Asian markets tumbled overnight, while safe havens rallied as fears over a coronavirus spread grew ahead of the China’s Lunar New Year holidays. Yesterday, the BoC stood pat as was widely expected, but opened the door to a potential rate cut. As for today, the Norges Bank and the ECB take their turn in deciding on monetary policy.
MARKETS TRADE “RISK OFF” AGAIN AS VIRUS CONCERNS GROW
The dollar traded lower or unchanged against all but one of the other G10 currencies. It underperformed versus GBP, JPY, AUD and CHF in that order, while it was found virtually unchanged against EUR, NZD, NOK and SEK. The greenback gained only against CAD.
Although the picture is not crystal clear, the strengthening of the yen and the franc suggests that after the relief bounce during the Asian session yesterday, at some stage later in the day, markets turned back to risk-off. Indeed, major EU indices ended their trading in negative territory, and while Wall Street was flat – the exception was Nasdaq (+0.14%) – the flight to safety intensified during the Asian day today, with both Japan’s Nikkei 225 and China’s Shanghai Composite tumbling 0.98% and 2.75% respectively.
The turnaround started with US President Trump threatening once again with tariffs on auto imports from the EU, something that weighed on EU indices. This prompted a response by Germany’s ambassador to the US, Emily Haber, who said that the Union could react in a similar manner. US indices were largely flat, with higher-than-expected revenue growth and forecasts for full-year profit from IBM being offset by reports that the deaths due to the coronavirus increased to 17 and that nearly 600 cases were confirmed. Fears heightened over the Asian session as millions of Chinese travel domestically and abroad during the Lunar New Year holidays, which start tomorrow, and the virus could spread rapidly, despite the shutdown of Wuhan, the city considered the epicenter of the virus outbreak.
Yesterday, the World Health Organization postponed its decision over whether the outbreak is an international emergency, something that is expected to be announced today. If indeed this is the case, we would expect equities to stay pressured, while safe havens are likely to continue attracting flows. Now in case the Organization serves as a tranquilizer to investors, we may see a relief bounce in risk assets and a pullback in havens.
Back to the currencies, the pound continued to gain, taking the first place on the G10 board for the second day in a row. It seems that following the better-than-expected UK jobs data for November, the more-than-anticipated increase in the CBI industrial trends orders index for January may have eased further speculation over a BoE rate cut at next week’s gathering. However, we maintain the view that what could really prove decisive on how officials will proceed may be Friday’s PMIs. Following last week’s weak economic data, a disappointment in the PMIs could force the pound to give back its recent gains and perhaps revive bets for a quarter-point cut at next week’s meeting. On the other hand, decent numbers could allow policymakers to delay such a decision, something that may allow GBP-bulls to stay in the driver’s seat for a while more.
Despite the risk-averse trading mood, the Australian dollar was found higher against its US counterpart, and this may have been due to the positive surprise in the Ausrtalia's employment data for December. The unemployment rate ticked down to 5.1% from 5.2%, while the employment change showed that the economy added 28.9k jobs during the month, more than the 15.0k forecast. Given the RBA’s emphasis on the labor market, this may have prompted market participants to push somewhat back the timing of when they expect the RBA to cut rates again.
USD/JPY – TECHNICAL OUTLOOK
USD/JPY sold off this morning, falling back below its key support at 109.70. This move is now raising concerns among the bulls, as it seems that investors might be jumping back into safe-havens again, given that global indices have stalled a bit after their sharp uprises. As long as the rate continues to trade below the hurdle, at 109.70, we will stay bearish, at least for some time.
A further slide may put the 109.43 support area to the test again, as it was the case on January 10th. Around there, the pair could also hit the 200 EMA, which might provide some support as well. If the rate rebounds, but fails to push above the 109.70 barrier, this could result in another round of selling. If the 109.43 zone fails to withstand the bear pressure and breaks, USD/JPY could travel lower to the 109.24 area, or even to the 108.86 support level, marked by the inside swing high of January 2nd.
Alternatively, if the rate gets push back above the 109.70 barrier, this might give hope for the bulls that not all is lost. But if the pair climbs back above the 109.83 hurdle, which is an intraday swing low of yesterday, more buyers could join the game and send USD/JPY further north. We will then aim for the 110.12 obstacle, a break of which could clear the path to the current highest point of January, at 110.29.
BOC OPENS THE DOOR TO A CUT, NORGES BANK AND ECB TAKE THE TORCH
Yesterday, we also had a BoC interest rate decision. The Bank kept interest rates unchanged as was broadly expected, but the statement had a dovish flavor, surprising those (including us) who expected officials to maintain a neutral stance. Policymakers removed the part saying that it is appropriate to maintain the current level of interest rates and instead noted that “In determining the future path for the Bank's policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast”. They also noted that the Canadian economy is no longer operating close to capacity and that indicators of consumer confidence and spending have been unexpectedly soft. At the press conference, Governor Poloz said that a rate cut wasn’t warranted at this time but also added that this doesn’t mean that the door is not open. “Obviously it is - it is open," the Governor said.
