Market sentiment improved somewhat overnight, with Asian indices rebounding after the number of infected cases due to the coronavirus slowed for another day. In the FX world, the euro continued bleeding due to the disappointing German ZEW survey. As for today, the agenda appears very busy, with the FOMC minutes and the UK CPIs entering the spotlight. Tonight, during the Asian morning, Australia’s employment report is due to be released.
The dollar traded higher or unchanged against the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most against SEK, NZD and EUR in that order, while it traded virtually unchanged versus GBP, AUD and CAD.
Just by looking at the FX performance we cannot derive safe conclusions with regards to the broader market sentiment. Thus, we will turn our gaze to the equity world. There, most EU and US indices traded in the red, getting the torch from the Asian bourses, which slid after Apple warned of lower revenue and iPhone shortages for the first quarter of the year. That said, investors morale turned around again during the Asian morning today, after the number of infected cases from the coronavirus slowed for the second consecutive day.
However, the number of deaths accelerated to 2009 from 1873 on Tuesday, adding to our view that the worst with regards to the virus is not behind us yet. As we noted in the past, we expect the slowdown in deaths to come with a lag compared to the cases, and with the World Health Organization saying that it could take 12-18 months for a coronavirus vaccine, things are not so encouraging.
With regards to the markets, the rebound in Asian equities may have also been due to hopes that the adopted measures to contain the virus may have been working, or that officials will roll out more if needed. It could also be due to expectations of more stimulus by the PBoC. On Monday, the Bank cut interest rates on medium lending, while on Thursday, it is expected to lower its benchmark loan prime rate.
As for our view, it has not changed. We are still reluctant to trust a long-lasting recovery. For now, it seems that EU and US stock markets await to get direction from the Asian ones, and this means that they may also rebound today. However, we prefer to wait for data to show how much the virus has impacted the Chinese economy, and by extent, the global economy. Friday’s preliminary PMIs for February may be key on that front, while the official Chinese indices, which come out on February 29th, could give us a first taste on how deep the scars of the world’s second largest economy are. Big disappointments could well reverse risk appetite once again, with investors abandoning risk assets in favor of safe havens.
Speaking about a first taste of the coronavirus impact, yesterday, we got Germany’s ZEW survey for February, which disappointed largely, pushing the already wounded euro even lower, perhaps raising speculation that Eurozone’s PMIs for the month, due out on Friday, may also miss their estimates by a large margin.
Disappointing data from the Eurozone may continue dragging the common currency lower, with some investors perhaps raising bets that the ECB may need to ease again in the months to come. However, our own view is that given the Bank’s limited scope for further easing, officials may not rush into doing so. After all, an extension of the euro’s latest tumble may eventually prove somewhat supportive for the bloc’s economy as it may give a helping hand to inflation and exports.
Now, flying from the Euro area to the US, USD-traders may be on the edge of their seats in anticipation of the minutes from the latest FOMC gathering. The message we got from that meeting was that policymakers are not comfortable with inflation persistently under their 2% target, and with the core PCE rate staying below that objective since December 2018, they may start thinking about rate cuts again if this continues for more. At the press conference Fed Chair Powell said that policy is not in a preset course, and also acknowledged the risks the coronavirus poses to the US economy, something he also did when he testified before Congress last week.
Although Powell insisted while testifying that rates are appropriate at current levels for now, we will scan the minutes to see whether and how many of his colleagues are on the same page, and how many have already started thinking about lower rates again. According to the Fed funds futures, investors are more-than-fully pricing in another cut to be delivered in September, despite the December “dot plot” pointing to no action this year, and despite the better-than-expected employment and CPI data for January.
EUR/USD still remains under the rulership of the bears, as it continues to slide, while trading below a short-term downside resistance line taken from the high of February 3rd. Although the pair already seems to be quite oversold on all timeframes, as long as it moves below that downside line, we will remain bearish.
If EUR/USD corrects back up a bit, but fails to lift itself above the aforementioned downside line, we will once again examine a possible slide, which may bring the rate to the 1.0777 hurdle, marked by the high of April 20th, 2017. The pair could initially stall around there, but if the bears continue to dictate the rules, another drop could clear the way to the 1.0738 level, marked near the highs of April 18th, 19th and 21st, 2017.
Alternatively, if the downside line breaks, this might give some hope for the buyers to see EUR/USD rising again, at least in the near term. However, to get slightly more comfortable with the upside, we will wait for a push above the low of 2019, at 1.0878. This way more buyers might see an opportunity to join in and lift the rate to the next potential resistance zone, at 1.0925, which is near the highs of February 11th and 12th. If the buying doesn’t end there, a further push north could clear the path to the 1.0957 area, or the 1.0992 level, marked near the low of February 5th.
Passing the ball to the pound, the British currency was among the main gainers yesterday, despite the weaker than expected employment data for December. The unemployment rate held steady at its 45-year low of 3.8%, but average weekly earnings, both including and excluding bonuses, have slowed by more than anticipated.
In any case, GBP-traders ignored the data, which validates our view that they may pay more attention to releases pointing how the economy has been performing in the post-election era. After all, BoE policy makers clearly pointed out at their latest meeting that they will wait for data to confirm the positive signals from recent indicators, with inflation taking the 1st place on the list.
