US set to pass $2 trillion stimulus package. Markets be like "what else you got"?

SUMMARY

ANALYSIS

USDCAD

So it looks like we finally have a stimulus deal in the US.  Bloomberg reported late last night that “the Trump administration struck a deal with Senate Democrats and Republicans on an historic rescue package that tees up more than $2 trillion in spending and tax breaks to bolster the hobbled U.S. economy and fund a nationwide effort to stem the coronavirus”.  More here.

This positive headline, while arguably expected by market participants, gave broad risk sentiment a boost heading into European trade this morning.  The S&P futures continued higher after rallying 9% yesterday, the 3-month EURUSD cross currency basis swap narrowed even further to +1.5bp, and the USD began yet another attempt to turn lower across the board.  All this optimism is being dialed back now as another bout of pessimism permeates ahead of the North American news cycle…which seems to be a new trend of late.  We find it notable that May crude oil prices didn’t participate in the risk uptick overnight, but it makes a whole lot of sense to us given that India (the world’s third largest oil consumer) is now fully on lockdown.  Dollar/CAD found support at the 1.4300 level and it has now quickly regained the 1.4350 level it lost in early London trade.

The tone for the broader USD is looking a tad uncertain here as follow-through selling from some overnight technical breakdowns has been hard to come by.  It’s as if the market needs even positive soundbites here (perhaps some unexpected ones) before it will decide to end its new love affair with the USD.

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MAY CRUDE OIL DAILY

EURUSD

Euro/dollar saw an uptick in overnight trade as the USD got sold broadly on the US stimulus deal headlines, but traders have had to deal with yesterday’s notably weak NY close below the 1.0820s on the charts.  We feel this is contributing to trader willingness to sell EURUSD, as risk sentiment deteriorates into the NY open.  Germany reported a depressing March IFO survey today but, like the flash March PMIs released yesterday, the market’s lack of reaction is effectively saying that we shouldn’t be surprised by news.

DE Mar Ifo Business Climate New, 86.1, 87.7 f'cast, 96.1 prev, 96.0 rvsd

DE Mar Ifo Curr Conditions New, 93.0, 93.6 f'cast, 98.9 prev, 99.0 rvsd

DE Mar Ifo Expectations New, 79.7, 81.9 f'cast, 93.4 prev, 93.1 rvsd

German economy could shrink by as much as 20% this year due to coronavirus – Ifo

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GBPUSD

Sterling was the notable outperformer in G7 FX overnight as it busted through the key 1.1790 resistance level.  Traders managed to achieve this in early Asian trade last night however and so we think this set the market up nicely to benefit from the broad USD selling that ensued after the US stimulus deal was announced.  A good chunk of this rally has been given back now though as NY trade starts with a more guarded risk tone.  The overnight high was 1.1972, which was slightly above the September 3^rd 2019 lows in the 1.1950s.  A close back below the 1.1790s would be hugely disappointing for the dip buyers while a close above the 1.1950-70s would finally put a notable dent in the market’s recent downtrend.

The UK reported stronger than expected core CPI figures for February this morning, but nobody cares.

GB Feb Core CPI YY, 1.7%, 1.5% f'cast, 1.6% prev

GB Feb CPI YY, 1.7%, 1.7% f'cast, 1.8% prev

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AUDUSD

The Australian dollar also benefited from the uptick in risk sentiment overnight and, like GBPUSD, it jumped the gun with a positive breakout above the 0.5960s in early Asia.  The news of a $2 trillion US stimulus deal then saw the 0.6020s give way.  A deterioration in the risk tone has led to some broad USD buying into NY trade, but it looks like AUDUSD dip buyers are going to try and put up a fight here.

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USDJPY

Dollar/yen buyers still don’t seem convinced about any of the new stimulus measures announced this week by the Fed and by the US Senate.  We find it notable too that the 3-month USDJPY cross currency basis swap has not narrowed to the extent that the EURUSD version has, which tells us that Japanese banks are still willing to pay a big premium for USD balance sheet capacity.  They borrowed a record $89.3 billion from the BOJ’s dollar funding facility yesterday.  We think familiar upward sloping trend-line resistance (now in the 111.40s) will once again be pivotal for USDJPY here.  A NY close above this level could usher in another wave of buying whereas another close below could finally prompt some recent buyers to give up.

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3-MONTH USDJPY CROSS CURRENCY BASIS SWAP 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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