03-Mar-2020

1) The US is Still The Safe-Haven Of Choice, Even if The Dollar is Lower
2) Asia Open: G7 Policy Bulls vs. The Covid 19 Bears
3) Aussie Bounces Amid Sharp USD Downturn
4) USD/JPY Re-Attempts 108.00 As Asian Equities Rise On Global Stimulus Hopes

 

 

1) The US is Still The Safe-Haven Of Choice, Even if The Dollar is Lower

The dollar’s abrupt reversal over the past three days seems to belie its two month run as the safe –haven of choice from the economic threat of the Coronavirus.

From January 31st to February 20 as the China crisis exploded the euro lost 2.8% against the US dollar.

That steep three week run down under the pressure of the mainland quarantine and factory closures and their implications for the global economy culminated a two-year decline in the euro that began, to choose one staring point of many on April 18th 2018 at 1.2372. Taken to the low of February 20th at 1.0783 the euro had shed 12.8% of its dollar value.

The four day climb to 1.0879 by the 26th, last Thursday, was an incidental bit of profit-taking as the euro neared the lower border of its nearly two-year trend.

Two factors then accelerated dollar decline into overdrive. On the Friday the 27th, the yield on the US 10-yer Treasury dropped below its previous record of 1.31% as bond prices soared with the demand for the safety of US debt.

As Treasury yields fell Federal Reserve Chairman Jerome Powell issued a rare unscheduled statement before the market close on Friday.

“The fundamentals of the U.S. economy remain strong,” Powell said, “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

That brief note was carefully reminiscent of previous crisis comments.

In August 2007 as credit spreads began to widen in the slide into the financial crisis, the Fed issued a statement saying it was “prepared to act as needed”.  Last June as the US-China trade war and Brexit threatened to derail the expansion Powell said the central bank would “act as appropriate.”  Three 0.25% rate cuts followed in July September and October.

With the Fed target range at 1.50% to 1.75% only the Bank of Canada which meets on Wednesday has as much leeway for interest rate stimulus of its economy.  The Reserve Bank of Australia cut it cash rate by 0.25% on Tuesday to 0.50%.

The fed funds futures are wholly in agreement that a rate cut is coming at the March 17-18 FOMC meeting. In a rare unanimity of opinion the view is 100% for a 50 basis point reduction and 71.8% behind a further 25 point cut at the April 29th meeting.

 

2) Asia Open: G7 Policy Bulls vs. The Covid 19 Bears

Expectations for global coordinated monetary policy stimulus are driving a rebound in risk sentiment.

The S&P500 is up a bit over 2% heading into the close. While the Stoxx600 closed up 0.1% in Europe, the UK FTSE was up over 1%, and most Asian bourses were better as well, notably the Shanghai composite up 3.3%.

Fixed income rallied further; however, U.S. 10Y yields down 4bps to 1.11%, although growing expectations of Fed easing have seen the yield curve steepen again.

Oil recovered almost 5%, while gold is down a bit.

The much-improved sentiment came after the Bank of Japan on Monday feeding of the Federal Reserve Boards lead on hinting at policy support, stating that it will “strive to provide ample liquidity and ensure stability.”

However, The ECB refrained from offering a similar backstop of support. Still, European central bankers nonetheless sought to calm nerves Monday when ECB Vice President Luis de Guindos noting that the virus adds a “new layer of uncertainty” but that there is “not yet a widespread slowdown in consumption.”

 G7 finance ministers and central bankers are planning a call from Tuesday to Wednesday to weigh a response to the virus. The conference call is scheduled for 1200 GMT (7 a.m. EST), two and a half hours before U.S. stock markets open.

 While it would be easy to deride news of a conference call, it is a good sign of potential action to come and should bring some stability to markets. And would suggest we’re moving beyond verbal intervention, as global policymakers want to get in front of the virus’s economic carnage through the framework of policy action, including the ECB, BoJ, BoE, and SNB.

Indeed, the market is forcing the Feds hands at this stage with a full 50bp cut priced for the FOMC meeting in March, with about a 60% probability of the move coming early.

Central banks can stop such spirals, and the Fed and BoJ have demonstrated that it can work by merely hinting at it. However, the policy shock and awe impulse needs to be delivered quickly to have the highest market impact. Supply-side driven economic disruption is different, and monetary policy is much less powerful there. Instead, governments will have to take fiscal action, as has started to happen in Italy and Hong Kong, for example.

 

3) Aussie Bounces Amid Sharp USD Downturn

The Australian dollar bounced off lows through trade on Monday, pushing back through 0.65 as broad-based US weakness and an upturn in risk demand helped counter the recent downward correction. Having touched intraday lows at 0.6465 the AUD rallied 1 cent to touch intraday highs at 0.6565 as investors largely ignored a sharp downturn in Chinese manufacturing data, instead pricing in a Fed rate cut later this month.

