- Rates: Emergency Fed rate cut sends yields falling deeper
An emergency 50 bps Fed rate cut failed to restore market confidence. US yields plummeted by up to 20 bps with another Fed rate cut (at least 25 bps) discounted for the official March policy meeting. Investors are losing misplaced trust in what policy can (monetary) and is willing to (fiscal) do to shield the economy from dipping into recession. - Currencies: USD decline to slow after Fed emergency rate cut?
The dollar declined further yesterday after the emergency Fed rate cut, but damage to the US currency was modest. Quite some Fed easing might be discounted at current yield levels. EUR/USD 1.1240/50 is a next resistance on the technical charts. A break might not be easy in the short-term as markets will also ponder potential steps from other CBs including the ECB
The Sunrise Headlines
- WS tumbled (up to -2.99%, Nasdaq) in a volatile session after the Fed took markets by surprise with a rate cut, amplifying worries about a deeper, lasting slowdown. Asian markets are trading mixed, South Korea outperforms (2.24%).
- The Fed slashed its benchmark rate by 50 bps to a range of 1-1.25% in the first such emergency move since the financial crisis, in a bid to shield the record US economic expansion from the impact of the coronavirus outbreak.
- China’s Caixin PMI tumbled from 51.9 to a record-low of 27.5 in February. The services indicator plummeted from 21.8 to 26.5. The details show record falls in total new work and export sales while outstanding work rose substantially.
- South Korea’s government proposed a supplementary stimulus budget of 11.7 tn won to be submitted for approval today. The government aims to help businesses and cushion the economic fallout of the coronavirus outbreak.
- OPEC+ experts advocated cutting oil supply by an additional 600K to 1mln b/d during the second quarter as the coronavirus is taking a greater toll on the oil market. That would be on top of the 2.1mln in current output cuts.
- The race for the US Democratic nomination is down to a tight two-way race between Joe Biden and Bernie Sanders. Sanders claimed victory in California while Biden staged a comeback, sweeping victories in 8 states.
- Today’s economic calendar contains US ADP numbers, the non-manufacturing ISM and the Fed’s Beige Book. Final PMIs are due for the eurozone and the UK. The BoC is expected to deliver a rate cut today. The UK taps the bond market
Currencies: USD Decline To Slow After Fed Emergency Rate Cut?
USD decline to slow after Fed rate cut?
Risk sentiment in Europe was rather fragile yesterday despite the risk rebound in the US on Monday. Still, the dollar decline slowed temporarily as did the decline in US yields. A G7 communiqué initially didn’t bring much concrete info on coordinated action to address the (global) impact of the coronavirus. However, the Fed soon took the lead with a 50 bps inter-meeting rate cut. In a first Pavlov-reaction, the dollar dropped further, but the damage was rather contained even as the Fed rate cut failed to give lasting support to risky assets/equities and as US yields declined further. EUR/USD closed the day at 1.1173 (from 1.1134). USD/JPY finished at 107 (from 108.33). This morning, Asian markets show a mixed picture. Chinese equities are losing only modestly even as the Caixin services PMI tumbled to 26.5! Korea outperforms as the government announced a fiscal package of $9.8 BLN. The yuan strengthens (USD/CNY 6.94) on the post-Fed USD decline. Even so, the dollar shows tentative signs of bottoming. Markets ponder potential easing from other CBs. The good performance of Joe Biden in the primaries of the democratic party might be supportive for US equities and the dollar. USD/JPY is changing hands in the mid 107 area. EUR/USD ease slightly (1.1150 area). Later today, markets will keep a close eye at to what extent corona will filter through into the final services PMIs/US non-manufacturing ISM. The ‘full’ impact will only be visible in the March releases, but a poor performance might add to the uncertainty. For global FX, the dollar lost further interest rate support as markets are discounting an additional Fed rate cut in the near future. Even so, the dollar decline might slow as plenty of Fed easing is already discounted. Markets will also ponder potential action from other major CBs (BoJ, ECB).
The technical picture of EUR/USD improved after the rebound north of 1.11. EUR/USD 1.1240/50 is next reference on the charts. The EUR/USD picture stays constructive, but a break of that level might not be that easy. Some consolidation in the 1.10/1.1250 area might be on the cards.
Yesterday, the EUR/GBP rally entered calmer waters after the recent sterling decline. EUR/GBP tested the 0.8740 area, but the test was rejected. Today, the final UK services PMI might be downwardly revised. We also keep an eye at the hearing of the new Governor Bailey before the UK Parliament. The global context remains sterling negative, but also EUR/GBP might take breather after recent rebound.
EUR/USD rally to slow as 1.1240/50 resistance is coming closer?
