04-Mar-2020

1) Dollar Falls In New York After Fed’s Emergency Rate Cut
2) Australian GDP Preview: How Will GDP Impact AUD?
3) Asia Open: Coordinated Policy In An Uncoordinated World

1) Dollar Falls In New York After Fed’s Emergency Rate Cut

The greenback ended gave up early gains made in Asia and Europe and ended lower against majority of its peers on Tuesday due to Federal Reserve’s 50 basis point surprise interest rate cut in New York session to reduce the negative impact of coronavirus on global growth.

Reuters reported the U.S. Federal Reserve cut interest rates on Tuesday in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus.    In a statement, the central bank said it was cutting rates by a half percentage point to a target range of 1.00% to 1.25%.

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate,” the Fed said a statement.    The decision was unanimous among policymakers.    The Fed’s decision to cut interest rates before its next scheduled policy meeting on March 17-18 reflects the urgency with which the Fed feels it needs to act in order to prevent the possibility of a global recession.

Versus the Japanese yen, although dollar rebounded to 108.53 in Australia, price met renewed selling and fell to 107.67 in Asia on active safe-haven yen buying as worldwide spreading of coronavirus triggered worries over global monetary easing before rebounding to 108.13 in European morning. However, price later tumbled to session lows of 106.94 on usd’s broad-based weakness after Federal Reserve’s surprised 50 basis points rate cut as well as selloff in the U.S. Treasury yields and then moved broadly sideways.

Although the single currency gained from 1.1121 to 1.1155 in Asia, price met renewed selling and later fell to session lows at 1.1096 at New York open due to cross-selling in euro. However, the pair then erased its losses and jumped to a 2-month high at 1.1213 on usd’s weakness before retreating to 1.1148 on profit-taking.

Reuters reported euro zone consumer prices grew more slowly in February than in January, as expected, data from the European Union’s statistics office showed on Tuesday, as the spread of the coronavirus around the world depressed oil prices.    Eurostat estimated that consumer prices rose 1.2% year-on-year in February after a 1.4% rise in January, in line with a Reuters poll of analysts.

The slower growth was mainly due to -0.3% year-on-year fall drop in energy prices. Without it, and excluding the volatile unprocessed food prices, inflation accelerated to 1.4% year-on-year from 1.3% in January.    An even narrower measure that also excludes alcohol and tobacco prices and that is watched closely by many bank economists also accelerated to 1.2% from 1.1% in January.

The British pound found renewed buying at 1.2741 in Australia and remained on the front foot in Asia and gained to 1.2812 in European morning, price then briefly retreated to 1.2763 but rose again to 1.2816 due partly to upbeat UK construction PMI data. Despite weakening to 1.2768 at New York open, cable then rallied to session highs at 1.2844 due to usd’s weakness before moving broadly sideways.

Reuters reported a measure of Britain’s building industry turned positive for the first time in nearly a year in February as Prime Minister Boris Johnson’s election win boosted economic sentiment for the second month in a row, a survey showed on Tuesday.    The IHS Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) rose to 52.6 from 48.4 in January, just below the Reuters poll forecast of 48.8 and representing less of a jump than in the previous month.    But the index showed growth for the first time since April 2019 — after the extension of an original Brexit deadline — and hit its highest level since December 2018.

In other news, Reuters reported the finance ministers of the Group of Seven (G7) nations will monitor the coronavirus outbreak closely and they have all options on the table, if needed, to counter a global economic downturn, German Finance Minister Olaf Scholz said on Tuesday.     “As G7 finance ministers, we have just discussed to monitor the situation regarding the coronavirus very closely. Should the need arise, we have all the means to counter a global downturn,” Scholz said in a statement posted on Twitter.     In a joint statement, G7 finance ministers and central bank governors earlier on Tuesday said they would use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks from the coronavirus.

2) Australian GDP Preview: How Will GDP Impact AUD?

Australia’s quarterly national accounts are due at 11:30am Syd/8:30am Sing/HK. The event will be held in high regard with financial and commodity markets considering the coronavirus and the fear-factor in the markets, driving equities into official correction territories and central banks to act accordingly.

The Reserve Bank of Australia, yesterday, cut the cash rate -25bp to 0.5%, although market pricing was between -30bp- -50bp cut which gave some value in the Aussie that bounced from under 0.6530 to 0.6566, before sliding to 0.6540. Markets are pricing around 100% chance of another 25bp cut at the next RBA meeting on 7 April and today’s GDP will be another key influencer for AUD.