Opening this morning at 0.6534 attentions now turn to today’s RBA policy meeting and a conference call between G7 finance ministers and central bank heads. While we expect the RBA will stay on hold at 0.75% there are risks to its optimistic outlook as the likelihood of a coordinated global monetary policy adjustment in a bid to dampen the economic impact of the spreading coronavirus increase.

With two-way volatility expected to climb through the short term as risk sentiment continues to fluctuate, we expect the AUD will struggle on moves toward the upside. Watch resistance at 0.6580/90 and supports on moves approaching 0.6460.

The Great British Pound continued its slide through trade on Monday, marking new four and a half month lows against both the USD and Euro. Investors adopted a cautious approach when evaluating day one of trade talks between the UK and EU, forcing Sterling below 1.28 to touch 1.2770. Officials sat down in Brussels for the first round of post Brexit trade talks with markets keenly attuned to any sign Britain will accept EU trade rules. Investors remain wary both parties will continue to kick the can down the road and fail to reach a comparable compromise before the 11th hour of negotiations with Sterling highly vulnerable to any headline comment suggesting trade discussions have stalled. Essentially, we are entering Brexit 2.0 as the next phase of the divorce proceedings begin.

The US dollar slipped against a basket of major counterparts through trade on Monday as investors increased bets the Federal Reserve will cut interest rates in a bid to combat the downturn forced by the spreading coronavirus. The dollar index slipped to one-month lows testing 97.50 following comments from Fed Chair Jerome Powell wherein, he committed to acting appropriately to support the economy. Markets saw Powell’s comments as guidance an imminent rate cut is on the table with bets the FOMC will cut rates at its March 17-18 fully priced in.

 

4) USD/JPY Re-Attempts 108.00 As Asian Equities Rise On Global Stimulus Hopes

USD/JPY looks to regain the 108 level, as the risk sentiment remains buoyed by the increased expectations of global policy action to combat the coronavirus outbreak, especially after RBA unexpectedly cut the interest rates. Focus on G7 efforts.

The USD/JPY pair is feeling the pull of gravity and could slide further toward 107.50, as the hourly chart relative strength index (RSI) has breached the ascending trendline – a sign the bears are gaining strength.

A break above the hourly chart resistance at 108.58 is needed to revive the immediate bullish bias.

USD/JPY ranging between 107.40 and 108.60.

Investors were buying US stocks and the Dow Jones Industrial Average added 1,293 points, or 5.1%, to close at 26,703, a stunning move in what was marking its best point gain in history and its best percentage gain since March 23, 200 – more on that here: Wall Street close: DJIA marks its best point gain in history

Meanwhile, news that the OECD issued downgraded growth forecasts in relation to the COVID-19 outbreak was doing the rounds. Global growth for 2020 was lowered by -0.5% to 2.4% from 2.9%. Chinese growth was revised –0.8% to 4.9% for 2020, recovering to 6.5% (+0.9%) in 2021. In response to the global outbreak, G7 finance ministers and central bankers who are holding a teleconference to discuss their policy response to the economic fallout from the coronavirus. Tomorrow’s G7 call is going to be led by Mnuchin and the Fed chair and there’s going to be a communiqué afterwards.

Meanwhile, as far as US data went, US February manufacturing ISM came in at  50.1 and was softer than its estimate of 50.5 and down from 50.9 in Jan. Across the Atlantic, Eurozone Feb final Markit manufacturing PMI was firm at 49.3 and close to its flash reading of 49.1 and over the Channel, UK Feb final Markit manufacturing PMI edged lower to 51.7 from its flash reading of 51.9. However, the real impact of the coronavirus will not be seen until next months data, which leads to a prospect that central bankers may wish to wait and see how their individual economies are holding up.

The Bank of Japan has very little room to manoeuvre, although its Governor, Haruhiko Kuroda, issued a statement yesterday after an early plunge in share prices, saying the central bank “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”

Today, we will have the first of central bank meetings since the outbreaks with the Reserve Bank of Australia. Westpac expects a -25bp cash rate cut to 0.50% but economists are divided, the Bloomberg survey finding a narrow preference for no change. “Market pricing, however, is around 100% for -25bp. This comes after plunging PMI data from China, an escalating spread of COVID-19 globally, and ahead of an expected FOMC rate cut at their March meeting. This should be enough to nudge a reluctant RBA into action.” And for that matter, will likely path a foundation for other central banks in the eyes of the market at least which makes the RBA a huge event today.

While stocks may have been rallying, profit-taking and algos would most likely be in play – triggering short-covering volumes and encouraging reversal traders to get on board, brave enough to catch the falling knives of the equity market.

In typical fashion, the yen was on the back foot in its negative correlation to equities and if the bulls can build up a position, on a swing trade basis, there are prospects for a return to higher volume nodes and point of control (POC) of the recent sell-off comes in the 1.1050 area, lining up nicely with a 61.8% golden ratio target. A 50% retracement is located at 109.80.