Market sentiment remained supported yesterday and during the Asian morning today, perhaps on optimism that China will do whatever it takes to contain the coronavirus. In the FX world, the greenback may have stayed supported due to relatively upbeat Fed minutes, while the pound was found lower, despite the better-than-expected UK CPIs for January. Perhaps GBP-traders paid more attention to headlines surrounding the Brexit transition period.
The dollar traded higher against most of its G10 peers on Wednesday and during the Asian morning Thursday. The main losers were JPY, GBP and AUD, while the greenback underperformed somewhat against NOK and CAD. Against the EUR, it was fount virtually unchanged.
The fact that the yen tumbled at a time when gold continued gaining and the commodity-linked Aussie and Kiwi slid, provides confusing signals with regards to the broader investor morale. However, looking at the performance of the stock market, we see that major EU and US indices were a sea of green, with the S&P 500 and Nasdaq hitting record closing highs as optimism surrounding China’s efforts to contain the spreading of the coronavirus grew further. The upbeat investor morale rolled over into the Asian session today as well, with Australia’s and New Zealand’s markets hitting new record highs. In Japan, Nikkei 225 closed 0.34% up, while China’s Shanghai Composite gained 1.84%.
Investors’ appetite remained upbeat due to a report that China is considering injecting cash or proceed with mergers in order to bail out airlines hit by the virus. Another slowdown in coronavirus cases, this time accompanied by a slowdown in deaths as well, may have gave another reason for investors to increase their risk exposure, while the PBoC’s cut in its benchmark lending rate, although expected, may have also been pleasant news.
Having said that though, we will maintain our cautious stance, despite many equity indices hitting new records. We still believe that the deaths will not stay for long in slowdown territory and that their slowdown will come with a lag compared to the cases. On top of that, with scientists saying that the virus may spread even more easily than previously believed, we cannot rule out the number of infected cases to start accelerating again in the days to come.
Yes, expectations that Chinese authorities will do whatever it takes to contain the virus may continue boost risk appetite, but what happens if additional measures prove not to be enough? We believe that the risks here are asymmetrical. Further slowdown in infected cases may help equities to climb higher, but not at the same pace as before. On the other hand, just a headline suggesting that things have gotten out of control again may be enough to spook investors, who could massively abandon risk assets and seek shelter in safe havens.
Tomorrow, we will get preliminary PMIs for February from several Eurozone nations and the bloc as a whole, as well as from the UK and the US. Market participant may be biting their nails in anticipation of signals with regards to whether and to which extent the coronavirus has left marks on the global economic landscape.
Back to the currencies, the greenback may have stood tall, despite the risk-on trading activity, perhaps aided by the minutes of the latest FOMC gathering, which revealed that policymakers were cautiously optimistic over their neutral stance, namely to keep interest rates untouched for the whole year. Although they acknowledged the risks the coronavirus poses to the economy, we have to recall that while testifying before Congress, Fed Chair Jerome Powell said that it is too early to tell whether the impact to the US economy will be severe of not. In our view, all this suggests that the Fed is very comfortable staying sidelined for now, but still, according to the Fed funds futures, investors are fully pricing in another quarter-point decrease to be delivered in September.
Yesterday, USD/JPY exploded to the upside, breaking some key resistance barriers on the way. Eventually, the pair found some resistance near the 111.59 hurdle, from which it corrected slightly lower. That said, if the buying momentum remains uplifted today, we may see another uprise. But in order to get slightly more comfortable with further upside, a break of yesterday’s high, at 111.59, would be needed. This is why we will stay bullish for now.
If the rate does make its way above the aforementioned 111.59 barrier, that would confirm a forthcoming higher high and more buyers may join in. This is when USD/JPY could drift to the 111.91 hurdle, which is the high of April 29th, 2019. Initially, the pair may struggle to push further above that barrier, which might lead to a small retracement. But if the rate remains above the 111.59 zone, the bulls may grab the steering wheel again and lift the pair to the 111.91 obstacle, a break of which may clear the way to the 112.24 level, marked by the high of April 24th, 2019.
