Equities rebounded during the US session, with the S&P 500 and Nasdaq hitting new record highs. The risk-on trading continued during the Asian session today as well, with investors ignoring the fact that the coronavirus continues to spread at a fast pace. As for today, Fed Chair Powell testifies before the Housing Financial Services Committee of the US Congress, with investors perhaps on the edge of their seats in anticipation of clues on how the Fed plans to move forwards. Tonight, during the Asian morning, the RBNZ decides on interest rates, but we expect it to refrain from acting at this gathering.
The dollar traded higher against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained the most against EUR, NZD and CHF, while it underperformed only versus AUD, NOK and GBP.
The performance in the FX world gives us a very blurry picture with regards to the broader market sentiment and thus, we will turn our gaze to the equity market in order to get more clues on that front. EU indices traded mixed, with investors perhaps still digesting the fact that the coronavirus has killed more people than the SARS did back in 2002/03. However, US equities traded in the green, with the S&P 500 and Nasdaq hitting new record highs. The positive sentiment rolled over into the Asian session today as well, with China’s Shanghai Composite and Hong Kong’s Hang Seng gaining 0.39% and 1.26% respectively. Japanese markets remained closed today in celebration of the National Day.
With the death toll due to the virus breaking the 1000 mark, we find it very hard to explain the optimism from the US session onwards. Many suggest that investors rushed into US equity markets as recent economic data suggested that the US economy is doing very well, and thus, it may be the safest place for investing in stocks, as it may feel the effects of the coronavirus the least. But if this is the case, why did China’s Shanghai Composite closed in positive territory? Is there still faith on China’s measures to contain the virus, or at least relieve the effects on its domestic economy?
In any case, we believe that investors are underestimating the potential impact of the fast-spreading virus to the Chinese economy, and even to the global growth outlook. Even the World Health Organization (WHO) warned yesterday that the spread among people who had not been in China may be the “the spark that becomes a bigger fire”. We stick to our guns that with no concrete signs that the virus could be stopped soon, the economic wounds could, not only impact Q1, but also drag into Q2. Anything pointing to that direction may eventually prompt investors to abandon risk assets in favor of the safe havens.
As for today, investors may take a break from the coronavirus saga, and turn their attention to Fed Chair Powell’s semi-annual testimony before Congress. He will testify before the House Financial Services Committee today, and tomorrow, he will present the same testimony before the Senate Banking Committee. The message we got from the latest Fed meeting was that policymakers are not comfortable with inflation persistently under their 2% target, and with their favorite inflation metric, the core PCE rate, staying below that objective since December 2018, expectations with regards to another rate cut are still on the table. According to the Fed funds futures, such an action is more-than-priced in for the September meeting.
In our view, Powell could say that the economy is doing well, but we also expect him to reiterate that there is little tolerance to low inflation. We also believe that he will acknowledge that the coronavirus constitutes a new risk to the economic outlook. The dollar could slide if Powell sounds somewhat more concerned than previously, as market participants may decide to bring closer the timing of when they expect the next cut be delivered. Nevertheless, as we already noted yesterday, bearing in mind that sometimes the US currency acts as a safe haven, we would treat any potential slide as a corrective move if concerns around the coronavirus intensify at some point soon. In such case, we prefer to exploit any potential upcoming dollar strength against risk-linked currencies, like the Aussie and Kiwi, which tend to slide during periods of market turbulence.
Recently, after finding support near its almost-11-year low, at 0.6662, AUD/USD rebounded and is now drifting a bit higher. That said, for now, this move higher could be seen as a temporary correction, as the pair still remains below a short-term downside resistance line drawn from the high of January 16th. If that line stays intact, this could result in another round of selling soon, hence why we will take a cautiously-bearish approach for now.
If AUD/USD makes its way a bit higher, but struggles to push above the aforementioned downside line, this may confirm that the current downtrend is still strong and that we could see more declines. This is when we will target the above-discussed 0.6662 hurdle, which if broken could set the stage for a move to the 0.6642 level, marked by the high of February 13th, 2009.
Alternatively, if the previously-mentioned downside line breaks and the rate climbs above the 0.6731 zone, which is near the high of January 31st and marks the high of February 7th, this might invite a few more buyers into the game. The rate could then travel to the 0.6774 barrier, marked by the high of February 5th, which may initially provide a bit of resistance and hold the pair down. That said, if the buyers only see that barrier as a temporary obstacle, another push higher might lead to a break of it, which could allow AUD/USD to move to the 0.6800 level. That level marks the low of December 10th and an intraday swing low of January 27th.
As for tonight, during the early Asian morning, we have a central bank deciding on interest rates and this is the RBNZ. This will be one of the “bigger” meetings, where apart from the decision, the statement and the minutes, we also get the quarterly Monetary Policy Statement (which includes updated economic projections), as well as a press conference by Governor Adrian Orr.
