EUR/NOK volatility will remain very elevated (hence the very wide EUR/NOK range for next week), with the krone overreacting to both good and bad news (be it large Fed rate cuts or further downgrades to global growth outlook). Our bias remains modestly bullish EUR/NOK, with the cross moving closer to the 11.40.
• With the Norges Bank already delivering a 50bp emergency rate cut, the NB meeting next week (Thursday) should be of less importance. The central bank is likely to reiterate its message that it stands ready to cut interest rates more should it be necessary.

SEK: The G10 cyclical outperformer

• Given its low exposure to the commodity prices, the Swedish krona remains the least vulnerable G10 cyclical currency in falling markets and this should not change next week. Still, given the challenging risk environment, our bias remains for higher EUR/SEK, but with SEK outperforming NOK and the dollar-block commodity currencies.
• The Riksbank's targeted measures (lending up to SEK 500bn via banks to Swedish companies) should have a limited impact on the currency. It shows that the bar for Riksbank rate cuts remains high with the bank preferring alternative measures at this point.