18th March 2020 - AUD hits 17 year lows at 0.5956 on a surging USD



Good morning


OVERNIGHT DATA AND HEADLINES


• A gauge of global equity markets and gold rose after the U.S. Federal Reserve said it would buy short-term corporate debt directly from companies to help relieve credit markets under strain by the impact of coronavirus epidemic. The renewal of the financial crisis-era Commercial Paper Funding Facility, first used in 2008, will provide a backstop to that market, a key funding source for a range of businesses for which liquidity has dried up recently. Fiscal stimulus is coming and the Fed is now supporting the corporate market with CP. We don't think either the Treasury, White House , or Fed is done yet ... we will see if the equity markets starts looking ahead. Investors are hoping that the Fed's moves will ease a credit crunch and lubricate financial markets and that helped boost stocks a day after they recorded their biggest tumble since the crash of 1987.

• Wall Street rebounded, following its steepest declines since the 1987 crash, as the Federal Reserve took more steps to boost liquidity in a market sapped by business and travel disruptions in the wake of the coronavirus pandemic. Dow Jones currently up 3.55% at 20,905, S&P 500 up 5.35% at 2,513, Nasdaq up 6.21% at 7,456.

• The German ZEW Survey came in weaker than expected with Expectations at -49.5 and Current Situation at -43.1, this compared to expectations of -30.0 in both cases.

• UK employment data was mixed with average weekly earnings in January slightly higher than expected though the unemployment rate unexpectedly rose 0.1% to 3.9%. February jobless claims also rose a little though with the data pre-dating the coronavirus pandemic, it was all but ignored by the markets.


CURRENCIES


• The USD surged as companies and investors sought out the most liquid currency as concerns about economic shutdowns from the coronavirus continued to dent risk appetite. The DXY index was last at 99.52, up 1.50% from 98.00.

• China's yuan was little changed after the central bank fixing helped the currency claw back losses from a major global selloff in risk assets. PBOC set the midpoint rate at 7.0094 and closed 7.0058.

• EUR tumbled from 1.1185 highs down towards 1.0953 on broader USD strength.

• GBP saw selling interest from 1.2250 to a 1.2000 low.

• USDJPY weakened 1.68%, rising up from 106.15 to 107.85 levels.

• AUD suffered another blow, falling below the 0.6000 support to a 0.5956 low. Managed to regain some of the losses back up to 0.6000.

• NZD also fell through it’s 0.6000 support to a 0.5913 low, rebounding back up to 0.5945 in late NY.

• AUDNZD selloff nearly resulted in the pair touching 1.0000 (1.0007 low), surpassing the all time low of 1.0017 set on 06/04/2015.

• AUDEUR remained steady at previous 0.5430 lows during the session.


TREASURIES


• The benchmark U.S. 10-year Treasury note yield climbed back over the 1% level as a modicum of renewed confidence shored up Wall Street and reduced demand for safe government debt after the Federal Reserve announced a plan to rescue the stressed commercial paper market.

• The yield on the 10-year note rose to 1.105% from 0.728% at Monday's close, its highest since March 5, after the Fed said it will relaunch financial crisis-era purchases of short-term corporate debt to thaw credit markets strained by the coronavirus pandemic.

• Yields on 30-year bonds were last at 1.6355%, up from Monday's close of 1.324% and two-year Treasury note yields were trading at 0.506%, up from 0.36% late Monday.

• Meanwhile, the New York Federal Reserve offered an additional up to $500 billion in overnight loans Tuesday afternoon, but only $10.1 billion in repurchase agreements or repo bids were submitted and accepted.

• Spanish and French borrowing costs hit 10-month highs as growing expectations of government spending to combat the effects of the coronavirus epidemic kept peripheral markets under pressure. Spain's 10-year bond yield was up 16 bps on the day to 1.02, rising above the 1% mark for the first time since last May. Portuguese 10-year bond yields held above 1% for a second straight day.


COMMODITIES


• Gold jumped higher as a five-session decline in the bullion market led bargain hunters out in force, with Federal Reserve's announcement to boost lending soothing market fears over a crunch in liquidity. Spot gold was up 0.9% to $1,527.35 per ounce from previous session $1,465 per ounce low.

• Benchmark steel futures in China pulled back after hitting near two-month highs in the previous session. Industry benchmark 62% iron ore's spot price climbed to $92 a tonne, the highest since Feb. 24.

• Copper prices tumbled to 40-month lows as slowing demand fed expectations of surpluses and a large amount of metal was delivered to London Metal Exchange-approved warehouses. Benchmark LME copper closed 2.8% down at $5,144 a tonne.

