Rates: ECB has little arrows left
Today’s ECB meeting risks becoming exemplary of the fact that there’s not that much that monetary policy can do at this stage to shield the economy from dark times ahead. It could help put a floor below the front end of the yield curve. Implication at the longer end is less straightforward given horrible eco data ahead and the global risk-off climate.
Currencies: Dollar stabilizes, at least temporary as risk-off intensifies
The dollar showed a mixed picture gaining against the euro but easing against the yen. EUR/USD traders maybe are a bit cautious head of the ECB meeting. The US travel ban on Europe also complicates the EUR/USD reaction function. However, the inability of the ECB to ease monetary conditions in a profound way might support ‘by default’ EUR/USD strength
The Sunrise Headlines
- US stocks plunged again on mounting worries about the economic fallout of the coronavirus, tipping the Dow Jones (-5.86%) into bear market territory. Asian markets extend the global stock rout. Thailand underperforms (-8.79%).
- The WHO labelled the coronavirus a pandemic pointing to the surging number of cases around the world and the sustained risk of further global spread. The WHO chief stressed his concern over countries’ “alarming levels of inaction”
- US president Trump announced he’s suspending most travel from Europe for the next 30 days and laid out a series of (fiscal) measures (deferred tax payments, boost market liquidity, etc.) to combat the corona outbreak.
- Australia unveiled a A$17.6 bn stimulus package that will subsidize wages of apprentices, offer one-cash payments to welfare recipients and lower-income households, and support SMEs to buttress the economy from the coronacrisis.
- The NY Fed announced for the 2nd time this week that it’s ramping up the size of its repo operations to as much as $505bn to keep money markets running smoothly amid possible funding disruptions caused by the corona outbreak.
- The European Banking Federation called on regulators to ease capital requirements and other regulatory barriers (e.g. liquidity rules) so that they would have more room to deal with the impact of the corona outbreak.
- Today’s economic calendar contains US jobless claims, Swedish CPI data and eurozone industrial production data? All eyes are on the ECB: what will Lagarde pull out of her hat? Italy, Ireland and the US tap the bond market.
Currencies: Dollar Stabilizes, At Least Temporary As Risk-Off Intensifies
Dollar stabilizes even as risk-off intensifies
Yesterday, uncertainty remained elevated as investors pondered the efficacy of multiple measures prepared or announced by monetary and fiscal authorities across the globe. Even so, US yields succeeded a brief technical pause/rebound after the recent free-fall. This this also gave the dollar some temporary reprieve even as risk-sentiment remained negative. USD/JPY closed the day at 104.51 (open at 105.64, but well above the correction low from Monday). EUR/USD even traded with a negative intraday bias probably as investors awaited today’s ECB policy decision. The pair closed the session at 1.1270 (from 1.1281) but held above the 1.1250/39 support.
Overnight, the risk-off trade intensified further as President Trump announced a travel ban for visitors from Europe to the US. Asian equity indices are extending their decline with China ‘outperforming’ (-2.5%) and Australia hit the hardest (-7.4%). The trade-weighted dollar (DXY) is holding relatively stable in the lower half of 96. USD/JPY dropped back well below 104, but the move still develops orderly. EUR/USD struggles to hold north of 1.13. The Aussie dollar remains in de defensive (AUD/USD 0.6450 area) even as the government announced a fiscal stimulus package of about A$ 18 bln.
Later today, FX trading will be at the mercy of the global risk-off move. Later, the ECB policy decision might bring some ‘insight’ on investor ‘confidence’ in the ability of authorities (fiscal and monetary) to address this crisis. The market currently discounts a 10 bp ECB rate cut. We are not convinced on the efficacy of such a move. In theory, the ‘perceived’ inability of the ECB to ease monetary conditions substantially further might support by default euro strength. However, the flaring-up of the (political) travel (or is it trade?) war between the US and Europe might complicate the euro reaction function. For now, we assume that a further risk-off and expectations for aggressive Fed action remain a USD negative. Earlier this week, we assumed the dollar to be captured in a sell-on upticks pattern. We hold on to that view. 1.1250/1.1620 might be a new trading range, with intermediate resistance at 1.15.
Yesterday, sterling succeeded an intraday rebound after the BoE rate cut. However, later in the session, sterling came again under pressure even as the UK Fin Min announced a fiscal plan to address the crisis. This morning, the risk-off also hurts sterling. Eco data/country specific news are of little importance for FX trading. We expect sterling to stay in the defensive as the risk-off correction develops.
USD trade weighted (DXY) dollar stabilizes (temporarily?) even as riskoff intensifies
