Asian equities rebounded today after China’s National Health Commission said that measures to stop the spread of the coronavirus are increasing. In the currency world, the pound was the main gainer among the G10s, boosted by better-than-expected employment data, something that may have eased somewhat expectations with regards to a BoE cut next week. As for today, the highlight may be the BoC rate decision, with investors eager to find out whether the Bank will maintain its neutral bias.
The dollar traded higher against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most against NOK, AUD and CHF in that order, while it underperformed only against GBP, and slightly versus SEK.
Although not clear by the performance in the FX sphere, market sentiment remained downbeat on Tuesday, with major EU and US indices ending their sessions in the red, due to fears over the coronavirus outbreak in China, with the US Centers for Disease Control and Prevention confirming one case of the new virus in Seattle. The only exception was the German DAX, which finished fractionally positive (+0.05%). This may have been due to the better-than-expected German ZEW survey for January. Having said all that, Asian bourses managed to rebound today, with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 0.70% and 0.28% respectively.
The nerves of investors may have calmed after China’s National Health Commission said that measures to stop the spread are increasing. However, officials also noted that the source of the virus has not been found yet, the route of transmission is not yet fully understood and that it could mutate. Today, The World Health Organization (WHO) will meet to decide whether the outbreak is an international emergency, and if this is the case, we would expect equities and risk-linked currencies, like the Aussie and Kiwi, to come under renewed selling interests as participants seek shelter in safe havens, like the yen. Now in case the Organization serves another tranquilizer to investors, the overnight rebound is likely to continue, while safe havens are likely to pull back.
Back to the currencies, the pound was the main gainer among the G10s, getting a boost after the UK employment data came in better than anticipated. The unemployment rate held steady at 3.8%, while the employment change showed that in the three months to November, the economy gained 208k from 24k in October, and much more than the 110k forecast. With regards to earnings, the including bonuses yoy rate remained unchanged at 3.2%, while the excluding bonuses one ticked down to +3.4% from +3.5%. Despite the modest slowdown in earnings without bonuses, bearing in mind the slowing inflation, real wage growth is still at decent levels.
All this may have eased somewhat expectations with regards to a BoE rate cut at next week’s gathering and that’s why the pound was bought, but what could really prove decisive on how officials will proceed may be Friday’s preliminary PMIs for January. Officials could be keener to see signs on how the economy may have been performing in the post-election era. Following last week’s streak of weak economic data, another disappointment in the PMIs could force the pound to give back its recent gains and perhaps seal the deal for a quarter-point cut at next week’s meeting. On the other hand, decent numbers could allow policymakers to delay such a decision, something that may allow GBP-bulls to stay in the driver’s seat for a while more.
After rebounding from the short-term upside support line drawn from the low of December 27th, GBP/NZD is once again approaching its key resistance barrier, at 1.9839, which is currently the highest point of January. We need a clear break above that area first, before examining a further move to the upside, hence why we will remain cautiously bullish for now.
Eventually, if the pair climbs above the 1.9839 barrier, this would confirm a forthcoming higher high and more buyers could be stepping in. We will then aim for the 1.9951 hurdle, a break of which may send the rate to the psychological 2.0000 zone, marked near the high of December 18th.
Alternatively, for to start looking at lower areas, we will wait until we see a break of the aforementioned upside line and a rate-drop below the 1.9605 hurdle, which is the low of this week. This is where the bulls might get spooked from the field and allow the bears grab the steering wheel, at least for some time. The pair could move to the 1.9542 zone, which may initially provide some support for GBP/NZD, and the rate might rebound slightly. That said, if the pair stays below the previously-mentioned upside line, another round of selling could materialize, potentially bringing GBP/NZD down again. If the 1.9542 hurdle fails to withstand the bear-pressure and breaks, this could open the door for a further slide to the 1.9461 area, or the 1.9415 level, marked by the lows of December 31st and 27th respectively.
As for today, the highlight may be the BoC interest rate decision. At its last meeting, the Bank kept interest rates unchanged, noting that there is nascent evidence that the global economy is stabilizing and that it is appropriate to maintain the current level of the overnight rate target. The key message was that officials have quickly switched back to neutral after flirting with the idea of easing at the prior gathering.
Since then, employment data for November disappointed, but the inflation numbers for the month came in better than expected overall. On January 9th, BoC Governor Poloz said that the potential downside risks from global trade frictions seem to have eased, but also added that the Bank will be watching closely to see whether the recent slowdown in job creation will continue. The following day, December’s jobs data surprised positively, which may allow policymakers to maintain their neutral stance for a while more, and thereby provide some support to the Loonie, as they would be among the few major central banks without an easing bias.
However, ahead of the meeting, we get Canada’s CPIs for December, which could result in some last-minute changes in the Bank’s statement. Both the headline and core yoy rates are expected to have remained unchanged at +2.2% and 1.9% respectively, while no forecast is available for the trimmed and median rates. If indeed the CPI rates stay largely unchanged, this may add to the case of policymakers maintaining their neutral stance. However, any potential disappointment could raise speculation that the statement may have somewhat of a dovish flavor.
AUD/CAD is trading below a newly-established short-term tentative downside resistance line taken from the high of December 31st. Although the path of least resistance lies slightly more to the downside, we will not exclude a possibility to see a small correction up before another leg of selling, hence why we will stay somewhat bearish, at least for now.
The pair is currently getting a hold-up near the 0.8947 hurdle, which is marked by the low of January 9th. If, for now, that area continues to keep the rate above it, we may end up with a small correction to the upside, potentially bringing AUD/CAD closer to the above-discussed downside line. That said, if it continues to provide decent resistance, this could result in another round of selling, possibly pushing the rate below the 0.8947 obstacle and targeting the 0.8903 level. That level is marked by the lows of October 25th, 27th and January 8th.
Alternatively, if the aforementioned downside line breaks and the pair flies above the 0.8997 barrier, which is this week’s high, this may open the door for further extensions to the upside. This is when we will aim for the 0.9012 hurdle, or even the 0.9038 zone, marked by the high of January 16th. Initially, AUD/CAD might get a hold-up around there, or even correct back down a bit. That said, if it continues to trade above the 0.9000 level, this could attract the bulls again, who may lead the rate higher again. If the previously-mentioned 0.9038 area fails hold the buyers down, its break could set the stage for a test of the 0.9070 zone, marked by the high of January 3rd.
From the US, we get existing home sales for December, with the forecast pointing to a 1.3% mom increase, after a 1.7% slide in November.
We will also keep an eye on the World Economic Forum in Davos, as well as on US President Trump’s impeachment trial in the US Senate. Yesterday, the chamber allowed for three days each for the defense and prosecutors to put forward their case. Anyhow, as we noted yesterday, bearing in mind the Republican majority in the Senate, we see the scenario of Trump being ousted as unlikely.
As for tonight, during the Asian session, we have Australia’s employment data for December. The unemployment rate is expected to have stayed at 5.2%, above the 4.5% mark, which the RBA expects to start generating inflationary pressures. The employment change is expected to show that the economy gained 15.0k jobs, less than November’s 39.9k.
At its latest gathering, the Bank kept interest rates unchanged at 0.75%, but adopted a less dovish stance that many may have expected, especially after the minutes of the previous meeting revealed that the Board discussed easing further back then. That said, they reiterated that they will continue to monitor developments, including in the labor market, and ease policy further if needed. According to the ASX 30-day interbank cash rate futures implied yield curve, investors are nearly fully pricing in another quarter-point cut to be delivered in May, but a soft employment report may prompt them to bring that timing forth.
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