• Brent crude fell below $30 a barrel to its lowest since 2016. Brent crude futures for May delivery fell 56 cents to $29.49 a barrel, or 1.9%. West Texas Intermediate (WTI) crude futures for April delivery fell 47 cents to $28.23 a barrel, a 1.6% loss. It has slumped more than 50% since Jan. 2.

ECONOMIC OUTLOOK TODAY


• Australia - Feb Westpac–MI Leading Index (last -0.46%). Tracking well below trend. Components weakening further.

• NZ - Q4 current account balance (% of GDP) (last –3.3%). Trade and investment balances both set to improve.

• Europe - Jan trade balance €bn 22.2. External demand to remain a headwind to at least mid-year.

• Europe - Feb CPI %yr (last 1.2%, forecast 1.2%). Inflation nowhere near target before COVID loss of demand.

• US - Feb housing starts (last –3.6%, forecast –4.3). A clear positive for economy in recent months set to come under pressure from demand uncertainty. Feb building permits (last 9.2%, forecast –3.2%).

• FOMC policy decision, Fedspeak - Powell holds post-meeting press conference.


AUD THOUGHTS


AUD hit a 17-year low overnight at 0.5956, surpassing the previous low of 0.6004 set 27/10/2008 and before that a 0.5936 set on 25/03/2003.

The strength of the USD permeated through all major currency pairs as the AUD 0.6000 barriers were finally broken in what seemed an obvious target for markets to continue the selling interest.


Demand for USD in the currency derivative markets spiralled to multi-year highs before slipping back after reports that the Federal Reserve was preparing to take more steps to ease the logjam in a key shorter-term cash market. It remains to be seen if the resumption of a facility called Commercial Paper Funding Facility (CPFF) in the United States will prove more effective than the interest rate cuts and cash injections central banks have deployed. But swap moves abated from the extremes seen earlier in the day. FX implied dollar borrowing costs had been blowing out as banks held on to their dollars and braced for a wave of corporate demand for shorter-dated cash and a possible spike in loan defaults.


Almost all central banks in the world have eased recently, many with new QE programs of their own. But the other policy theme that’s gathering pace is new fiscal spending. In the US, today may see a new Congressional fiscal plan take shape (in addition to the virus bill already being negotiated.) The broad contours program were released yesterday, and call for USD 750bn in federal commitments, or roughly 3¾% of GDP, toward building hospitals, and child-care and medical-cost assistance, etc. But like TARP in 2008, the bill may also have financial guarantees and committed capital for troubled industries (e.g., airlines), and not just spending. What More Can Central Banks Do? While central banks are easing to promote domestic liquidity, a USD shortage is also happening, as is normal in times of global financial stress. The shortage of USDs is seen in the rally in the USD in recent sessions; even the USD/JPY rose off of its lows, suggesting that FX moves are dominated now not just by risk aversion per se, but by the shortage of USDs in funding markets. The USD shortage is also seen in the rising cost of USD funding in cross-border markets. The rise - to the USD’s advantage - in the cross-currency basis of forward USD/FX rates is one refection of this USD funding shortage, but so is the relative rise in the USD Libor-OIS basis relative to the EUR Libor-OIS basis. While CBs can address problems of domestic currency demand, addressing USD shortages in non-US markets requires that CBs have large USD reserves or can tap USD funding themselves. That’s easier, say, if there are large pools of USD deposits onshore. Alternatively, most EM central banks have large int’l reserves, but even those may be stressed in times like these. So the next step for CBs is to alleviate funding stresses, with cross-border USD liquidity. G-5 CBs already enhanced their swap lines with the Fed as on Sunday. But the Fed should soon re-activate new USD swap lines with EM central banks, incl. Brazil, and Mexico – as it did in 2008 before ending them in 2010 (here). The Bottom Line is that there are still unaddressed areas of policymaking, including monetary-financed fiscal spending and cross-border liquidity swaps. Of course, another policy ‘big bang’ could come with tariff relief. From a technocrat’s perspective, the goals of policy, in view of the constraints set up by the coronavirus crisis, are (1) to avoid financial stress today, keeping the crisis from getting worse with a wave of bankruptcies, and (2) ensuring that the post-crisis economy is seen as so strong that it shapes financial decisions and asset prices today, thus softening the crisis today.

For the AUD, unchartered territory as we progress forward from here. Heavy selling interest remains – technical picture provides a battered and bruised AUD, calling out for a life line, anywhere!


TECHNICAL OUTLOOK


AUD longs struggle to see any upside despite Fed's newest move.

AUD fall extends as early equity gains fade, bond yields rally - 0.6000 barrier breaks, stops tripped, fall extends below 0.5960.

Small bounce back near 0.600 after Fed adds new policy - USD buying returns though, AUD nears the day's low late in the session.

Supports now at overnight low 0.5956, RSI’s have been aggressively oversold and look for some relief buying.




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