- Rates: Chinese virus triggers more risk aversion in Asian dealings
Asian stock markets lose up to 1% this morning with China underperforming (-3%) as investors take some chips off the table ahead of the weeklong Chinese Lunar NY holiday (starts on Friday). Core bonds hold their momentum as the Chinese virus story unfolds. Our expectations for today’s ECB meeting are low. Lagarde might elaborate on the start of the policy review. - Currencies: EUR/USD holding tight range north of 1.1066 support despite risk-off
Risk-off sentiment has a divergent impact on the major USD cross rates. USD/JPY failed to sustain north of 110 as the yen profited from lingering global uncertainty. However, global risk, rising political tensions in Italy and harsh comments from US policy makers on US-EU trade all failed to inspire EUR/USD trading. The sterling rebound accelerates on strong CBI data
The Sunrise Headlines
- US stock markets ended near flat (up to 0.14%) as investors remain worried on the economic impact of the spreading Chinese coronavirus. Asian markets are colouring mostly red with a strong underperformance (up to -3.36%) in China.
- China has put the city of Wuhan in lockdown in an effort to stop the spread of the new coronavirus ahead of the lunar new year. The death toll from the SARS-like virus stands at 17 with 571 confirmed cases in China, state media reported.
- The EU snapped back at president Trump, stating it will respond to any punitive US tariffs with levies of its own on US goods. Moreover, French finance minister Lemaire reiterated to stick with the digital tax if no OECD pact is reached.
- Emerging market inflation jumped to a six-year high of 4.6% (Y/Y) in December, up from 3.4% in September. The push in inflation was largely driven by a surge in food prices (meat and vegetables) (8.2%) across many countries.
- Fitch held New Zealand’s currency rating at AA but raised the country’s outlook to positive from stable. The rating agency cites a sound fiscal management and a low level of government as driving forces, enhancing the country’s resilience.
- Australian data showed a surprising drop in unemployment in December from 5.2% to 5.1% and job growth defying all expectations (28K, consensus at 10K). The positive print reduces odds that the RBA will deliver another cut in Feb.
- In today’s economic calendar all eyes are pointed to Frankfurt, where Christine Lagarde will fire the starting gun of the ECB’s strategic review. Moving to the US, initial jobless claims are due. Spain and France tap the bond market.
Currencies: EUR/USD Holding Tight Range North Of 1.1066 Support Despite Risk-Off
EUR/USD hovering north of 1.1066 support
(FX) markets struggled to assess the impact of the Corona virus for the Chinese/global economy and for global trading yesterday. An initial risk-off repositioning earlier this week eased, but uncertainty lingered. The USD/JPY performance mirrored sentiment quite well. The pair returned temporarily north of 110, but yen strength finally prevailed (close little changed at 110.84). EUR/USD trading was confined to a tight range below the 1.11 big figure. Political tensions in Italy and some noise on the US-EU trade relations (rather harsh comments from Trump and Mnuchin) had only limited impact on the euro. EUR/USD came again within reach of the 1.1066 support but closed above at 1.1093. This morning, Asian equities are coming under further pressure, with China underperforming (losses of up to 3.0% +). The yuan tumbles (USD/CNY 6.9325). The yen rebound accelerates (USD/JPY 109.55). The Aussie dollar initially profited from a strong labour report, but struggles to maintain the intial gain as the global risk-off intensifies. EUR/USD declines marginally but is holding in the established range.
Today, the data (US jobless claims and EC consumer confidence) will only be of intraday significance for EUR or USD trading, at best. Investors expect ECB president Christine Lagarde to kickstart a ECB policy review, but we don’t expect much specific guidance for euro trading. Global (risk-off) sentiment will probably dominate trading, but risk sentiment recently was an ambiguous factor for EUR/USD as a decline in core/US yields often counterbalanced the safe haven appeal of the US currency.
Of late, EUR/USD trading was locked in tight intraday ranges, but MT technical picture remains fragile. The pair struggles not to fall below the 1.1066 support. 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.
Sterling extended its recent rebound yesterday. The comeback of the UK currency accelerated after CBI confidence jumped to a multi-year top. Markets now again see a case of about 50% on a BoE rate cut at the end of this month. EUR/GBP is falling below the 0.8450 area (recent range bottom). Today, the UK eco calendar is empty.
Of late, sterling didn’t suffer much from the debate on a potential rate cut. For now, ST sterling momentum remains constructive. The UK preliminary PMIs (tomorrow) might be key for the BoE and for sterling
EUR/USD extends directionless trading just above 1.1066 support.
