Equities continued sailing north yesterday, with DAX, S&P 500 and NASDAQ hitting new record highs after a Chinese advisor said that the number of new coronavirus cases has started falling. Elsewhere, in his testimony, Fed Chief Powell said that the economy is doing well, but warned that the virus could leave marks on the U.S. economy. As for today, during the early Asian morning, the RBNZ appeared more optimistic than expected, sending the Kiwi higher against all the other G10 currencies.
EQUITIES KEEP SAILING NORTH AS CORONAVIRUS CASES SLOW DOWN
The dollar traded lower against all but two of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed the most against NZD, GBP and NOK, with NZD taking the 1st place by a large margin after the RBNZ rate decision (see below). The greenback was found virtually unchanged against EUR and JPY.
Even though not clear by the performance of the G10s, the weakening of the yen suggests that market appetite remained supported. Indeed, looking at the performance of major equity indices, we see that the EU and US ones were a sea of green, with the German DAX, the S&P 500 and Nasdaq hitting new record highs. The optimism rolled over into the Asian session as well with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 0.74% and 0.87% respectively.
It seems that risk appetite intensified yesterday after a Chinese medical advisor said that the number of new coronavirus cases has started falling in some provinces, forecasting that the virus could peak this month and end by April. Indeed, looking at the graph below we can see that the % change of the cases in any given day compared to the cases of the previous one, has been falling below zero more often this month, with the last two days staying in the negative territory, which means that the cases may have indeed started slowing down (Anything above zero signals acceleration, while anything below zero points to slowdown).
However, taking the same graph for the deaths, we see that yesterday was the first day marked by a slowdown. Up until yesterday, the death-toll had been rising at an exponential pace, and it can return doing so, as we believe that a more stable slowdown in deaths may come with a lag compared to the cases. What’s more, among the 39225 currently infected patients, the condition of 8216 is considered serious or critical. Thus, the number of deaths may could increase well beyond the 1000 mark. Currently that number stands at 1115.
In our view, it depends from which angle you want to see things. In cases with an outcome, 81% of patients were recovered or discharged, while the deaths account of 19%. Investors prefer to see the bright side at the moment, with the slowdown suggesting that we may be nearing the peak. That said, even if the optimism continues for a while more and equities keep rising, we prefer to take a more cautious stance and see things day by day, instead of getting excited over a long-lasting rally. After all, the risks surrounding any reaction to fresh headlines may be asymmetrical and tilted to the downside. Anything pointing that the cases and deaths have begun to accelerate again may trigger a notable sell-off in equities and risk-linked currencies, as investors will abandon them and seek for safety in assets like the Swiss franc and the Japanese yen. Now, in case the slowdown continues, they may continue adding to their risk exposure, but not at the same pace as before.
AUD/CHF – TECHNICAL OUTLOOK
After AUD/CHF reversed to upside in the beginning of February, it started slowly grinding higher, forming higher lows above a short-term tentative upside support line drawn from the low of February 4th. But at the same time, the pair is finding it difficult to overcome the 0.6590 barrier, which is the current highest point of February. All this activity seems to be building a potential ascending triangle, which according to TA textbooks, tends to break to the upside. But for now, we will stay cautiously bullish and wait for a break above the 0.6590 zone, in order to get comfortable with further upside.
Eventually, if the rate rises above the 0.6590 area, this will confirm a forthcoming higher high. Such actions may lead the pair to the 0.6615 zone, which is marked near the low of January 23rd and near the high of January 27th. Initially, AUD/CHF could get a hold-up around there, or even correct back down a bit. That said, if the pair stays above that upside line, the uptrend may resume and the pair might drift above the 0.6615 obstacle and target the 0.6677 level, marked by the high of January 16th.
On the other hand, if the previously-mentioned upside line breaks and the pair slides below yesterday’s intraday swing low, at 0.6542, this could clear the way to the 0.6497 hurdle, which is the low of February 7th. If the selling doesn’t stop there, the 0.6497 area might just be seen as a temporary pit-stop for the bears, a break of which might send AUD/CHF further south. The next potential support area might be seen around the 0.6438 level, marked by the lowest point of January.
POWELL SAYS RATES ARE APPROPRIATE, BUT WARNS ON VIRUS
Passing the ball to Fed Chief Jerome Powell, in his testimony before the House Financial Committee of the US Congress, he said that the US economy is in a good place and reiterated the view that the current target range of interest rates is “appropriate” to keep the expansion on track. However, he added that the new coronavirus will impact the Chinese economy and its close trading partners, and that there will “very likely be some effects on the US,” as well. On whether these effects could lead to a material reassessment of the economic outlook he said that it is still too early to know.
