16th March 2020 - AUD spikes higher after Fed cuts rates to near zero



Good morning


OVERNIGHT DATA AND HEADLINES


• France and Spain joined Italy in imposing lockdowns on tens of millions of people, Australia ordered self-isolation of arriving foreigners and other countries extended entry bans as the world sought to contain the spreading coronavirus. Panic buying in Australia, the United States and Britain saw leaders appeal for calm over the virus that has infected over 156,000 people globally and killed more than 5,800. Several countries imposed bans on mass gathering, shuttered sporting, cultural and religious events, while medical experts urged people to practice "social distancing" to curb the spread. Australian Prime Minister Scott Morrison said from midnight Sunday international travellers arriving in the country would need to isolate themselves for 14 days, and foreign cruise ships would be banned for 30 days, given a rise in imported cases. Australia's latest restrictions mirror those announced by neighbouring New Zealand on Saturday. Donald Trump tested negative for the coronavirus, his doctor said on Saturday, as the U.S. president extended his country's travel ban to Britain and Ireland.

• A gauge of stocks across the globe bounced back led by a late rally on Wall Street, after U.S. President Donald Trump freed $50 billion to tackle the novel coronavirus pandemic. Oil prices shot higher after Trump, in the same speech, said that the United States would take advantage of the recent sharp decline in prices to fill the U.S. strategic reserves of oil "right up to the top."

• Wall Street staged a furious rally in the waning moments of the session although major averages still suffered sharp losses for the week. In a volatile session, the Dow Jones rose 9.36% to 23,185, the S&P 500 gained 9.29% to 2,711 and the Nasdaq added 9.35% to 7,874.


CURRENCIES

• The USD surged, posting sharp gains against the JPY (largest daily percentage gain against the yen since April 2013). The DXY index rose from 97.30 towards a 98.81 high.

• EUR nursed losses despite ECB policymakers' efforts to reassure markets. EUR fell down to a 1.1055 low from a 1.1220 high on Friday.

• GBP also plunged 2.2% to 1.2275 from a 1.2625 high.

• USDJPY weakened, climbing up from 105.30 towards low 108.00 levels.

• AUD lay bloodied at 11-year lows shedding 3.9% overnight to a 0.6120 low (the largest one-day drop since mid-2010).

• NZD followed the selloff, dropping from 0.6160 towards 0.6014. Opens lower this morning at 0.5990 (fell to 0.5933 low).

• AUDNZD fell to a 1.0126 low over the Friday night session but gapped higher this morning at 1.0290 high. Opens 1.0227.

• AUDEUR saw a continuation in the huge selling spree, dropping from 0.5665 down towards 0.5520 lows.


TREASURIES


• U.S. 10-year Treasury yields jumped back over the 1% level after President Donald Trump declared a national emergency over the spreading coronavirus, a move that sent stocks soaring.

• The 10-year note yield, which was at 0.934% before the president's Rose Garden address, rose to 1.019%, up from 0.852% at Thursday's close.

• Yields on 30-year bonds on Friday jumped to an overnight high of 1.87%, before dropping back down to 1.623% (up from Thursday's close of 1.411%).

• Two-year Treasury yields were trading at 0.518% after reaching a 0.544% high in the session.

• Euro zone bond yields jumped as investors' expectations of fiscal stimulus to combat the coronavirus pandemic rose in the region. Italian 10-year borrowing costs were set for their biggest weekly jump since 1994, after having their worst day since the euro zone debt crisis.

• The benchmark German 10-year yield rose 16 basis points to -0.58%, a 10-day high, helped by a rebound in stocks following the worst day on record for European shares on Thursday.

COMMODITIES


• Gold tumbled as much as 4.5%, headed for its biggest weekly loss since 1983 as investors embarked on a selling spree to hoard cash and meet margin calls across other markets. Spot gold slid 4% to $1,513.11 from $1.597 per ounce.

