• Joel

Freak Fundamental Themes Right Now

The key theme driving markets at the moment is the international spread of Covid-19. Markets have been aggressively pricing in an increased risk of a severe global economic slowdown, that might even culminate in recessions in developed economies such as the US, Europe and Japan.

That is why we are seeing global equities getting absolutely hammered!


USD has been hammered this week, mainly due to the Fed. Or more precisely, mainly due to the fact that markets have begun aggressively pricing Fed rate cuts this year. The Fed themselves haven’t yet said they are going to do this, but will likely be forced to play along with the market. Compare this to the ECB and BoJ. Both are largely out of ammunition – meaning they can’t ease monetary policy much more from where it already is. Markets are currently in the process of factoring in a huge potential reduction in US/EU and US/Japanese rate differentials.


EUR has had a great week. Weaker USD has been a key factor. As noted above, the ECB has very little room to ease policy compared to most other central banks, which is EUR positive. Also supporting EUR this week is its status as a funding currency; it gets safe-haven flows when carry trades are unwound. Finally, the chances of Eurozone fiscal stimulus appear to be growing, as indicated by comments from German and Eurozone officials (also EUR supportive).


We had a little blip last week where JPY got hammered. But I think its full status as a safe-haven currency has returned, as we have seen with JPY strength this week. Moreover, in very similar analysis as with EUR, the BoJ also has very limited options to further ease monetary policy compared to most other central banks. This also supports JPY.


A rollercoaster week for GBP as the UK and EU unveiled their respective negotiating positions. Tense negotiations lay ahead, as the two sides want different things on a number of key issues. The EU loves to leave things until the last minute, so any signs of a lack of progress will force markets to have to price in an increasing risk that the UK will end the transition period without a deal with the EU, which most see as a catastrophe for the UK economy. Expect GBP volatility ahead.


CAD has been smashed this week. Partly, this is due to lower oil prices (hit alongside equities on Covid-19 concerns). Moreover, like with the Fed and USD, the BoC can also ease policy a lot more than other developed market central banks to counter a slowdown. Markets are in the process of pricing in easing from the BoC, as they are from the Fed.


Both have been smashed in line with the equity/crude market sell off. Remember, both are highly sensitive to the market’s broader appetite for risk. If risk appetite continues to worsen due to Covid-19, they are unlikely to bounce anytime soon. The RBNZ and RBA were surprisingly hawkish in their most recent meetings. Markets are expecting that they will surely have to become more dovish and start cutting rates soon to counter the effects of the virus. This is a further negative for both.


Guys, markets move very quickly and these fundamental themes are constantly adapting and changing. As traders, we have to stay on top of themes and adapt with them, else we risk getting left behind!

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