The dollar traded lower, perhaps due to Powell highlighting some concerns with regards to the virus, or maybe due to the improvement in the broader market sentiment. Let’s not forget that, sometimes, the US currency wears its safe-haven suit, strengthening during market turbulence, and weakening in periods of broader optimism. In any case, investors barely adjusted their bets with regards to the Fed’s future policy steps, still anticipating another 25bps rate cut to be delivered in September.
RBNZ APPEARS MORE UPBEAT THAN EXPECTED
Today, during the Asian morning, we had an RBNZ policy decision, with the Bank keeping rates at the record low of +1.0%, but delivering a much more sanguine statement than previously. Officials noted that employment is at or slightly above its maximum sustainable level, while consumer price inflation is close to the 2% midpoint of their target range. They also assumed that the overall impact of the coronavirus in domestic economy will be of a short duration and that growth is expected to accelerate over the second half of 2020. On a more important note, they removed the phrasing saying that they “will add further monetary stimulus if needed”, and just said that “Monetary policy has time to adjust if needed as more information becomes available.”
With regards to the quarterly Monetary Policy Statement, officials upgraded their inflation and employment forecasts, while their rate-projections for this year were revised up to 1.0% from 0.9%, removing the likelihood of a potential decrease. At the press conference, when asked over whether “an insurance cut” was discussed due to the virus, Governor Orr said that “At this point, we didn’t see a need for a cut in the OCR with regard to a specific event.”
The Kiwi skyrocketed on the RBNZ’s more-upbeat-than-expected view, especially with officials scaling back chances over a rate cut. Moving ahead, we expect Kiwi-traders to turn attention back to developments surrounding the broader market environment. If indeed investors are willing to continue adding to their risk exposures for a while more, the Kiwi may drift somewhat higher. However, as we already noted, any headlines suggesting that the worst with regards to the virus is not behind us yet, could bring the currency under renewed selling interest.
NZD/CAD – TECHNICAL OUTLOOK
During the Asian morning today, the New Zealand dollar rallied against most of its major counterparts, where the Canadian dollar was no exception. NZD/CAD got very close to its short-term downside resistance line drawn from the high of December 31st but got held slightly below the 200 EMA on the 4-hour chart. The pair still has a bit of space left until it could reach the downside line, but if that line remains intact, we might see another round of selling. For now, we will aim slightly higher, but if the downside line holds, we will take a somewhat bearish approach, at least for the near term.
As mentioned above, if the pair rises further north, it may test the area near the 0.8614 barrier, marked by the high of February 6th, or the aforementioned downside line. But if NZD/CAD struggles to overcome the short-term downside line, the bears may try and take advantage of the higher rate. If so, NZD/CAD could drift south towards the 0.8570 hurdle, a break of which might send the pair to the 0.8541 zone, marked by the low of January 31st. Just a few pips lower sits another potential support area, at 0.8527, which is yesterday’s high. That area might take the role of support this time and keep the rate afloat.
However, if the downside line breaks and the rate travels above the 0.8632 barrier, marked by the high of February 4th, this would confirm a forthcoming higher high and more buyers may enter the game. That’s when we will aim for the 0.8658 hurdle, a break of which might set the stage for a push to the 0.8700 level, which is the high of January 24th.
AS FOR THE REST OF TODAY’S EVENTS
During the European morning, we have another central bank deciding on interest rates and this is Sweden’s Riksbank. At its last meeting for 2019, the world’s oldest central bank decided to hike rates by 25bps to 0%, becoming the first Bank to abandon the negative-rate regime, after adopting it back in 2015. Officials also noted that the rate is expected to stay at 0% in the coming years but added that if the economic outlook and inflation prospects were to change, monetary policy may need to be adjusted.
Both the CPI and CPIF rates for December held steady at 1.8% and 1.7% respectively, while the core CPIF rate, which excludes energy, has ticked down to +1.7% yoy from +1.8%. In our view, this suggests that we are unlikely to get any major changes, neither in policy neither in the Bank’s language. Thus, this may be one of the quiet meetings of the Bank in terms of reaction in the Swedish Krona.
Later in the day, the only noteworthy indicators on the agenda is Eurozone’s industrial production for December and the EIA (Energy Information Administration) weekly report on crude oil inventories. Eurozone’s IP is forecast to slide 1.5% mom after a 0.2% increase in November, which would drive the yoy down to -2.3% from -1.5%. With regards to the EIA report, it is expected to show a 0.557mn barrels slide after a decline of 1.512mn the week before. Nonetheless, bearing in mind that the API reported a 6.000mn barrels increase, we see the risks surrounding the EIA forecast as tilted to the upside.
As for the speakers, apart from Fed Chair Powell who will deliver his testimony before the Senate Banking Committee, we have three more central bank Chiefs speaking during the Asian morning Thursday: RBNZ Governor Orr will speak again, while later we will get to hear from BoC Governor Poloz and RBA Governor Lowe.