Investors nerves calmed somewhat overnight after US President Donald Trump said that he will hold a news conference today to reveal economic measures against the coronavirus outbreak. As for our view, it has not changed, despite the overnight rebound. We are reluctant to assume that the worst is behind us and that equity markets will recover all the virus-related losses. With the virus still spreading at a fast pace, and with no vaccine on the horizon, the economic damage could deepen further and most probably drag into Q2.
The dollar was found higher against most of the other G10 currencies this morning. It gained against JPY, CHF, SEK, NOK and EUR in that order, while it underperformed versus NZD and AUD. It was found virtually unchanged against GBP and CAD. The performance in the FX world suggests that after the ugly opening yesterday, market panic calmed somewhat at some point.
Turning our gaze to the equity sphere, we see that major EU and US indices collapsed, on average around 8%, with Wall Street triggering trading halts put in place in the wake of 1987’s “Black Monday” crash. The Dow fell a record 2000 points, while the S&P 500 extended its tumble to nearly 20% from its record high, with futures briefly breaching that threshold after the bell. Investors consider a 20% slide to signal the beginning of a bear market. Ironically this happened on the 11th year anniversary of the prevailing bull run. The big loser was Italy’s FTSE MIB (down 11.17%), as the nation ordered people to avoid unnecessary movement, and banned all public gatherings, a move suggesting that the outlook with regards to the coronavirus continues to darken.
The trigger behind the early panic yesterday was Saudi Arabia’s decision to hike its crude production and to cut its official selling price after Russia denied joining deep production cuts proposed by OPEC in order to stabilize the energy market hit by the economic effects of the coronavirus. After the opening, both Brent and WTI tumbled nearly 30% from their Friday closings.
Having said all that, and as the FX performance suggests, panic calmed somewhat during the early Asian morning today, with most Asian indices and global stock futures trading in green territory. Japan’s Nikkei and China’s Shanghai Composite rebounded 0.85% and 1.82% respectively. What have calmed investors’ nerves may have been an announcement by US President Donald Trump that he will hold a news conference today to reveal economic measures against the coronavirus outbreak. On top of that, US Treasury Secretary Steven Mnuchin said that the White House is considering a meeting with bank executives to discuss more measures.
As for our view, it has not changed, despite the overnight rebound. We are reluctant to assume that the worst is behind us and that equity markets will recover all the virus-related losses. With the virus still spreading at a fast pace (infected cases returned into acceleration mode yesterday), and with no vaccine on the horizon, the economic damage could deepen further and most probably drag into Q2. Even the rate cuts may not prove as effective as many believe. With fears that the virus is unlikely to be contained soon, we see it hard for consumers and businesses to opt for cheap loans and start spending. Thus, we believe that we haven’t hit the bottom yet. Equities and other risk-linked assets could well resume their slides, while safe havens may continue attracting flows.
As for the dollar, we would also treat its latest recovery as a corrective move. Lately, the US currency has been driven by expectations with regards to the Fed’s future course of action. Following last week’s double cut outside a scheduled meeting, market participants are now convinced that the Committee will act again at next week’s gathering. According to the CME FedWatch Tool, investors consider the case of a triple cut as a done deal, while they assign a 52% chance for US rates to touch zero at the April meeting.
So, with the Fed expected to act much more aggressively than other major central banks, the dollar is likely to resume its latest downtrend, especially against the euro, the central bank of which is anticipated to proceed with only a 10bps cut in the deposit rate when it meets on Thursday. Other currencies against which we could exploit further dollar weakness are the traditional safe-havens yen and franc. We would avoid Aussie and Kiwi as these risk-linked currencies tend to get beaten in periods of market turbulence, and as we already noted, we don’t believe that the worst is behind us yet. Such loses may be larger if we choose as counterparts the yen and the franc. In other words, if panic returns, AUD/JPY, AUD/CHF, NZD/JPY and NZD/CHF may be among the currency pairs that will fall the most.