At its November meeting, the RBNZ surprised investors, who were largely pricing in a rate cut, and instead decided to stand pat, keeping its rates at +1.0%. That said, officials maintain an easing bias, saying that they will add further monetary policy stimulus if needed. They also noted that employment remained around its maximum sustainable level.
Since then, New Zealand’s CPI accelerated to +1.9% yoy from +1.5%, just a tick below the midpoint of the Bank’s target range of 1-3%, while the unemployment rate ticked down to 4.0% from a downwardly revised 4.1%. However, given that the employment change revealed no new added jobs, the decline in the unemployment rate may have not been for the good reasons. Indeed, with the participation rate sliding to 70.10% from 70.40%, the slide in the unemployment rate may be owed to many people being discouraged to register as unemployed and seek for a job.
In any case, our humble view is that the employment report was not that disappointing and combined with notable rise in the nation’s inflation rate above the Bank’s latest projection for the quarter, which was at +1.6%, may allow policymakers to wait for a while more before they decide to cut. This may result in a higher Kiwi, as some of those who were anticipating a rate cut in November may have pushed their bets into this meeting. Having said all that, the big risk to that view is the fast-spreading coronavirus which could have a negative impact on New Zealand’s economy. Let’s not forget that New Zealand is one of China’s main trading partners, and the potential effects could eventually prompt a rate cut.
Now, even if we are correct and the RBNZ does not cut interest rates, any potential strength in the Kiwi could stay short lived in case fears with regards to the coronavirus return into the markets in the coming days. Kiwi is considered a commodity-linked currency, and thereby a risky asset, and could come back under selling interest. In case the broader sentiment switches back to risk-off, we prefer to exploit any potential Kiwi weakness in the aftermath of the RBNZ decision, against the safe-havens franc and yen, which tend to attract decent flows during risk-off periods.
Yesterday, NZD/CHF got held near the 0.6235 support area, from which the rate pushed up this morning. Given that the pair looks slightly overstretched to the downside on the shorter-time frames, we may get a bit of a corrective move higher. Our oscillators, the RSI and the MACD, started pointing north, which could support the idea of a near-term upside correction. That said, let’s not forget that this move upwards might be short-lived, as NZD/CHF is still trading below its short-term tentative downside resistance line drawn from the high of December 31st. Thus, although we may see a bit of recovery to the upside, still, we will stay cautiously bearish overall.
If the rate makes a move above yesterday’s high, near the 0.6275 mark, this may increase the pair’s chances of drifting further north. We could then aim for the 0.6320 hurdle, marked by the high of February 5th, or for the aforementioned downside line, which might help keep the rate lower. If so, such actions may result in another round of selling, possibly bringing NZD/CHF back to the above-mentioned 0.6275 zone. If that zone fails to provide decent support and breaks, this might once again clear the way to 0.6235 obstacle, or to the 0.6218 level, marked by the current lowest point of February.
On the other hand, if the aforementioned downside line breaks and the rate travels above the 0.6348 area, marked by the low of January 29th, the buyers might take the steering wheel, at least for a while. That’s when we will target the 0.6377 obstacle, which if breaks could open the door for a further move north, possibly aiming for the 0.6429 level. That level marks the high of January 24th.
During the European morning, we get a string of data releases from the UK. Kicking off with the preliminary GDP for Q4, expectations are for the qoq rate to have held steady at +0.4% qoq, but this will drive the yoy rate down to +0.8% from +1.1%. What’s more, following the first increase after 5 quarters of declines, business investment is expected to have tumbled again in Q4. Specifically, expectations are for a 1.3% yoy slide following a 0.5% growth in Q3. Both the industrial and manufacturing production yoy rates are expected to have risen in December but to have remained within the negative territory, while the nation’s trade deficit for the same month is forecast to have widened.
When it last met, the BoE decided to hold rates unchanged, disappointing those who were expecting a rate cut to be delivered. That said, the statement had a more dovish flavor than the previous one, with the Committee dropping its “gradual tightening” wording, and adding that “Policy may need to reinforce the expected recovery in UK GDP growth”.
So, having that in mind, softness in the aforementioned data sets may revive some bets with the regards to a BoE rate cut, and perhaps push the pound slightly lower. However, our view is that policymakers will place more emphasis on data pointing to how the economy has been performing in the post-election era before deciding whether to cut or stay sidelined. After all, they clearly pointed that they would wait for data to confirm the positive signals from the latest PMIs, with inflation taking the 1st place on the list.
From the US, ahead of Powell’s testimony, we get the NFIB small business optimism index for January and the JOLTS Job Openings for December. The NFIB index is forecast to have risen to 103.4 from 102.7, while the job openings are expected to have increased to 7.0mn from 6.8mn the month before. We also get the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.
As for the speakers, apart from Fed Chair Powell and RBNZ Governor Orr, we have five more on the agenda: ECB President Christine Lagarde, BoE MPC member Jonathan Haskel, Fed Board Governor Randal Quarles, St. Louis Fed President James Bullard, and Minneapolis Fed President Neel Kashkari.