Summary: Markets awoke to a manic Monday start after the US Federal Reserve slashed rates to zero in an emergency meeting. The Fed cut its Fed Funds rate to a target range of 0% to 0.25% and said it would expand its balance sheet by at least USD 700 billion in the coming weeks. Just before, the Bank of New Zealand cuts its Official Cash Rate to 0.25% from 1.0%. The New Zealand Dollar plunged 1.4% to 0.5965 from it’s New York close of 0.6068 Friday. It was the lowest trade for the Kiwi since May 2009. NZD/USD immediately bounced back to 0.6148 after the Fed cut rates. Also reports saw the Coronavirus spread climbing in the U.S. Following Friday’s frightful turnaround that saw the Dollar Index (USD/DXY) rebound 1.25% to 0.9869 from 0.9737, this morning’s early trade showed little relief for shell shocked traders. On Friday, the US Federal Reserve announced stimulus measures through bond-buying and repurchase operations. Following those measures, the US Dollar, stocks and bond yields surged. The Bank of Canada slashed its main benchmark by 50bps to 0.75% its second this month. USD/JPY skyrocketed 3.03% to 107.95 (105.35). There was no shortage of extreme FX volatility this morning. Reuters reported this morning saw the US Covid-19 death toll hit 62, while limited testing recorded nearly 3,000 cases. USD/JPY slumped to 106.70. The Euro, trading at 1.1102 in late NY, jumped to 1.1182 this morning. The Australian Dollar soared from 0.6145 to 0.6262. Sterling rebounded to 1.24 from its NY close at 1.2275. Wall Street stocks jumped. The DOW finished a whopping 10% up at 23,020 (21,600) while the S&P500 was 10.09% higher at 2,703. Bond yields jumped on Friday following the Fed’s initial stimulus moves. The benchmark US 10-year rate closing at 0.96% from 0.81%. Germany’s 10-year Bund yield soared 20 basis points to -0.55%.
On the Lookout: Just another manic Monday indeed. Expect high volatility to continue to dominate FX and all markets. The options market signalled that currency volatility remains elevated following last weeks turbulent moves, not seen since 2008.
Following the Federal Reserve and RBNZ surprise rate cuts, the Fed announced that it and five other major foreign central banks were also cutting pricing on their swap lines to make it easier to provide Dollars to their financial institutions facing stress in credit markets. The Fed, European Central Bank, Bank of Japan, Bank of England, Swiss National Bank and Bank of Canada set up swap lines in the financial crisis. Last week the credit crunch boosted demand for the Greenback which surged almost 4% against its rivals.
Trading Perspective: The Fed’s latest move and global central bank coordination to alleviate the pressures of Dollar funding saw the Dollar plunge this morning. After its meteoric rise last week, expect more US Dollar falls. FX trading will continue to experience high volatility.
In these markets, flexibility and quick decision making are one’s best tools to neutralise the volatility.
Market positioning remains long US Dollar bets against most of the majors, which will weigh on the Greenback. US interest rates have further to fall than those of its global rivals. Which will narrow the US Dollar’s yield advantage.
EUR/USD – Another Volatile Session, 1.1050-1.1250 Likely
The Euro had a roller coaster ride this morning after dropping to 1.1055 overnight and finishing at 1.1100 in New York. The surprise Fed rate cut saw the shared currency surge to 1.11995 before easing to its current 1.1160. EUR/USD may have found a short-term base at 1.1055. The initial resistance level is at 1.1200 which should hold initially. A break of 1.1200 could see 1.1500.
Expect further high volatility in the EUR/USD pair. The Fed’s announcement of Quantitative Easing to weather the Coronavirus effect on the US economy will keep US rates at ultra-low levels. Which is supportive for EUR/USD.
Today, European finance ministers are due to meet following last week’s disappointing ECB meeting.
In Europe, Spain declared a state of emergency to deal with one of the worst Covid-19 outbreaks. Australian Business Insider reported that the number of confirmed cases has risen to more than 4,200 with at least 120 deaths.
AUD/USD – Roller Coaster Ride Set to Continue, Base Formed at 0.6120-50
The Aussie Battler survived another attempt to push the AUD/USD toward 0.60 cents on Friday following the US Dollar’s robust rally. AUD/USD plummeted to 0.61231 overnight, settling to close at 0.6185 in New York. The Fed rate cut saw the Battler spike to 0.6305 before easing to settle at its current 0.6185.
Wall Street stock futures collapsed following the Fed easing this morning. The DOW fell 900 points, triggering a limit down. The risk-off response will keep the AUD/USD pair under pressure although this morning the RBA announced that Australia’s financial system is resilient and well placed to deal with the effects of Covid-19.
Immediate support for the Australian Dollar lies between 0.6120-50. The next support comes in at 0.6080. Immediate resistance can be found at 0.6210 and 0.6260. At the end of the day, the softer US Dollar will be the supportive for the Aussie. Look for further volatile trade between 0.6130-0.6330. Prefer to buy dips.
USD/JPY – What Goes Up Must Come Down, 105.00-108.00 Next
The Dollar soared over 3% against the Yen on Friday following the market’s impressive turnaround. After the Fed slashed its interest rate to zero and announced QE, USD/JPY dropped over 1% to 105.73 from its 107.95 NY close. The big move lower was reminiscent of Blood, Sweat and Tears Spinning Wheel tune..”What goes up must come down…”
USD/JPY has immediate support at 106.30 followed by 105.70. Immediate resistance is now found at 106.85 and 107.35. Friday’s upmove in the USD/JPY pair was the biggest weekly advance since November 2016. All that says is expect further high volatility in this currency pair.
With US short term interest rates at or near zero, USD/JPY topside is now limited to 108.00. There should be an initial base at 105.50 and 105.00. The Bank of Japan will be monitoring any breaks below 104.50 as this would open the door for 101.50 and 100.00. Look for a likely trade between 105.50-107.50. Just trade the range of this puppy, be nimble, stay flexible. Establish your parameters and trade your levels.