- Rates: Virus outbreak causes risk aversion in Asia
The Chinese virus outbreak triggers a risk-off reaction in Asia this morning with core bonds, gold and the Japanese yen profiting while stocks cede ground. We expect the story to have similar market characteristics as the Middle East tensions earlier this week: a short shelf date as market theme, but hard to call the turning point, especially with Chinese NY looming. - Currencies: EUR/USD holding north of 1.1066 support, at least for now
Yesterday, EUR/USD drifted further below the 1.11 level, but the euro was saved by headlines on a US-French ‘trade truce’. The 1.1066 support was left intact. This morning, the risk-off weighs on USD/JPY but has no clear directional impact on EUR/USD. Of late, the dollar profited more from low volatility than the euro. Will this help EUR/USD in a risk-off context?
The Sunrise Headlines
- US stock markets were closed yesterday for Martin Luther King Day. Asian markets are feeling a chill as concerns about a new coronavirus in China spurs flight to safe havens. Hong Kong underperforms (-2.48%).
- China’s National Health Commission confirmed the contagiousness of the coronavirus among humans, mounting concerns about the outbreak of the disease after China reported the number of cases continues to rise.
- Rating agency Moody’s lowered Hong Kong’s sovereign rating one notch from Aa2 to Aa3, citing the government’s possibly weaker than expected capacity to address the political/social concerns that caused protests across the region.
- The BoJ stood pat and left its main policy settings unchanged today. The central bank nudged up its economic growth forecasts, as PM Abe’s $120bln stimulus package took some pressure off the central bank to top up stimulus.
- French and US presidents Macron and Trump reached a breakthrough in their digital tax dispute, agreeing to refrain from punitive tariffs this year. The truce puts a halt to a spat that risked leading to a broader transatlantic trade conflict.
- The Hungarian central bank moved to reduce surplus liquidity in the economy by rejecting all FX swap bids at its weekly liquidity-providing operation yesterday. Hungary’s forint jumped 0.5% to EUR/HUF 334.51.
- Today’s economic calendar contains UK earnings/employment data for November and Germany’s ZEW data for January. Investors expect sentiment to improve amid easing trade tensions. Germany and the UK tap the bond market
Currencies: EUR/USD Holding North Of 1.1066 Support, At Least For Now
EUR/USD holding north of 1.1066, at least for now.
Yesterday, USD trading (including EUR/USD), developed in thin market. There were no important EMU data and US markets were closed for Martin Luther King Day. EUR/USD initially continued its drift south from last week and tested intermediate support near the 1.1080 area. However, after the close of European markets, the euro was saved by headlines that France and the US reached a truce in their dispute over a French digital tax. EUR/USD rebounded to close the day little changed at 1.1195. USD/JPY finished at 110.18, within reach of recent top levels.
This morning, Asian markets are unsettled by headlines of accelerated spreading of the coronavirus. Regional equities are falling prey to profit taking. The yuan tumbled (USD/CNY 6.8975) after the recent protracted up-move with somilar declines in other regional currencies like the won. The yen strengthens back below USD/JPY 110. The Bank of Japan as expected left its policy unchanged. The BoJ upwardly revised its growth forecast for the 2020 fiscal year to 0.9%, but inflation is expected to remain low (1.0%). Moves in the yen and JGB’s were primarily driven by global regional risk-off rather than the BoJ decision.
Today, US markets reopen after a long weekend, but there are no data. German ZEW confidence (expectations) is expected to improve from 10.7 to 15 and might be mildly EUR/USD supportive. This also applies to the US-French ‘trade truce’. However, global USD moves will probably mainly be driven by global developments. A risk-off move is USD/JPY negative, but the impact on the likes of EUR/USD is less obvious. Of late, a positive interest rate differential and low volatility supported the USD more than the euro. In this context, it isn’t that evident that EUR/USD will break below 1.1066 even as the risk-off builds. From a technical point of view, EUR/USD continues struggling not to fall below the 1.1085/66 support. EUR/USD 1.1066 remains the first downside reference. A break would deteriorate the short-term picture. A rebound above 1.1180 would call off the ST downside alert, but that looks difficult for now.
Yesterday, EUR/GBP held a tight range mostly in the lower part of the 0.85 big figure. Initial sterling weakness after harsh comments from UK politicians on the EU-UK trade negotiations gradually evaporated. Today, the UK labour market data might further shape market expectations on the need for a BoE rate cut at the end of this month. We have the impression that sterling might still be more sensitive to a positive surprise, compared to a negative one.
EUR/USD struggles not to fall below 1.1066 support