From dovish to neutral and back to dovish. It seems that the BoC finds it hard to maintain a stable stance, which suggests that each meeting may be a different one, with the focus mostly on how economic data evolve heading into each gathering. In any case, following yesterday’s outcome, according to Canada’s OIS, the probability for an April cut has risen to around 50% from near 20% on Tuesday. For now, the Canadian dollar could stay pressured for a while more, especially if retail sales data for November, due out tomorrow, disappoints. The tumble in oil prices could also weigh on the Loonie given that Canada is one of the world’s largest oil producing nations.
Oil prices fell on concerns that a potential spread of the coronavirus could lower fuel demand, as it could lead to a slump in travel. Apart from that, the API weekly report revealed a 1.6 million barrels increase in crude oil inventories, which combined with the International Energy Agency forecasting a market surplus, raised oversupply concerns. Today, oil traders may focus on the EIA weekly report, which is expected to show an inventory slide. However, following the build revealed by the API, we see the risks as tilted to the upside, something that may weigh further on the black liquid.
Coming back to central banks, today, the torch will be passed to the Norges Bank and the ECB. Kicking off with the Norges Bank, last time, Norwegian officials kept their policy and forward guidance unchanged, reiterating that the rate will most likely remain at the current level in the coming period. Since then, both the headline and core CPI rates declined further, to +1.4% yoy and +1.8% yoy, from +1.6% and 2.0% respectively. Both rates are below the Bank’s latest projections of 1.6% and 1.9% and thus, it would be interesting to see whether officials will lean somewhat more dovish at this gathering. However, we don’t expect a policy change, neither a major change in language. Officials may prefer to wait for a while more before they proceed to any bold shifts, as they may want to see whether this inflation weakness persists or not.
Passing the ball to the ECB, at the previous meeting, the first headed by Christine Lagarde, officials decided to keep interest rates untouched, with the statement not deviating much from the previous one. At the press conference, Lagarde reiterated Draghi’s words that officials stand ready to adjust all their instruments as needed, and that the risks to the economic outlook remain tilted to the downside. That said, she added that the risks are less pronounced and that there are some stabilization signs in growth slowdown. In the minutes of that meeting, it was noted that political risks were probably ebbing, inflation pressures seemed to be building and that the manufacturing sector was showing signs of bottoming out, suggesting that other members have been on the same page with their new President.
Since then, preliminary PMIs for December disappointed, but the final readings revealed upside revisions. On the inflation front, the headline CPI rate rose to +1.3% yoy from 1.0%, while the core rate remained unchanged at +1.3% yoy. Combined with the minutes revealing a view somewhat more optimistic than previously, the data may have lessened chances for additional easing by the Bank. Therefore, we don’t expect any major changes in language compared to the previous meeting, especially as this gathering will be accompanied with the start of a strategic review, examining the effectiveness of monetary policy. The review may take a year and it would be interesting to see whether the definition of price stability, or in other words, the Bank’s inflation objective is changed, perhaps from “below, but close to 2%” to a more symmetric one, like “around 2%”. For now, EUR-traders may pay even more attention to the PMIs for January, due out tomorrow, in order to adjust their bets on how the Bank may proceed in the foreseeable future.
EUR/CAD – TECHNICAL OUTLOOK
EUR/CAD had a strong boost yesterday, which led to a break of a short-term tentative downside resistance line taken from the high of December 17th. In addition to the whole positivity, the pair also broke above the 1.4580 barrier, which was previously the highest point of January. As long as the rate continues to trade above that barrier, we will remain positive.
A further uprise may bring EUR/CAD to the 1.4608 hurdle, which is the inside swing low of December 30th. The pair might stall around there, or even correct back down slightly, considering the strong jump that we saw recently. If the rate corrects itself lower, but stays above the 1.4580 zone, this could attract the bulls back into the field and allow them to push EUR/CAD up again, potentially bypassing the 1.4608 obstacle and targeting the 1.4652 level, marked by the high of December 30th.
On the downside, if the rate slides back below the aforementioned 1.4580 hurdle, this might raise concerns in bull block about the possible further upmove. But if the pair starts moving below the 1.4565 hurdle, marked by the high of January 16th, this may also place EUR/CAD below the 200 EMA on the 4-hour chart. Such a move might attract a few bears, who could apply more downside pressure on the pair. We will then examine a possible move to the 1.4537 mark, or to the 1.4524 obstacle, which is near the inside swing high of January 21st. The rate may stall there temporarily, but if the selling continues, a further drift south could set the stage for a test of the 1.4483 level, marked by an intraday swing low of January 21st.
AS FOR THE REST OF TODAY’S EVENTS
From the US, we get initial jobless claims for last week, which are expected to have increased to 215k from 204k the week before. Overnight, during the early Asian session Friday, New Zealand’s CPIs for Q4 are coming out, with the forecast suggesting a slowdown in quarterly terms, to +0.4% from +0.7%. However, this would drive the yoy rate up to +1.8% from 1.5%.