On the other hand, if USD/JPY starts correcting down and moves below the 111.10 area, which is today’s low, this could lead to a deeper slide. That’s when we will aim for the 110.67 hurdle, marked by the high of May 21st, 2019. If there are still no bulls in sight, another drop could send the pair to the 110.29 level, which is the high of January 17th. The rate might get a hold-up around there, as it could also test a short-term tentative upside line, which may provide some additional support.
Now, flying from the US to the UK, yesterday, we got the nation’s CPI data for January, where the headline and core CPI rates rose by more than anticipated. Specifically, the headline rate climbed to +1.8% yoy from +1.3%, while the forecast was for an increase to +1.6%. The core rate also exceeded its forecast for an uptick to +1.5% yoy from +1.4%, and instead rose to +1.6% yoy. The pound gained at the time of the release, perhaps as the data lessen the need for a BoE rate cut, especially following the resignation of Sajid Javid as Finance Minister, a move which triggered speculation for more fiscal support.
However, the British currency was quick to give up those gains and to trade even lower against its US counterpart, perhaps as investors paid more attention to headlines surrounding the Brexit transition period. Yesterday, a senior EU advisor said that the European Union will not give special treatment to the UK, and it will determine its access to financial markets the same way it did for Japan and the US. It seems that both sides are hardening their stance, with the EU demanding fair competition guarantees, while PM Johnson’s adviser said that they will never abide to EU rules. With PM Johnson insisting that any accord should be reached before the end of the year, and EU Commission President Ursula von der Leyen noting that it is impossible for a deal to be agreed by then, the risk for a disorderly exit at the end of this year remains well on the table. Thus, despite data suggesting that there is little need for a BoE cut, the pound may be set for a bumpy ride, with any rallies due to upbeat data, perhaps being offset by disagreements in EU-UK talks.
As for today, GBP-traders may pay close attention to the UK retail sales for January. Headline sales are expected to have increased +0.5% mom after sliding 0.6% in December. That said, this will drive the yoy down to +0.7% from +0.9%. The core rate is also forecast to have rebounded. Specifically, it is expected to have increased to +0.8% mom from -0.8%, but the yoy core rate anticipated to have slid to +0.4% yoy from +0.7%. The case for lower yoy rates is also supported by the BRC retail sales monitor, the yoy rate of which declined to 0.0% from +1.7%. That said, at this point, we need to note that the BRC monitor is far from a reliable gauge of the official retail sales prints. Taking data from January 2011, the correlation between the BRC and the official headline yoy rate is 0.26. Its correlation with the core one is also low, at 0.29.
In any case, despite the potential slide in the yoy rates, a rebound in monthly terms could allow investors to push back the timing of when they expect a rate cut by the BoE. Something like that could prove supportive for the pound, but the negative sentiment surrounding the EU-UK negotiations may keep any gains limited and short-lived.
Apart from the UK retail sales, today we also get the minutes from the latest ECB meeting. At that meeting, the Bank kept its rates and guidance unchanged. Thus, all the attention fell to the Bank’s strategic review, with President Lagarde noting that that the aim will be reviewed, as well as the Bank’s toolkit and how inflation is measured. “How we measure inflation is clearly something we need to look at,” she noted.
This will be key for market participants trying to figure out how the Bank will act moving forward, as it may also result in a change in the target. For example, officials could signal commitment to the 2% rate, as most of the other major central banks, but this would mean more stimulus for hitting that goal, as any undershooting may not be dealt with the same tolerance as in the past.
We will dig into the minutes for further clues on that front, but given that the review is expected to be completed in November, we don’t expect market participants to start betting on further easing as early as in the next couple of months, only due to potentially dovish minutes, despite Lagarde adding that the Bank would stick to its current policy for now, which means that policy moves could still occur before a new strategy is adopted. We believe that investors will pay more attention to tomorrow’s PMIs, as they are eager to find out whether and how much did the coronavirus impact the Euro area economic outlook.
This week, after finding strong support near the 0.8281 hurdle, EUR/GBP accelerated sharply to the upside, breaking one of its key resistance barriers on the way, which is at 0.8347. Given that the pair had distanced itself from a short-term tentative downside resistance line drawn from the high of January 14th, there is a chance to see a larger correction to the upside in the near term. For now, we will take a cautiously-bullish stance and aim for slightly higher areas.
