As we move further and further, into steeper and steeper social-distancing regulations, to try to contain COVID-19 all standard and historical trade theory is being thrown out the window.
G10 currency Central Banks have moved to global recessionary footings but have failed to stem the volatile flow.
Quantitative easing has and is now being enacted in countries that have never seen it. And, fiscal policy which is being made on the fly has yet to have any significant impact in slowing the outflows seen in markets.
FX, equities and bonds are trading intraday what one would normally see over a year. Equities in particular are seeing normal price theory completely obliterated as pricing 12 months ahead time, just isn’t possible in the current environment.
We should highlight that there are some traditional pricing and structural setups that are holding true. These include:
1. Risk and EM exposed trade currencies: All are seeing sustained selling expect this to continue. (So much so we have seen the Federal Reserve enact USD swaps with. almost all central banks around the world to try and elevate the pressure on economies with high levels of USD denoted debt.)
2. USD, US risk-free rates and US fixed interest markets are seeing hug flows towards them.
3. JPY remains a safe-haven however flows are not as strong as that seen in previous financial downturns.
Traditional pricing not performing as one would expect
1. Precious metals – XAU, XAG and Palladium are being shelled out at rapid rates. (Particularly silver and Palladium). The suggestion why is institutional traders are using metal positions to fund losses experienced elsewhere.
2. Risk free rates are not ‘risk free’ – Bonds outside of the US are also being shelled; in. Australia for example the Aussie-10year bond has seen yield rising from 0.81% to over 1.53% (ignoring the spike to 2.25% expected to be an algo error) in just 9 days.
3. The EUR’s movement is asymmetrical, considering the impacts being seen in Europe due to COVID-19 it behaviour is sporadic and is leaving traders moving the crosses in the lerch.
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