Risk markets are lifting after EU traders have had a night to mull the impressive ECB packages and are wasting little time donning the rally-cap, saying "who cares about NFP?"
The ECB headlines dominated global markets on Thursday, but it will be traders putting that stimulus to work that is bound to dominate the newsreels today.
Liquidity supports risk assets as stimulus impetus becomes too hard to fight, although skepticism remains high on the critic's list for a rapid return to economic normalcy. The words' capitulation' and 'melt-up' are appearing more frequently in the narrative, suggesting the moves are starting to cause pain.
There is a hell of a lot more money sitting on the sideline to be invested as the rally continues. Any resistance to believe and trade it otherwise is futile. The fundamentals of contracting GDP or expected US unemployment to go above 19% today don't count. Central bank liquidity is what drives it all
Looking at the market weekly and monthly deltas, you would think we're in the best all-time markets, not in the midst of a pandemic crisis, with GDP burning and expectations of record unemployment and recession. Who cares? Markets certainly don't, so rally on, and turn rationality off, the trend is your friend.
Currency markets
The more positive fundamental platform for EUR/USD as ECB monetary policy is now finding a viable partner in fiscal policy, something that was absent during the Draghi era. This in itself will pump up the euro to no end. But it is also altering the single currency's carry-trade characteristics for EM FX. Carry trades will now look more favorable via USD shorts. So with the euro on a bull path, it now suggests EM FX will share a high positive beta with EUR.
Still, "Big Bold and Beautiful" for the euro is how the market sees the ECB policy. The ECB on Thursday delivered a bigger-than-expected stimulus package – an increase of PEPP by €600 bln to €1,350 bln, and an extension of the program until mid-2021. The ECB has moved well ahead of the curve absent a severe escalation of the corona-crisis
Happy oil markets make for buoyant currency markets as, indeed, the impact of higher oil prices is leaving a profound effect on commodity-producing currencies. Persistent declines in implied US equity volatility against the backdrop of stabilizing oil prices are a powerful and sturdy combination. The market lean suggests that OPEC+ will extend the existing first-stage agreement for output cuts, which should be bullish for commodity currencies.
Also, the global investor's insatiable chase for yield is helping Asia high yielders. USD/IDR has been heading south, and downward momentum has accelerated this week with record top subscriptions to Tuesday's bond auctions, signaling improving risk sentiment and inflows into high-yield local assets. BI's decision to keep the target rate on hold at its last meeting is also helping the move lower in the spot.
USD/CNH finally traded lower to catch up with the broad dollar moves but is still lagging, and the CNH index has continued to weaken