- Rates: Fed called to action
Short term US rates are reflecting a surging probability that the Fed will be called to action soon in dealing with the negative fallout of the coronavirus. Core bonds remain underpinned in a very fragile risk environment. The US 10-yr yield closed below 1.3% for the first time ever. Most Asian stock markets record losses of around 2% this morning.
- Currencies: EUR/USD regains 109 mark
The USD decline took a pause intraday, but resumed as risk-off sentiment continued to pressure US yields. The decline is US yields probably won’t continue at the same pace, but the dollar might remain vulnerable to headlines on the spreading of the virus in the US. Sterling traders will monitor the UK government publishing its ‘red lines ‘ for the negotiations with EU.
The Sunrise Headlines
- WS extended its losses in a volatile session as corona headlines kept investors on edge. DJI underperformed (-0.46%). Asian markets are mostly red while Chinese stocks pick up (+0.77%), fuelled by government stimulus measures.
- The US FDA warned for the coronavirus outbreak and pointed that the world is “on the cusp” of a pandemic. President Trump tapped VP Mike Pence to coordinate Washington’s response to the looming global health crisis.
- South Korea’s central bank stood pat despite looming coronavirus risks, dashing expectations for a rate cut. Governor Lee announced the decision was not unanimous and warned the country’s economy will contract in Q1.
- PBOC vice governor Liu disclosed the central bank will go “as far as possible” to contain the economic fallout from the coronavirus. The CB will cut the RRR in the future and launch additional policies to focus on re-lending to SME banks.
- New UK Chancellor of the Exchequer Sunak will cut the corporation tax to 17% when presenting his March 11 budget statement and will delay decisions on revenue-raising measures until the second budget statement, FT reported.
- US new home sales jumped 7.9% (M/M) in January from 3.5% in December, the strongest pace since mid-2007. The increase defied the expected 3.5% pick-up amid i.a. cheaper borrowing costs and a resilient labour market.
- Today’s economic calendar contains US labour market data and Q4/2019 GDP. In the EMU, confidence and price data are due. UK’s PM Johnson will lay out his government’s red lines. Italy and the US tap the bond market.
Currencies: EUR/USD Regains 109 Mark
EUR/USD regains 1.09 mark.
Until a week ago, most news, risk-on or risk-off, turned out USD supportive. This positive USD bias is gone. The USD shifted to a more binary pattern driven by swings in US yields. Markets are pondering when the news on corona will reach its peak. Sentiment improved temporary yesterday, but US equities reversed gains on ‘rumours’ that the virus might be spreading in the US. US yields touched news lows, and this capped the USD-upside. EUR/USD closed little changed at 1.0881. USD/JPY gained marginally (110.43) but closed off the intraday top. US housing starts were strong but hardly help the USD.
Corona fears again intensify this morning, in particular in Asian markets outside China. Japan underperforms. Even so, BOJ members signal that it isn’t opportune to ease policy further to contain the impact of corona yet. The yuan is trading rather stable (USD/CNY 7.0175 area). The yen strengthens with USD/JPY returning to the 110 area. The Aussie dollar (AUD/USD 0.6550 area). stays at multiyear lows as local yields are at/near record low levels. EUR/USD regained 1.09 on USD softness.
Today’s calendar is moderately interesting with the revision of the US Q4 GDP, US durable orders and jobless claims. In EMU EC confidence will be released. However, headlines on the spreading of corona in Europe, but also in the US, will continue to drive FX trading. US yields have reached low absolute levels and the USD probably won’t lose much rate support anymore. Still headlines on the spreading of corona in the US and (expectations for) weaker data, might cap a USD rebound ST. Earlier this week, we assumed more (neutral) trading in EUR/USD or USD/JPY. The jury is still out, and the EMU economy will also face strong corona headwinds. However, for now, it looks that the USD is a bit more vulnerable to further profit taking as long as sentiment remains risk-off.
The EUR/USD 1.0778 level survived, and the pair is receiving breathing space. A rebound above 1.0950 would improve the ST picture.
Yesterday, sterling eased further, and EUR/GBP rebounded north of 0.84. Today, the UK government will publish its red lines for the negotiations with UK on their future relationship. The UK will ask a more independent position from the EU, complication the trade flows. The headlines on the issue probably won’t help sterling. EUR/GBP might keep the ST upward bias from the previous days
EUR/USD regains 1.09, moving further away from the 1.0778 support