The January CPIs are released today, with the headline rate expected to have risen to +1.6% yoy from +1.3%, and the core rate to have ticked up to +1.5% yoy from +1.4%. Having said that though, bearing in mind that the yoy change in Brent oil turned negative in January, if core inflation is set to accelerate, the headline rate may rise by less than anticipated.
In any case, a move in the desired direction may allow BoE policymakers to hold their fingers away from the cut button for a while more, especially after the resignation of Sajid Javid as Finance Minister, which sparked hopes of more fiscal support. According to the CME MPC Sonia futures, a 25bps decrease is nearly fully priced in for the November gathering.
The Aussie was also among the big winners, despite the Wage Price Index for Q4 coming at 2.2% yoy as the forecast suggested. Remember, yesterday we noted that with inflation ticking up to +1.8% yoy during the quarter, a stable earnings rate would mean slowing real wages, and this was the case. Slowing real wages may not be a pleasant development for RBA policymakers, but the Aussie may have stood tall due to the increased risk appetite during the Asian morning today.
Now, focus for AUD-traders is likely to turn to Australia’s employment report for January, due out tonight, during the Asian morning Thursday. The unemployment rate is expected to have rebounded back to 5.2% from 5.1%, while the net change in employment is expected to reveal a slowdown in added jobs, to 10k from 28.9k in December. Combined with declining real wage growth, an unemployment rate still well above the 4.5% threshold, which the RBA believes will start generating inflationary pressures, may prompt market participants to bring forth the timing of when they anticipate another rate decrease by the Bank, and thereby bring the Aussie under some selling interest. According to the ASX 30-day interbank cash rate futures implied yield curve, market participants are almost pricing in another quarter-point decrease to be delivered in September.
Overall, GBP/AUD continues to balance above two of its upside lines: a medium-term tentative one drawn from the low of January 14th and a short-term support line taken from the low of February 12th. Even if the shorter-term one breaks, still, the bulls have a chance to take control near the medium-term one, if it stays intact. But in order to get comfortable with the upside again at this point in time, we would like to see a clear push above the 1.9517 barrier first, hence why we will remain cautiously bullish for now.
If, eventually, we do see a rise above the 1.9517 barrier, which is the high of February 18th, this would confirm a forthcoming higher high and could lead to a continuation of the prevailing uptrend. That’s when we will target the 1.9638 obstacle, a break of which might set the stage for a test of the 1.9752 level, marked by the highest point of January.
On the other hand, if GBP/AUD breaks below both of its upside lines and the rate falls through the 1.9314 area, which is the high of February 12th, this may result in a change of the current trend. The pair then might get pushed by the bears to the 1.9210 zone, marked near the lows of February 10th, 11th and 12th. The rate may rebound back up from there, however, if it remains below the previously-mentioned medium-term upside line, we will stay somewhat bearish. If GBP/AUD slides once again, tests and breaks the 1.9210 hurdle, this could clear the path to the 1.9163 level, marked by the lowest point of February.
Early in the EU session, Sweden releases its inflation data for January. Both the CPI and CPIF rates are expected to have ticked down to +1.7% and +1.6% yoy from +1.8% and 1.7% respectively. That said, we repeat for the umpteenth time that we will pay more attention to the core CPIF rate, which excludes the volatile items of energy. In December, that rate ticked down to +1.7% yoy from +1.8%.
At its latest meeting the Riksbank acknowledged that falling energy prices are expected to dampen inflation this year, but it expects the headline rate to be close to the 2% target afterwards. Thus, a modest slowdown in the headline rates is unlikely to tempt officials altering their forward guidance which suggests that the repo rate is expected to remain at 0% during almost the entire forecast period. That said, a notable slide in the core CPIF rate may raise concerns that the weakness in inflation may not be due to falling energy prices. This could raise speculation that officials may start rethinking their current policy stance, and thereby push the Swedish Krona lower.
Apart from Sweden and the UK, we also get January CPIs from Canada as well. The headline CPI is expected to have risen to +2.4% yoy from +2.2%, while the core one is anticipated to have ticked up to +1.8% yoy from +1.7%. Using again the logic that energy prices are somewhat correlated with the spread between the headline and core rates, the fact that the yoy change in WTI turned negative in January may not allow headline inflation to accelerate that much.
At its previous gathering, the BoC removed from the statement the part saying that it is appropriate to maintain the current level of interest rates, and instead noted that “In determining the future path for the Bank's policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast”. This means officials have opened the door to a rate cut, with Governor Poloz confirming that at the press conference following the decision. Even if headline inflation does not accelerate as expected, as long as it stays above 2%, it may allow BoC officials to stay away from the cut button, especially following January’s better-than-expected employment report.
In the US, besides the FOMC minutes, we also get the PPIs, building permits and housing starts, all for January. The API (American Petroleum Institute) weekly report on crude oil inventories is also coming out, but as it is always the case, no forecast is available.
We also have four Fed speakers on our agenda: Atlanta President Raphael Bostic, Cleveland President Loretta Mester, Minneapolis President Neel Kashkari, and Richmond Fed President Thomas Barkin. It would be interesting to hear what they have to say about the Fed’s future monetary policy plans.
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