After finding support near the 101.18 hurdle yesterday, USD/JPY rebounded sharply and is now trying to make its way back up. Although we may see a bit more recovery in the near term, let’s not forget that the pair is still trading below a short-term downside resistance line taken from the high of February 21st. If the rate moves higher, but fails to overcome that downside line, this could result in another round of selling, hence why we will stay cautiously bearish, for now.
A further push north, above the 104.99 barrier, which is the low of last week, could invite a few more buyers and help lift the pair to test the aforementioned downside resistance line. If USD/JPY struggles to move above it, that’s when the bears might jump behind the steering wheel again and send the rate lower. We will once again aim for the 104.99 obstacle, a break of which could set the stage for a drift to the 103.67 level, marked by today’s intraday swing high.
Alternatively, if that downside line breaks and USD/JPY pushes above the 106.85 zone, which is the low of March 3rd, this may totally spook the bears from the field and allow more bulls to join in. We will then target the 107.74 hurdle, or even the 108.58 area, marked by the highs of March 4th and 2nd respectively. The pair might get a hold-up near the 108.58 territory, from which it could retrace back down a bit. That said, if the rate remains above that downside line, the buyers may step in again and lift USD/JPY back up again. If this time the 108.58 zone fails to withstand the bullish pressure and breaks, the next resistance level to consider could be around 109.69, marked near the low of February 18th and near an intraday swing low of February 27th.
After a sharp sell-off that we saw yesterday, today, AUD/JPY is trying to recover almost all of those losses. Although we may see a bit more upside in the near-term, the pair continues to trade below a short-term tentative downside resistance line taken from the high of February 21st. As long as that downside line remains intact, we will take a cautiously-bearish stance.
A push higher could send the rate to the 69.17 or 69.57 levels, marked by the current high of this week and last Friday’s low. Slightly above those runs the aforementioned downside line, which may provide additional resistance. If it continues to hold the pair down, the sellers might quickly pick up on that and send AUD/JPY to the downside. We will once again target the above-discussed areas, a break of which could clear the path back to the 68.49 zone, which is yesterday’s intraday swing high. If the selling continues, the pair might drift all the way back to the 66.49 area, marked by yesterday’s intraday swing low.
Alternatively, if the previously mentioned downside line breaks and the pair moves above the 70.30 barrier, marked by the high of March 6th, this could attract more bulls into the field, who could then charge the 71.42 zone. That zone is the high of March 5th, which could temporarily provide some resistance. That said, if the buyers are still feeling comfortable, a break of that area would confirm a forthcoming higher high and AUD/JPY might drift to the 72.59 level, marked by the high of February 27th.
During the early European morning, we already got Norway’s CPIs for February. The headline rate tumbled to +0.9% yoy from +1.8%, while the core one slid to +2.1% yoy from +2.9%. With central banks worldwide easing their respective policies in order to prevent a global recession due to the effects of the coronavirus, a slump in Norwegian inflation may come as an extra reason for Norgegian policymakers to follow the footsteps of the RBA, the FOMC and the BoC, especially after the sharp tumble in oil prices yesterday.
From the Eurozone, we get the final GDP print for Q4, which is expected to confirm its second estimate, namely that economic growth in the Euro area has slowed to +0.1% qoq from +0.3% in Q3. The bloc’s employment change for the same quarter is also due to be released and the forecast points to an acceleration to +0.3% qoq from +0.1%.
From the US, apart from US President Trump’s conference, we also get the API (American Petroleum Institute) report on crude oil inventories for last week, but as it is always the case, no forecast is available.
As for tonight, during the Asian morning Wednesday, New Zealand’s electronic card retail sales for February are expected to have rebounded 0.3% mom after sliding 0.1% in January. Australia’s Westpac consumer sentiment index for March and home loans for January are coming out as well. The Westpac index is expected to have declined 0.4% after rising 2.3% in February, while there is no forecast for home loans. We also have one speech tonight, from RBA Assistant Governor Guy Debelle.
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