12-Feb-2020

1) Dollar retreats broadly on profit taking
2) Wall Street hovers near record levels
3) NZD/USD is holding onto gains above the 100-day

1) Dollar retreats broadly on profit taking

The greenback pared recent gains and fell against its major peers on Tuesday after Federal Reserve Chairman Jerome Powell indicated rates would stay on hold. Sterling jumped across the board on the back of slightly better-than-expected U.K. growth data.

Reuters reported Federal Reserve Chair Jerome Powell was fairly upbeat about the outlook for the U.S. economy in the first of his twice-a-year updates to Congress Tuesday, but cited a potential threat from the coronavirus in China and concerns about the economy’s long-term health.

The U.S. economic expansion, now in its 11th year, is the longest on record. Over the second half of 2019 “the economy appeared resilient to the global headwinds that had intensified last summer,” Powell said in remarks to the House Financial Services Committee, as economic activity increased further and the labor market strengthened.    His remarks echo the formal report the Fed submitted to the U.S. Congress on Friday, which repeated the central bank’s view that its current target range for short-term borrowing costs, between 1.5% and 1.75%, is “appropriate” to keep the expansion on track.

With risks like trade policy uncertainty receding and global growth stabilizing, Powell signaled he sees no reason to adjust U.S. interest rates unless new developments cause a “material reassessment” to the current outlook.    However, he added “We are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.”

Versus the Japanese yen, although dollar rose from 109.74 at Asian open to 109.94 in European morning on rise in U.S. Treasury yields, price pared its gains and retreated to 109.75 due partly to selling in eur/jpy cross. However, the pair found renewed buying there and briefly climbed to session highs of 109.96 in New York after Federal Reserve Chairman Powell’s testimony to the House Financial Services Committee before erasing intra-day gain and fell to day’s low of 109.73.

The single currency moved sideways in Asia and dipped to 1.0906 at European morning. Despite rebounding to 1.0920 in Europe, price then dropped to a fresh 4-month low 1.0892 at New York open due partly to cross-selling in euro especially vs sterling. However, the pair erased its intra-day losses and rallied to 1.0924 in New York on broad-based usd’s weakness.

The British pound initially rebounded to 1.2921 at Asian open and despite a brief dip to 1.2895 in European morning on cross-selling in sterling, cable jumped to 1.2943 (Reuters) after U.K. economic growth showed no change in the fourth quarter despite market expectations that it would be slower before retreating to 1.2916 in Europe. Later, renewed buying emerged pushed the pair to session highs of 1.2968 in New York morning before retreating to 1.2934 after BOE Governor Carney’s remarks.

Reuters reported Britain’s economy flat-lined in the final three months of 2019, when the country was in a deadlock over Brexit that was only broken by Prime Minister Boris Johnson’s December election victory, leading to some signs of a recovery early this year.

Official figures released on Tuesday showed zero growth in the fourth quarter compared with the third, matching the median forecast in a Reuters poll of economists.   In annual terms, growth was 1.1%, stronger than the poll forecast of 0.8% after upward revisions to growth in some previous quarters. However, the last time annual growth was weaker for a calendar quarter was in mid-2012.

In other news, Reuters reported Bank of England Governor Mark Carney said higher government spending, as well as more investment by businesses, is needed to get Britain’s economy out of its slow growth mode and low interest rates made such investment easier to do.   “This is an environment in which, yes, the right infrastructure, the right corporate investment projects make sense and will be necessary in order to ultimately get us out of this situation,” Carney told lawmakers in the upper house of Britain’s parliament.

2) Wall Street hovers near record levels

US indices had a steady session yesterday after Fed Chairman Powell said the US economy appeared to be quite resilient, though the impact of the coronavirus would be monitored closely. The UK narrowly avoided recession in Q4 while the Reserve Bank of New Zealand held rates, as expected, but revised its forward path for rates higher.

• The US30 index was little change at yesterday’s close and has opened flat this morning
• The 55-day moving average has risen to at 28,610 while the 100-day moving average is at 27,934
• There are no major data releases scheduled for today but Fed Chairman Powell faces day two of his semi-annual testimony. Yesterday he said as long as incoming information about the economy remains broadly consistent with the current outlook, the monetary policy stance will likely remain appropriate.
• The Germany30 index hit a record high yesterday from records going back to 2003, boosted by the sentiment on Wall Street
• The index remains above the 55-day moving average at 13,311 while the 100-day provides longer-term support below at 13,035
• Euro-zone industrial production probably fell 1.6% m/m in December, according to the latest survey of economists, negating the 0.2% expansion seen in November. ECB’s Lane is scheduled to speak today.
• West Texas Intermediate (WTI) is clinging onto the $50 per barrel handle amid a lack of announcements from OPEC and its allies about additional production cuts when faced with the coronavirus threat
• WTI has opened slightly higher this morning, facing its second up-day in a row
• The Energy Information Administration (EIA) releases its weekly stockpiles data to February 7 today. Analysts anticipate an addition of 2.93 million barrels following on from last week’s 3.36 million barrels. The API data earlier in the week showed an increase of six million barrels.

3) NZD/USD is holding onto gains above the 100-day average

NZD/USD continues to trade at session highs above the 100-day moving average (MA) at 0.6459 with Reserve Bank of New Zealand’s governor Orr downplaying coronavirus scare during the press conference.

Orr called coronavirus outbreak a downside risk to New Zealand’s economy but said the negative impact will be short-lived and the economy will rebound in the second half of 2020 on the back of fiscal and monetary policy stimulus.

The central bank kept rates unchanged at 1%, as expected, at 01:00 GMT and surprised markets by rolling out forecasts that showed the borrowing costs will remain unchanged throughout 2020.

The markets were expecting the central bank to hint at deeper rate cuts during the year ahead.

As a result, the NZD/USD pair jumped from 0.6408 and 0.6462 in the 15 minutes to 01:15 GMT and is now trading at 0.6465.

The pair could continue to gain altitude on RBNZ’s lack of rate cut hint and signs of risk reset in the equity markets. The US stocks rallied on Tuesday with the S&P and Nasdaq printing highest daily closing prices. At press time, major Asian indices like Nikkei and Hang Seng are flashing moderate gains.