Some analysts are expecting the global economy to move into a recession and Australia is in the firing line. While today’s GDP data will not factor in the threat of the spread of the coronavirus and its impact on business and the economy, traders will be looking at the vulnerability of the economy according to the prior quarter as the coronavirus impacts in the first quarter of January 2020.

One of the major concerns has been with international trade and according to the Bureau of Statistics, the current account surplus, seasonally adjusted, fell by 85 per cent to $955 million in the December quarter 201, reflecting lower commodity prices and lower demand for exports. Also, Australian retail turnover fell 0.5 percentage points in December 2019, which is a worry considering consumer spending generates the bulk of economic growth. One would expect that this will be a trait that will continue in the first quarter of 2020 as the coronavirus bites.

 Spending by businesses was also lacklustre in December and businesses spending on equipment, plant and machinery only rose 0.8 per cent in the December quarter and as the Reserve Bank governor, Philip Lowe, said, businesses remain reluctant to spend and certainly do not possess the “animal spirits”.

Meanwhile, the market consensus is for a year on year outcome as 1.9% vs 1.7% prior. Where most of the focus will be today, markets look for 0.3% vs 0.4% for the quarter over the prior quarter result. We have seen soft net exports and public demand data, and the markets are factoring headwinds surrounding productivity in the main as well as a subdued economy. December quarter current account deficit fell back to 0.2% Gross Domestic Product on the back of lower export prices.

However, on the other hand, we have seen stronger than expected inventories, profits, and wages, only partly offset by slightly weaker government spending and net exports. any improvements in the expected data today could put the economy on track towards a 2.3% target, consistent with the RBA’s characterization of a “gentle turning point”.

We have already seen the Reserve Bank of Australia cut interest rates, but below the genal consensus and hence AUD was bid into the emergency interest rate cut by the Federal Reserve overnight. The market was long AUD into 0.6645 vs the greenback highs before moving back to current levels around 0.6580.

Depending on today’s outcome, the levels of interest are seen as 0.6544 and 0.6721 on the wide-based on the volume profiles and points of control of the 28th Feb swing low-post-Fed rate cut rally and the 2020 range respectively. The former has a confluence of a 50% mean reversion of the range while the latter has a 50% mean reversion confluence of the 2020 range. However, the 200 four-hour moving average falls in at 0.6700 and we also see strong support at 0.6670 built up over Feb business, where sellers would be expected to defend shorts in a higher volume node area. To the downside, 0.6540 and 0.6510 and 0.6480 are the final supports on the 2020 value range. Should the data come out in line with expectations, we can expect to see some weakness in AUD considering the weakness in the economy. Immediate support comes as 0.6570.

3) Asia Open: Coordinated Policy In An Uncoordinated World

The Fed pulls forward what consensus had expected to happen in two weeks. After the initial bounce in the SP 500, there has been no significant bullish follow through in stock market flow. Existing sell orders did not get pulled, and more selling orders are getting added to the stack. As it appears discretionary traders were looking to sell on the algo spike to SPX 3120-25

Value tried to run briefly on the Fed cut but struggled to make much ground in the absence of a fiscal pulse, and which continues to point to a mild disappointment trade from the G-7 event. Fear is the economic problem, and Twitter is the super spreader. We know central banks cannot directly reverse that, nor can they force people into shopping malls or onto planes.

The debate will rage on about the merit of the rate cut to which the markets are much divided. But from my perspective, the swift and decisive move was a necessary measure to support the equity markets which were entering a death spiral and demanded an urgent response.

 In that regard, the Fed leadership was commendable, but a considerable level of caution still needs to be exercised.

Will rate cuts boost the service economy and get people back on airplanes and cruise ships into St. Mark’s Square? NO!!

The FOMC cut a necessary stop-gap to buy G-7 more time in order for them to better quantify the supply chain carnage and calibrate the appropriate fiscal measures. But the clock is ticking.

Cutting at this time is a questionable use of limited ammunition. Without G-7 fiscal cannons firing, a rate cut alone is not going to solve supply chain issues or get people back on planes. The psychological benefits and positive asset price impacts of rate cuts right now may also be fleeting, especially as the market gets swamped yet again by more negative real-life headlines about new cases.