Another uprise could bring the rate to the 0.8381 hurdle, which could temporarily provide decent resistance, possibly forcing the rate to correct back down a bit. However, if EUR/GBP remains above the previously-discussed 0.8347 area, this could help the bulls to take charge again and drive the pair higher. If this time the 0.8381 barrier breaks, this would confirm a forthcoming higher high and the path towards the 0.8400 zone could be open. If the buying doesn’t end there, a further move north may lead to the 0.8433 mark, which is the low of February 5th. Around there, EUR/GBP could end up testing the 200 EMA on the 4-hour chart.
Alternatively, if the rate falls below the 0.8315 hurdle, which is an intraday swing high of February 18th, at 0.8315, that may spook the bulls from the field temporarily and allow the bears to take control. The pair might then drift to the 0.8294 zone, which may stall the rate for a bit. That zone acted as good support on February 13th and 19th. If the slide continues and EUR/GBP overcomes that area, this may lead to a test of the 0.8281 obstacle, or the 0.8275 level, marked by the lowest point of December 2019.
Passing the ball to Aussie and the Loonie, the former was among the losers, despite the upbeat investor morale, perhaps taking a hit from Australia’s employment report, released overnight. The unemployment rate rose to 5.3% from 5.1%, instead of ticking up to 5.2% as the forecast suggested. The employment change revealed that the economy added more jobs than anticipated, while the participation rate ticked up to 66.1% from 66.0%, suggesting that the rise in the unemployment rate may have not been only due to bad reasons. It could also be due to more people being encouraged to register for unemployment benefits and start seeking for a job.
In any way, a rise to 5.3% is not encouraging news for the RBA, the view of which is that the number that will start generating inflationary pressures is 4.5%. Thus, a rising unemployment rate combined with slowing real wage growth may have prompted participants to bring forth their expectations with regards to another cut by this Bank. Indeed, according to the ASX 30-day interbank cash rate futures implied yield curve, that timing was brought forth to August from September yesterday.
Yesterday, apart from the UK CPIs, we got inflation data from Canada as well. Both the headline and core rates increased by more than anticipated, which may allow BoC officials to stay away from the cut button for a while, especially following January’s better-than-expected employment report. The Loonie gained at the time of the release and today it was found in the 2nd place among the G10 gainers, just behind NOK.
From the US, we get the initial jobless claims for last week and the Philly Fed manufacturing PMI for February. Initial jobless claims are expected to have increased somewhat, to 210k from 205k the week before, while the Philly index is anticipated to have declined to 12.0 from 17.0.
The EIA (Energy Information Administration) weekly report on crude oil inventories is also coming out and expectations are for a slowdown to 2.494mn from 7.459mn barrels the week before. That said, bearing in mind that, yesterday, the API report revealed a 4.200mn barrels inventory build, we see the risks surrounding the EIA forecast as tilted to the upside.
As for tonight during the Asian morning Friday, Japan releases its National CPIs for January. The headline rate is forecast to have ticked down to +0.7% yoy from +0.8%, while the core one is anticipated to have ticked up to +0.8% yoy from 0.7%. Bearing in mind that both the headline and core Tokyo CPIs for the month slid to +0.6% yoy and +0.7% yoy from +0.9% and +0.8% respectively, we view the risks surrounding the National forecasts as tilted to the downside.
At its previous meeting, the BoJ kept its ultra-loose policy as well as its guidance unchanged, reiterating that it “expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost”. A slowdown in inflation combined with Monday’s disappointing GDP prints may encourage investors to add to bets with regards to additional easing.
However, we believe that with little room to do so, officials may prefer to wait for the picture to worsen significantly before they eventually decide to act. As for the yen, we don’t expect a major reaction due to the CPIs. Given its safe-haven status, we expect it to stay hostage to developments surrounding the broader market sentiment and especially to headlines surrounding the fast-spreading coronavirus.
We also have one speaker on today’s agenda, and this is ECB Vice President Louis de Guindos.
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