• Iron ore futures in China and Singapore reversed early losses to trade higher, helped by growing expectations for further policy measures to support a global economy hammered by the coronavirus pandemic. Iron ore prices in the physical market also remained volatile, with the industry benchmark 62% iron ore falling to $90.50 a tonne, after rising to $91.50 the day before.

• Industrial metals rose on Friday, boosted by expectations of a stimulus package from the U.S. Benchmark LME copper ended 0.4% higher at $5,460 per tonne.

• Oil prices posted their biggest week of losses since the 2008 GFC, rocked by the coronavirus outbreak and efforts by top exporter Saudi Arabia and its allies to flood the market with record levels of supply. On Friday, prices were higher, rebounding after the U.S. signalled plans to support weakening economies. Brent rose 63 cents to settle at $33.85 a barrel. U.S. crude rose 23 cents to settle at $31.73 a barrel, after earlier gaining to $33.87 a gallon.

ECONOMIC DATA TODAY


• No Australian Economic data releases today.

• NZ - Feb Business NZ PSI & Jan net migration (annual in flow continuing to gradually trend down).

• Japan - Jan machinery orders (last –12.5%, forecast –0.8%). Business investment will remain weak in 2020.

• China - Feb industrial production, Feb retail sales YTD %yr (last 8.0%, forecast –1.7%), Feb fixed asset investment ytd %yr (last 5.4%, forecast –0.3%). The Feb partial data will provide a first look at consumption and business investment as COVID-19 hit.

• UK - Mar Rightmove house prices 0.8%. A weak UK economy a heavy weight for housing.

• US - Mar Fed Empire state index (last 12.9, forecast 5.1). Manufacturing to be hit in coming months by COVID-19 spread. Jan total net TIC flows $bn 78.2 – US Treasury's in strong demand given risks.


AUD THOUGHTS


AUD was smashed once again over the Friday night session, this time falling from around 0.6300 to a 0.6120 low as a continuation of risk currencies took a battering against a surging USD across the board.

AUD also gapped lower this morning after the weekend announcement of travel restrictions in Australia.


Another frantic week is expected as the struggle for central banks to maintain the smooth functioning of credit and bond markets as well as stem equity market sell-offs will continue. There are several scheduled central bank meeting while the risk of emergency central bank action remains large. The US Federal Reserve’s meeting will set the tone with the degree of widening in interest rate differentials potentially allowing or even pressuring other central banks to ease. For some EM central banks, however, their ability to ease policy to offset the impact of the coronavirus is constrained by weakness in the domestic currency. There is likely to be aggressive action taken at the Federal Reserve’s 18 March interest rate decision amidst the continuing spread of COVID-19 and the oil price shock. We see the Fed as cutting by at least 50 bps and potentially as much as 100 bps. Further measures designed to ease credit spreads and ease funding may also be announced. Chair Powell’s press conference will be closely monitored for hints of a roadmap of what further measures the FOMC may consider in the months ahead.

Overall, the Fed is likely to be early and aggressive in its response. This will be intended to limit the potential for financial market volatility to exacerbate the impacts that COVID-19 and the oil price shock are likely to have on the growth and inflation outlook.


For the AUD, with no critical supports until low 0.6000’s and a surging USD, expect selling interest to remain heavy as we trade into the week. Demand remains thin although expect corporate interest may materialise ahead of 0.6100. Following the Fed announcement closely – potential to cut 100bps which may drive USD lower and see AUD back up towards 0.6400 / 0.6500.



TECHNICAL OUTLOOK


AUD gaps lower, Australia announces travel restrictions. AUD down 1% in early Asia, trades at new 11-year low of 0.6120.

AUD falls on news Australia to impose 14-day self-isolation on international travellers. World closes borders, restricts travel to contain global coronavirus spread.

Lockdowns, self-isolation, entry bans imposed to fight spread. Markets price in inevitability of global recession, AUD heads for sub 0.6000. Initial support 0.6075, Nov 2008 low; resistance 0.6165, 0.6190, 0.6215-25.






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