London Open: Is Oil Shaking The Trees Again? FX Commodity Bloc Flops

The commodity bloc wobbles as oil slides again.

Currency markets and particularly the commodity bloc of currencies are getting a bit antsy with oil prices falling again as the OPEC ++ deal in its current format sorely disappointed relative to market expectations even if executed to the letter. But even more worrisome is that it failed to address the immediate structural oversupply, leaving oil prices vulnerable, especially with even the most bullish oil traders worried about backing the wrong horse at current levels. Markets believe the deal won't come close to offsetting demand devastation and isn't even large enough to eat into what's in storage.

The Australian dollar struggled for traction today as profit-taking set in as the PBoC rate cuts failed to inspire as commodities have been unable to fire higher and are falling as Oil prices continue to wallow in a thickening sea of crude.

Given this is a bit of a contrarian view, I'm more than prepared for the fact that AUDUSD 6450 is going to be a tough nut to crack. Which suggests there will be excellent opportunities to fade short term Aussie moves higher even if you're as bullish Aussie as I'm.

Markets

Policy support remains a dominant theme in the markets. Still, the easing of social distancing restrictions is top of mind after all this is crucial in meeting market expectations for a rebound in economic activity. As virus curves continue to flatten, attention turns to when lockdowns can end. At the moment, evidence suggests that governments will continue to tread carefully until otherwise confirmed. But even if the governments ok an exit from hibernation, things will open up gradually to ensure hospital capacity stays available, and at least there's a clear indication no secondary spreader. So any thought of a substantial pent up demand supporting the economy out of the lockdown gates might be but a pipe dream at this stage, and the market will probably start to L, U, V ... W no, its not a love letter but a more sensible expectation of how the economy emerges from Covid 19.

There's going to be enormous amounts of pressure on the government to get this right suggesting that lockdown extends as the last thing anyone needs is confusing messaging from government leaders. Hopefully, the political decision balancing public health advice again economic consideration is correct.

Leaders across Europe weighed steps to exit quarantines, with Denmark set to reopen daycare centers and primary schools. Spain, Germany, and Italy all reported fewer infections, suggesting the crisis continues to ease. It's these kinds of headlines that traders are paying attention to rather than what bad data seem to suggest or that the IMF predicts the "Great Lockdown" recession would be the steepest in almost a century.

But one thing that is crystal clear is weak incoming data are certainly not denting risk sentiment as credit, and equity markets take solace in the staggering amount of stimulus that has been thrown at the left hand of the V curve. It's 2009 all over again, where bad news equals good news for markets on the back of increased policy support expectations."

PBoC tried but failed to surprise but A for effort.

The People's Bank of China might have tired to surprise the market by possibly pulling a page out of the Fed handbook while proactively cutting interest rates ahead of a potential data heat spot like Friday's GDP data. Not sure if this is ominous or not. But the China bounce remains alive and well as evidence emerges, the ground hasn't cratered entirely after yesterday's trade data.

But none the less it does anchor expectations to guide market interest rates lower. USDCNH tried lower before the open following the weaker dollar overnight but bounced over 100 pips + on the MLF rate cut. Given the markets PBoC's dovish lean, I expect USDCNH to track the broader dollar, but CNH could underperform the basket over the near term. Ultimately, I see the USDCNH challenging 7.00 during the next 10-20 trading session as the Chinese economy lights up ahead of the rest of the world. The upcoming tax payment season and massive special-purpose debts planned will test the lower interest rates trajectory, I'm sure.

The HKMA last Thursday said it would reduce the issuance of Exchange Fund Bills, effective next week. The issue size of EFBs will be decreased by HKD20 bn in the next four weeks, by HKD5 bn each on April 21, April 28, May 5 and May 12. This should automatically boost the aggregate balance and push USDHKD points lower. But with more interbank traders working from home, banks would rather stay long HKD cash in case of market disruption as they won't be able to square their HKD shorts in time.

India relaxing lockdowns

India is said to allow factories in rural areas to reopen from April 20, as well as port operation and cargo movement via air transport, Bloomberg reports. India is gradually opening up, but it's a consumption-based economy, and consumers/households will be under lockdown for another 19 days. Maybe a bit early to chase the USDINR lower amid persistent bond outflows.

Currency Analysts

One of the oddities I've always found about Commonwealth Currency analysts is how bearish they continuously are on the home currency. Now I thought growing up on Bay Street that Canadian bank analysts were bearish on the CAD, but these days they pale in comparison to the ones that hang around Martins Place AUD.

It's like a tunnel vision where the only focus on the ills of the domestic landscape without realizing you need to cross this currency with another economy. So, while the long Aussie might not be for everyone as its certainly one of the risks, but from that perspective, it probably on of the cleanest dirties shirts in the laundry with China's engines revving back up.

But the big question that should be on everyone's mind is not their domestic economies but rather has risk jumped the gun, suggesting that if it has the US dollar demand will come back with a vengeance.

Asia Update

Lots of market banter going on today, this is a good thing.

