- Rates: Intraday sentiment rebound
We look for clues whether yesterday’s intraday moves were an exhaustion trade followed by profit taking on core bond markets/a short squeeze on stock markets. Markets/investors seem to be banking on a coordinated response, which could help sentiment in the short run. Longer term, the handling of the corona outbreak could dip some economies into recession. - Currencies: USD remains in the defensive even as US yield decline slows
Yesterday, the sell-off of risky assets halted, at least temporarily and US yields rebounded off recent lows. However, for now it doesn’t help the dollar much. In case of global policy response to mitigate the impact of the corona virus, the Fed has most room to cut rates. This prospect continues to weigh on the dollar
The Sunrise Headlines
- WS rallied with gains up to 5.09% (DJI) on hopes of monetary and fiscal stimulus. Asian markets opened on a positive note, but pare intraday gains as sources suggest that the G7 won’t pledge coordinated action yet. Japan underperforms.
- The G-7 group holds a teleconference today to discuss its response to the coronavirus outbreak and its economic fallout. However, the group will not call for new government spending nor for coordinated rate cuts, Reuters reported.
- In a rare statement, ECB president Lagarde announced the central bank is keeping an eye on the coronavirus epidemic and pledged the ECB stands ready to take “appropriate and targeted measures” if needed.
- The RBA slashed its policy rate to 0.50% from 0.75% as a response to the coronavirus epidemic. The central bank warned Q1 growth is likely to be noticeable weaker than expected and vowed further easing if necessary.
- Amy Klobuchar exited the Democratic presidential race less than a day after fellow moderate Pete Buttigieg dropped out after dismal performances in South Carolina. The two former opponents will endorse Joe Biden.
- USTR Lighthizer disclosed the NHS issue won’t derail US-UK trade talks which are expected to start in the next few weeks. With regards to India, the US hopes to reach a phase one accord, paving the way for a free-trade deal later on.
- Today’s economic calendar contains inflation numbers for the euro area. The G-7 top will hold its corona call and the NY Fed’s Logan will discuss the central bank’s ample reserves regime. Austria and Germany tap the bond market
Currencies: USD Remains In The Defensive Even As US Yield Decline Slows
USD still the defensive even as yield decline slows
Investors guessing the response of global policy makers to the corona virus still dominated the price dynamics on global FX markets yesterday. The (tradeweighted) dollar maintained its downward path. Among the major CB’s, the Fed has most room to cut rates and markets expect Powell an co to deliver a big step as soon as this month. A short squeeze in US stocks and congruent rebound in yields didn’t help the dollar that much. The difference in policy room also become clear as ECB Lagarde indicated the bank is ready to take appropriate/targeted measures. EUR/USD closed at 1.1134 (from 1.1007 open). USD/JPY rebounded modestly in line with equities to close at 108.33. (open 107.46).
Yesterday’s risk rebound already peters out Asia this morning. Even so, Chinese equity indices currently still show modest gains as the country is considered being ahead in the management of the virus. The yuan is slightly losing ground (USD/CNY 9.9775 area) after yesterday’s rebound. The RBA cut its policy rate by 25 bp to a record low 0.5%. The Bank is ready to ease policy further if needed. Still, the Aussie dollar rebounded slightly after the RBA rate cut (AUD/USD 0.6550 area). EUR/USD is holding in the mid 1.11 area. USD/JPY is sliding back below the 108 handle as the risk rebound can’t continue this morning. Later today, the eco calendar is thin except for the preliminary EMU February CPI release (headline expected to ease from 1.4% to 1.2%). We doubt the release will have much impact on EUR/USD trading. Markets will closely monitor the outcome of the conference call of G7 Finance Ministers and Central bankers on any coordinated action on corona. The decline in US yields slowed/halted at a low-level yesterday, but gains of the dollar against other majors, if any, were limited. US yields and the dollar might look for 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 is a solid support for this cross rate. The rebreak above the 1.11 area is another indication that the USD momentum is fading further.
Sterling yesterday continued to underperform both against a strong euro and a weak dollar. The broader rise of the euro, the anticipation of a BoE rate cut and uncertainty on the EU-UK trade talks propelled EUR/GBP north of 0.87. EUR/GBP is moving into overbought territory. However, we don’t expect a sustained sterling rebound as long as global market volatility remains as high as it is now.
USD (DXY-trade-weighted): USD anticipates aggressive Fed action
