Summary: Fear and risk aversion reigned in financial markets as the coronavirus spread overwhelmed global efforts to contain it, hitting like a tsunami. Stocks dropped the most since the 1987 “Black Monday” market crash. The Dow continues to plunge as this commentary is written, now down 11%. The CBOE VIX Fear Index jumped over 40% to 75.50, its highest since 2008. The Euro fell 0.60 % to 1.1190 after the European Central Bank approved fresh stimulus measures to help the Eurozone economy but fell short of cutting its main deposit rate. A few hours later, the Federal Reserve of New York announced a USD 1.5 trillion liquidity intervention that included bond purchases and expanded operations in the repo market. US Treasury yields stabilised despite the fall in equities. The key 10-year note yielded 0.80% and the US Dollar soared. Both central bank measures failed to quell investor fears. The Dollar Index (USD/DXY) a gauge of the Dollar’s value against a basket of currencies rose sharply to 97.37 (96.52), up 0.90%. Sterling fell under the weight of the broad-based US Dollar rally to 1.2615 from 1.2840. Risk and Emerging Market currencies from smaller economies slumped. The Australian Dollar sank over 3% to 0.6275 from 0.64950, its lowest since 2008. The Dollar soared 3% against the Russian Rouble to 74.00 (72.7 yesterday). At the close of day in New York the DOW was trading at 20,930, down 11.3% from 23,600 yesterday. The S&P 500 ended at 2,460 from 2,530 yesterday.
On the Lookout: Both central bank measures failed to quell investor fears. Hopes for an announcement of a stimulus package from President Trump never came. Signs of leadership from the White House and US Congress amid the COVID-19 pandemic so far have fallen short of expectations. The economic turmoil is expected to get worse. Business Insider reported that “the US stock market has now wiped out the entire USD11.5 trillion of value it gained since Trump’s 2016 election victory. As Kathy Lien from BK Asset Management aptly described the stock market collapse, “the continued sell-off in equities reflects the market’s lack of confidence in their leaders to contain the virus.”
Economic data releases were mostly ignored for the time being. US Headline PPI missed forecasts, dropping to -0.6% against -0.1%. Core PPI fell -0.3%, below expectations of 0.1%.
Trading Perspective: The stable performance of US bond yields despite the equity market rout saw FX flows return to the Greenback. The Dollar’s rally was broad based. volatility was the one constant in trading all the FX pairs. The focus remains on the coronavirus pandemic.
While China and South Korea have reported a fall in new cases, in the US where the largest economy and financial market sits, has yet to see the worst of the virus. Large scale events like the NBA basketball competition, are just being banned. Which will put King Dollar at risk. volatility was the one constant in trading all the FX pairs. Traders need to be flexible and swift in these markets and sentiment can change on a sixpence.
USD/JPY – Modest Gains Despite Risk-Off, Traders Wary of BOJ
Despite the market’s risk off stance, the USD/JPY pair saw a modest gain to 105.35 at today’s New York close, up 0.56%. The extent of the move was mild compared to earlier in the week where big swings were seen. A Reuters report yesterday highlighted comments by Bank of Japan Governor Haruhiko Kuroda in a meeting with Prime Minister Abe that the BOJ is ready to take further steps to support the economy. The BOJ meets next week and is expected to unveil a spending package of between JPY 10-20 trillion (USD 100-200 billion). The timing of his message also coincided after the big plunge in USD/JPY to 101.18 on Monday. The BOJ also stand ready to intervene in the FX markets should USD/JPY slide further.
USD/JPY has immediate resistance at 105.60 and 106.10 (overnight high). Immediate support can be found at 104.70 followed by 104.20 and 103.70. Despite the modest gain, trading in this currency pair remained choppy with the overnight range 103.08-106.10. Look for a likely range of 103.50-106.00 today. Be nimble and be prepared to go on both sides of this range.
EUR/USD – Weighed by the ECB, Supported by the Fed
The Euro finished its NY trading session at 1.1190 after the ECB left policy rates unchanged and failed to relief investor fears. The Euro dropped immediately to an overnight and 3-week low at 1.1055 before spiking back to 1.1216 a few hours later following the Federal Reserve announcement.
The US central bank announced a USD 1.5 trillion liquidity package that includes bond purchases, and supported the shared currency.
The coronavirus pandemic has yet to impact the US as it has the rest of the globe with measures to contain the spread coming relatively later. Some interest rate traders expect the US Fed to cut rates into negative territory this year. Which will see widespread selling of Greenbacks.
EUR/USD has immediate support at 1.1140 and 1.1105. Immediate resistance lies at 1.1220 followed by 1.1270. Look for a choppy trading session between 1.1140-1.12360 today. Be nimble and trade the range shag.
AUD/USD – Risk Off Tsunami Knocks the Battler; Down but Not Out
The Aussie Battler got knocked down hard from the tsunami that hit financial markets with risk and Emerging Market currencies slumping. AUD/USD plunged to 0.6213, November 2008 lows amid the risk aversion triggered by President Trump’s inability to live up to his “major economic response” to the coronavirus in the United States. The ECB’s action plan to battle COVID-19 is seen as modest and not enough. Risk assets sank, taking the Australian Dollar along with it.
Australian Prime Minister Scott Morrison announced an AUD 17.6 billon coronavirus stimulus package yesterday. Traders shrugged this aside. FX will continue to pay close attention to pandemic headlines with little in the way of economic data and events released today. Which will keep the Aussie heavy. That said, often in volatile conditions, the Battler has always felt heaviest when it is forming a short-term low.
AUD/USD has immediate support at 0.6250 followed by 0.6210. Immediate resistance can be found at 0.6340 followed by 0.6380. Tin helmets on, its going to be a choppy ride. Stay nimble, keep an open mind, fix your levels firmly and get ready to rumble. Likely range today 0.6240-0.6380.