Summary: The US Federal Reserve cut interest rates by 0.5% to a target range for the Fed Funds rate of 1.00% to 1.25% (from 1.75%). The emergency move was designed to protect the world’s largest economy from the impact of COVID-19. Shortly before, the Group of Seven (G7) finance officials said that they would use all appropriate policy tools to “achieve strong, sustainable global growth and safeguard against downside risks posed by the fast spreading coronavirus. The Dollar Index (USD/DXY), a favoured gauge of the Greenback’s strength against a basket of 6 currencies slumped to a six-week low at 96.979 before paring loses to close at 97.139. Against the haven sought Japanese Yen, the US Dollar plunged to 106.935, steadying to settle at 107.22, down 1.14%. Earlier in the day, the RBA trimmed its Overnight Cash Rate by 0.25% to an all-time low of 0.5%. The Australian Dollar immediately jumped to 0.6565 as the move was largely expected. The Fed’s move boosted the Aussie further to 0.66454 before easing to settle at 0.6597. Sterling added 0.33% to 1.2800 (1.2775) in a muted response to the broad-based US Dollar drop as Brexit fears and an anticipated Bank of England rate cut stunted the British currency’s advance. The Euro extended its rally against the Greenback, trading to 1.12133 before easing to close 0.3% higher at 1.1182 in NY.
The US 10-year bond yield plummeted to a new low at 0.936%, the first time the benchmark rate has fallen below 1%. The key yield rallied at the close to finish at 1.02%, a loss of 13 basis points.
Wall Street stocks initially spiked but ended poorly with investors worried that the emergency cut won’t be enough to battle the economic impact of the coronavirus. The DOW dropped 2.57% to 25,866 (26,000) while the S&P 500 lost 2.5% to 2,996 (3,010).
On the Lookout: While other global central banks are expected to follow, some have already slashed rates to record lows and may be hesitant to reduce them further. The US has room to reduce rates further. This is likely to weigh on the US Dollar, boosting the currencies of other countries.
Data released today see Australia’s Q4 GDP and China’s Caixin Services PMI data in Asia. Euro area (Germany, Italy, France, Spain) and the Eurozone report their Services PMI’s. Switzerland releases its February CPI. The UK follows with its Services PMI report. US releases include ADP Private Non-Farm Employment Change (February) and ISM Non-Manufacturing PMI.
The Bank of Canada is expected to cut its Overnight Rate to 1.25% from 1.75%.
Trading Perspective: The US Dollar has room to move lower with market positioning long of the Greenback against 4 of the major IMM currencies. The yield differential between US and rival global yields will narrow further, pushing the currencies of other countries higher.
The effect of the coronavirus spread in the US has yet to be fully realised and the Fed may be forced to act again soon.
AUDUSD ended 0.8% up around the 0.6600 cent mark after climbing to an overnight and near 2-week high at 0.66454. After the RBA trimmed its prime Overnight Cash Rate by 0.25% to 0.50%, an all-time low, traders took the Aussie from 0.6530 to 0.6570 on the highly anticipated move. Some had wanted a bigger cut. Australian Prime Minister Scott Morrison announced that he was ready for fiscal measures to counter the COVID-19 risk.
The Fed’s emergency move was the first since 2008 and supplanted the RBA’s 0.25% cut. The differential between US and Australian 10-year yield narrowed to 23 basis points. At the start of 2020, the differential between the 2 key rates was 53 points (USD 1.87%, AUD 1.34%).
The Aussie has faced a grim outlook since the start of the year with the Australian bushfires followed by the coronavirus spread. AUDUSD has been battered as well as the Aussie crosses and the AUDTWI (Trade Weighted Index). US interest rates have further to fall. Short Aussie market positioning will add further fuel for more AUDUSD gains ahead.
Immediate resistance today lies at 0.6640 followed by 0.6680. Immediate support can be found at 0.6570 and 0.6540. Expect consolidation first up with a likely range of 0.6575-0.6645. Prefer to buy dips.
EURUSD extended its gains to 1.12133 before easing to 1.1182 at the NY close. The shared currency has rallied in recent sessions on the view that the U.S. will trim interest rates more than Europe. Overnight, Germany’s 10-Year Bund yield was unchanged at -0.63% even as the key US 10-year rate plummeted 15 basis points to 1.00%. Despite the pledge from G7 officials to us all appropriate tools to achieve sustainable growth from the downside risk posed by the coronavirus spread, ECB officials have been quiet on any rate cuts.
Eurozone Preliminary CPI released yesterday was in line with expectations. Today sees Euro area and Eurozone Services PMI’s.
EURUSD has immediate resistance at 1.1215 followed by 1.1235. Immediate support can be found at 1.1160 and 1.1130. Look for consolidation in a likely range today of 1.1160-1.1220. Wait and see what the ECB’s response is. Meantime just trade the range shag on this one.
USDCAD rallied against the trend of the broad-based US Dollar fall as the Bank of Canada is widely expected to follow the Federal Reserve’s lead and cut its interest rates by 0.5% to 1.205% from 1.75%. USDCAD closed at 1.3375 from 1.3355 yesterday. The Loonie was the only major currency to fall against the Greenback. Bloomberg News reported that the Bank of Canada is poised to follow the US Fed. It would be the first BOC interest rate move since it raised rates in October 2018. Traders are expecting a cut of at least 0.25%. Canadian 10-year treasury yields plunged 16 basis points to 0.96%. Market positioning in the Loonie (COT report for week ended 25 Feb) saw speculators long of Canadian Dollar bets (+CAD 14,624).
USDCAD has immediate resistance at 1.3400 followed by 1.3440. Immediate support can be found at 1.3360 and 1.3330. Look to sell rallies in a likely range today of 1.3360-1.3410.
USDJPY plummeted below 107.00 for the first time since early October 2019 to a depth of 106.935 before recovering to settle at 107.22 at the New York close. In early Sydney, USDJPY is trading around 107.10. Following the Fed’s rate cut move, the benchmark US 10-year Treasury yield dropped a whopping 15 basis points to 1.00%. By contrast, Japan’s 10-year JGB yield was one basis point higher at -0.12%. The USD JPY pair is particularly sensitive to moves in the US 10-year yield.
So far, the Fed’s emergency rate cut move has not convinced investors to buy risk assets. This will keep USDJPY heavy.
Keep an eye out for verbal intervention from BOJ officials led by President Haruhiko Kuroda. The BOJ does not like the combination of an appreciating currency and a falling equity market.
USDJPY has immediate support at 106.85 followed by 106.60. Immediate resistance lies at 107.40 followed by 107.90. Look for a choppy trading range of 106.85-107.55. Look to sell rallies, not dips. Choose your levels well.