• The People's Bank of China conducts CNY100 bn of 1-year MLF at 2.95% vs. 3.15%, and skips reverse repo, Bloomberg reports. The 20bp cut in MLF rate was widely expected, but the size conducted is only half of the amount maturing on Friday. So the reaction has been less than enthusiastic but does offer up a chance for the Yuan bulls to buy more CNH after USDCNH nudged higher on the rate cut.
• Superannuation should spice things up for the Aussie As part of the Australian government's fiscal stimulus package, individuals economically impacted by the coronavirus pandemic are allowed tax-free withdrawals from their Superannuation retirement accounts of up to A$10k in the current fiscal year (up to June 30). Another A$10K next year and this broader portfolio balance shift should support the AUD.
• Lots of chatter emanating around the markets this morning as state governors from seven states, including New York indicting they were creating a working group to develop a regional plan to ease lockdown restrictions. At the same time, a "Western States Pact" of three states, including California, agreed to reopen their economies based on health outcomes jointly. There remains some tension with the federal government about these plans. However, President Trump seems keen to revive the marketplace more quickly -- again indicating Tuesday, he's the ultimate decision-maker.
• Most of the chatter is centering around whether President Trump correctly defers to Doctor Anthony Fauci, who stated a May 1 target to reopen "is a bit overly optimistic." And there some thoughts on the street that state officials are just responding and paying lip service to media while telling markets and their business constituents want they want to hear. So worth keeping an eye on this evolving narrative
• In the never-ending banter about the incredulous central bank and government support getting thrown at the left-hand tail risk of financial collapse are too hard to ignore.
• Ultimately any hope for a V shape recovery boils down to finding a cure, which is the only enablers of economic recovery that financial markets can depend on. In the meantime, economic recovery depends on how fast people return to work, which will then be predicated on economies being able to open up without running the risk of intermittent shutdowns.
• As such, this favors selling the USD selectively as risk sentiment continues to improve, especially currencies with high beta to normalizing China's industrial production like the Australian dollar. Also, Asia FX that are benefiting from the shift into modest lockdown restrictions that could see increased equity inflows (e.g., KRW, and TWD).
• Bank Indonesia left its policy rates on hold yesterday, against a majority consensus the policy statement guides that the decision was linked to external (rupiah) stability, but also that BI does see further space to cut policy rates if required.
• As for risk sentiment, OIl prices remain a problem child and will continue to be a thorn in the risk market side. Oil has an enormous influence over a breadth of cross-asset concerns, equity market, notwithstanding, tumbling oil prices are too hard to ignore

Table of Content

Stock Markets: Flattening infection curves and the thoughts of more stimulus lifted all boats. And It feels like 2009 all over again, where bad news equals good news for markets on the back of increased policy support expectations.

Oil Markets Even with a new OPEC+ agreement, oil is likely to remain under pressure as the OPEC ++ deal in its current format sorely disappointed relative to market expectations even if executed to the letter

Gold Markets: Gold has been putting in a sustained rally in active trading. But overnight bulls won betting the trifecta into key US earnings. But were quick to take profit, but debasement resonates.

G-10 FX: The improved risk tone has lifted all currency boats even more as cross-asset volatility is declining.

Asia FX: Yuan hampered but this week's data deluge and rate cut banter, While the Ringgit frets over oil gnarly predicament

A peek into the crystal ball: Why behind the headlines lies the most gnarly storm clouds building, suggesting there is still much to be worried about

Stock Markets

At first glance this morning with the S&P 500 soaring overnight, one would think that a V-shape recovery in markets is underway. However, appearances can be deceiving as behind the headlines lies the most gnarly storm clouds building, suggesting there is still much to be worried about

But flattening infection curves and the thoughts of more stimulus lifted all boats. And regardless of whether I think we are in la-la land, it is what it is.

In the US, there has been a noticeable leveling off in coronavirus cases in several states. Most encouraging, perhaps, is Louisiana, where social and comorbidity issues threatened to create a large number of deaths. In terms of the broader impact on the economy, infection rates appear to be under control in most of the heavily-populated states. Likely encouraged by this hard data, President Trump is set to make an important announcement in the coming days regarding state guidelines on reopening the economy. Suggesting he's going to throw the Whitehouse's weight behind reviving the US economy, which was received well by investors and added to the bullish momentum

The US data was terrible, but the markets are in a time warp. It feels like 2009 all over again, where bad news equals good news for markets on the back of increased policy support expectations.

Oil Markets

Even with a new OPEC+ agreement, oil is likely to remain under pressure. While the deal is a vital acknowledgment, a free market for oil is troubling in a Covid19 world, and the return of supply-side management is an essential step towards recovery in oil prices.

But the deal in its current format sorely disappointed relative to market expectations even if executed to the letter. But even more worrisome is that it failed to address the immediate structural oversupply, leaving oil prices vulnerable, especially with even the most bullish oil traders worried about backing the wrong horse at current levels. Markets believe the deal won't come close to offsetting demand devastation and isn't even large enough to eat into what's in storage.

