Global currencies get a breather as dollar pares gains after a week of rampant strength
All major currencies are in the green against the US dollar overnight, after the wave of risk aversion and dollar liquidity stress that drove the greenback higher has abated slightly. With Japanese markets currently closed for the vernal equinox and fears mounting that more states in the US will follow suit with California’s decision to lock down its 40m residents, the dollar is retracing some of this week’s gains. The dollar weakness is most visible in currency pairs that plumbed historic levels this week; GBP, AUD and NZD all lead the G10 rally today with gains over 2% against the dollar in today’s session. Notably, however, the Norwegian krone has trimmed early gains against the dollar as markets test the Norges banks resolve after it cut rates this morning and pledged to intervene in FX markets if necessary (see earlier note).
- Today’s biggest winners are generally currencies associated with higher risk sensitivity, many of which such as MXN, GBP, and AUD had suffered large losses over the previous sessions. JPY is among the worst performing currencies this morning, consistent with the idea that we have seen a modest stabilization in risk appetite.
- The Fed announced it was expanding swap lines to a wide range of central banks from Brazil, New Zealand, Australia, and many others. Furthermore, a funding facility was announced for money market mutual funds.
- The RBA began its sovereign asset purchase program, while the RBNZ re-opened various crisis-era measures aimed at providing liquidity to its domestic financial system, including a Term Auction Facility providing lending to banks. Speaking to Bloomberg, Christian Hawkesby reiterated that the next move was QE, and that the RBNZ was already buying small amounts of government bonds for liquidity purposes.
However, there is a compelling argument to be had that this may just be a sigh of relief, not necessarily a new market theme that is here to stay. The resumption of Japanese markets on Monday could soon reset the tone of a shortage in USD liquidity for when European markets open. Despite the Fed extending swap lines, now to 14 central banks globally, cross currency basis swaps continue to price a high premium for USD demand against the yen, while other currencies have experienced a reduction in the cost of accessing USD due to open swap lines. Additionally, many sovereign wealth funds, created in the Middle East and nations flush with oil revenue such as Norway, hold large exposure to US assets, which may put further stresses on dollar liquidity to finance such positions, or alternatively result in a rapid fire sale of them to finance USD liquidity. Additionally, both month-end and fiscal year-end approaches, where the USD tends to be in high demand in normal times for balance sheet rebalancing. All of these factors suggest another wave of USD may be on the horizon.
Global financial conditions show signs of easing but remain concerningly tight overall
Certain measures of dollar funding stress have eased this morning, and long-dated sovereign bond yields have fallen after the extremely worrying spike seen in the middle of the week. In this sense, the massive QE measures announced by the ECB and BoE are working. The BoE said specifically it was the increase in gilt yields and volatility in that market that prompted their asset purchase programme, and this was likely true of the ECB as well. The ECB announced QE after an emergency call on the same day that Italian BTP yields spiked in the morning and rumours circulated of national central bank buying in the afternoon. Cross currency basis swaps are trading with lower premiums for USD liquidity this morning, indicating that the Fed’s FX swap lines are filtering through to overseas financial systems. EUR and GBP basis spreads are trading at less than -10bps, while JPY funding remains expensive at -79bps, but less so than yesterday’s levels in excess of -100. USD Libor rates have stabilised to an extent, although the spread to OIS remains extremely elevated. Credit spreads in the US are generally measures using lagged indices that are yet to be released, so these will be the key marginal factors for judging how broad the improvement in risk appetite has been today.
3 month OIS-Libor spread continues to rise as credit conditions continue to tighten
3-Month cross currency basis swaps recover after Fed swap lines extend globally, but pricing in JPY remains concerning
Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
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