- Rates: Fed and BoJ show willingness to act
The Fed and the BoJ released rare statements vowing to closely monitor developments and showing readiness to act if necessary. German Bunds and US Treasuries are in heavily overbought conditions. Asian stock markets rebound this morning, but market conditions remain too uncertain/volatile to call a turnaround yet. - Currencies: EUR/USD regains 1.10 as market expects aggressive Fed action
On Friday, the dollar decline turned a bit more choppy but EUR/USD finally closed north of 1.10. US yields and the dollar might look for a new equilibrium after recent sharp declines. However, if the loss of interest rate support for the dollar is considered permanent, any rebound of the US currency might remain modest for now.
The Sunrise Headlines
- WS extended its losses (up to -1.39%) on Friday on mounting concern about the economic consequences of the coronavirus outbreak. Asian markets rebound as investors find comfort in central bank statements. China outperforms (3.86%)
- The BoJ offered to lend up to 500bn yen via JGB repo deals after governor Kuroda issued a statement pledging the BoJ will provide “ample liquidity” and stabilize markets through market operations and asset purchases.
- Fed Chairman Powell stated the coronavirus “poses evolving risks” to the US economy despite strong fundamentals and signalled the central bank is prepared take action if necessary.
- China’s manufacturing sector took a hit in February as the coronavirus epidemy has activity juddering to a halt. Both the official PMI (35.7 vs. 45 expected) and the Caixin manufacturing index (40.3 vs 46) plunged, hitting records lows.
- Italy seeks to unleash an additional 3.6bn emergency stimulus package as the country grapples with the coronavirus outbreak. The crisis spending would widen Italy’s deficit by 0.2%, which needs green light from Brussels.
- Slovakia’s centre-right populist opposition Ordinary People party (OLaNO) claimed a resounding victory yesterday in the country’s parliamentary election, ending the reign of the long-dominant leftist Smer-SD party.
- Today’s economic calendar contains the February US non-manufacturing ISM. Final manufacturing PMIs will be published in the UK and across the eurozone and the OECD is releasing its interim economic outlook
Currencies: EUR/USD Regains 1.10 As Market Expects Aggressive Fed Action
EUR/USD regains 1.10 on Fed rate cut pricing
The risk-off repositioning due to corona continued unabatedly on Friday. Earlier last week, the tighter interest rate differential between USD and the other majors, weighed on the dollar. This pattern stayed in place, but it turned choppier intraday. The USD rebounded temporarily below EUR/USD 1.10. However, the market seeing a growing chance of forceful Fed emergency action soon blocked a sustained USD comeback. EUR/USD closed at 1.1026 (from 1.1001). The yen fully lived up to its safe haven status. USD/JPY closed at 107.89 (from 109.59). Smaller, less liquid currencies (scandies etc.) stayed in the defensive, but the pressure showed tentative signs of easing.
This morning and during the weekend, China’s PMI’s nosedived to historic low levels, confirming big damage for the Chinese economy. However, equity markets are rebounding, with China taking the lead. Major central banks (including the Fed and the BoJ) indicate they are ready to do what is appropriate and fiscal authorities will step in too, even in countries with less policy room (Italy). The picture on the FX market is a bit diffuse. The yuan rebounds (USD/CNY 6.97 area). USD/JPY rebounds as risk-off selling eases. At the same time, EUR/USD is holding strong in the mid 1.10 area.
Usually, at the start off the month, markets are keeping a close eye on the data (US ISM). However, markets currently try to assess (monetary and fiscal) stimulus and its efficacy to mitigate the impact of corona. The US curve further bull steepens as the market hopes the Fed to cut rates 50 bp this month. In theory this remains USD negative, but a lot of Fed easing should be discounted. At the same time USD/JPY bottoms this morning as risk-off selling eases. If the risk-off slows, US yields and the dollar might find a new ST equilibrium. However, in case of a ‘permanent’ loss of interest rate support, we don’t expect a sharp USD comeback right now. EUR/USD 1.0950 should be a first solid support for this cross rate.
The combination of a global risk-off and a likely difficult start for EU-UK trade negotiations kept sterling in the defensive last Friday. EUR/GBP closed near 0.86. As is the case for other currencies, the UK manufacturing PMI, even if better than expected, probably won’t help sterling. Headline risk on the UK-EU trade talks probably prevents a sustained sterling rebound. EUR/GBP breaking north of 0.86 deteriorated the ST picture of sterling against the euro
EUR/USD regains 1.10. Fed rate cut speculation caps USD rebound