OPEC has a deal, but you'd never know it from the price as WTI threatened to move below $ 20 overnight only to recover slightly on the news that President Trump will make an important announcement in the coming days regarding state guidelines on reopening the economy. But frankly, I don't even know if that good news or not with medical experts chiming in it might be unrealistically optimistic for many areas of the country.

The market, meanwhile, remains in an extreme contango. Half of the curve's steepness has happened in just four months. Such is the extent of oil in storage. If OPEC (and other producers) want to get a handle on the market again, they need to flatten the curve, not hyper invert it. The bulk of the cost of oil isn't the cost of crude oil – it's the cost to store it. The curve is showing that even with an assumed economic recovery in just over a month or so, that oversupply will again be a significant concern, especially as most estimates suggest there's only a month or so before storage fills up and Dated Brent starts to head back towards zero.

And unmercifully drilling home this oversupply concern, this mornings API inventory data revealed a massive weekly build of over 13 million barrels in US crude supplies, and if the EIA data confirms a hefty build oil, markets will likely show the oil bulls all the mercy of a Greek tragedy.

Gold markets

Outside of some profit-taking venture, gold has been putting in a sustained rally in active trading. Overnight bulls won betting the trifecta into key US earnings as the bulk of the overnight gains came from front running into the US open as gold at one point hit al the high notes. But traders were quick to book profits.

Massive profit-taking ensued, and even shorts are building as the stock market surged with evident sings the Covid19 outbreak is leveling off. But positions started to melt more aggressively after President Trump is expected to herald in the opening of some parts of the US economy so now, we're trading back towards yesterday Asia market highs where some tentative support if filling out the stack.

The Trifecta

1) bleak economic outlook
2) US $ printing presses working on overdrive (debasement)
3) weaker US dollar

The real economy is grim, suggesting the Feds will keep the printing presses working on overdrive, which should eventually weaken the dollar, all of which indicate gold could rally beyond current levels. And even more, so considering the extent of policy easing as opportunity costs evaporate and massive deficits lie in waiting.

Debasement

Today, fiat currencies and are not based on Gold So; it only requires that the government print more money, or in the Feds case, since money exists only in digital accounts. They can simply create more electronically by adding a few more zeros to their digital bank book ledger.

As such, within the next two years, traders expect the world will face the most massive wave of asset price inflation/fiat currency debasement in recorded history. Once the economy returns to pre-pandemic all systems go, the incomprehensibly-large global stimulus will find its way into every nook and cranny imaginable. All of which should support gold

Currency markets

The US dollar weakened as positive risk sentiment return to the market. The improved risk tone has lifted all currency boats even more as cross-asset volatility is declining.

The Euro

The Euro is higher as European bond yields help float the Euro with virus worries in the region, ebbing providing good measure.

The Australian dollar

The Aussie continues to revel in the positive risk sentiment, and as industrial metals got a lift from yesterday's China trade data. There was some profit-taking ahead of the US session given the uncertainty around Q1 earning, but it was clear sailing after risk lights turned green with US equities climbing the ladder.

6450 is a formidable level that needs to be cleared before the March gap lower gets filled. However, when we move above 65, I suspect that's when the big stops get triggered.

The Yuan

The Yuan is getting held back to a degree by the big economic data day on Friday and rate cut banter. But the latter should be playing out more positively as interest rates cuts should drive more equity inflow, not to mention bond flows.

The Ringgit

While the pandemic curves are stabilizing supporting risk sentiment, unfortunately, for the ringgit oil prices are not, and the prospects of further oil price declines could continue to hamper the ringgit recovery.

A peek into the crystal ball.

The VIX has fallen, but the shape and level of the volatility curve remain elevated. Governments aren't freely talking about exit strategies; they are only commenting because the media is hounding them. Some governments are extending lockdowns.

Tremendous efforts have been made by the official sector to stabilize economies and markets – higher and faster than in 2008/09 and, in some cases, such as the Fed's credit purchases, beyond what was thought possible, but it would be wrong to suggest that blue skies are ahead.

Equities have gained, but participation is low, and nerves are frayed. The positioning has increased over the last couple of weeks but remains as low now as it has been at any point in the previous 12 years the S&P's 20% gain has been achieved without real involvement from a broad array of investors. There's a concentrated bid from a select group – corona rebound short-covering group, the omnipresent technology group that loves cheap money, and the thriving "stay at home group."

The latest fund manager survey from Bank of America Merrill Lynch (NYSE:BAC) (BAML) showed cash levels among investors edged higher in April, going from 5.1% to 5.9%, the most since 2001, Bloomberg reported. The survey also showed client equity allocations at their lowest since March 2009, per Bloomberg. Discussions about cash on the sidelines will arguably ramp up, then.

In terms of risks, the survey identified a recurrence of the virus as the most prominent tail, with 30% of respondents still fearing a systemic credit event despite central bank action, Bloomberg said.
Those believing in a V-shaped recovery are in the minority (15%), with 52% expecting a U-shaped recovery, Bloomberg said. The survey was conducted between April 1-7.