Viral repercussions = hedging considerations
Risk sentiment failed to edge back to lofty heights overnight even though the return of US liquidity saw G10 volumes back up above average. Markets are clearly running with the Coronavirus story and deeply considering the economic implications of a potential fully fledged outbreak, not dissimilar to SARS back in 2003.
As liquidity is expected to tail off in light of Chinese New Year celebrations and demand could be impacted by the worsening spread of the virus, it makes sense that portfolios at the present time are taking advantage of the abysmally low costs of hedging. Hence, why USDJPY is seeing decent price action, with the typical anti-risk pair falling into 109.8 after reports of a US virus case hit the news wires.
Looking across the board, clearly, there’s broader participation in hedging with VIX Volatility up 6.2%, US 10y Treasury yields ~4bps lower and European credit default spreads bid +0.6%. This has flowed through to major benchmarks, with ASX set for a soft start according to futures.
Asia FX
Major commodity currencies in AUDUSD and NZDUSD have lagged G10 by -0.4% and -0.2% respectively. In the case of AUDUSD, negative momentum could carry through to 0.68 having broken January lows overnight.
Though, Aussie traders won’t just be concerned with the Coronoavirus, with a pivotal Aussie employment report due on Thursday. How that prints should be the main consideration out till end of week for rate pricing and AUDUSD price action. Therefore, it’s safe to largely ignore Westpac Consumer Sentiment (10.30am AEDT), which tends to be low impact for AUD anyway.
Notable mentions
A couple of developments in Europe are also worth a mention. The UK November Employment Report that failed to disappoint steadies GBPUSD and sets Friday up for a very, very interesting finish given UK PMIs – arguably a more important data point.
German ZEW Economic Sentiment soared to 26.7 reflecting more optimistic macro conditions, but again, EURUSD failed to take notice with PMIs right around the corner.
USDCNH nudged back to 6.9 on risk-off behaviour.
