25th February 2020 - Coronavirus fears push Australian dollar to 11-year low

Overnight Data & Headlines

The coronavirus-led declines in equity markets accelerated in Asia, Europe and the US, the S&P500 currently down 3.2%. Bond yields also fell, while currencies were less affected. Markets appeared to be concerned at the acceleration in virus cases outside China, notably South Korea and Italy, and the potential for a longer disruption to global activity than previously expected

Currency Markets

- The US dollar index is currently down 0.1% on the day.

- EUR bounced off 1.0805 to 1.0864.

- USD/JPY fell from 111.66 to 110.47, the yen reasserting its defensive attributes.

- AUD bounced off 0.6587 (close to its decade low) to 0.6619.

- NZD similarly bounced off 0.6304 to 0.6352.

- AUD/NZD fell from 1.0460 to 1.0411.

Interest Rates

2yr treasury yields fell from 1.31% to 1.25% - the lowest since 2017, 10yr yields from 1.43% to 1.36% - the lowest since 2016.

Commodity Markets

Brent crude oil fell 5.3% to $55, copper fell 1.1%, iron ore fell 0.7%, and gold rose 1.8% to the highest level since 2013

Event Risk Today

In the US, the market anticipates that modest gains in house prices will continue in December, the S&P/CS 20-city home price index rising 0.4%. Conference Board Consumer Confidence is also expected to remain robust, holding at an above-average level in February.

The Federal Reserve’s Clarida will speak on the economy (7:15 AEDT).

Market View

AUD/USD trades at its lowest level since 2009 as the coronavirus casts a weakening outlook for the Asia/Pacific region, and the exchange rate may continue to exhibit a bearish behavior as the Relative Strength Index (RSI) slips into oversold territory.

AUD/USD extends the decline from earlier this month as the Reserve Bank of Australia (RBA) warns that the coronavirus is “a new source of uncertainty for the global economy,” with the meeting minutes fueling bets for lower interest rates as “members reviewed the case for a further reduction in the cash rate.”

The Australian Dollar may face a more bearish fate ahead of the next RBA meeting on March 3 as the central bank shows a greater willingness to insulate the economy, and Governor Philip Lowe and Co. may re-establish its rate easing cycle over the coming months as “economic growth was expected to be weaker in the near term than had been forecast three months earlier.” In turn the RBA may continue to endorse a dovish forward guidance as the board remains prepared to ease monetary policy further if needed,” and AUD/USD may continue to give back the correction from the 2008 low (0.6006) as the Federal Reserve tames speculation for lower US interest rates.

In fact, Fed Fund futures show a greater than 80% probability the Federal Open Market Committee (FOMC) will keep the benchmark interest rate in its current threshold of 1.50% to 1.75% on March 18, and speculation for a wider interest rate disparity between Australia and the US may keep AUD/USD under pressure as China, Australia’s largest trading partner, struggles to contain the coronavirus.

At the same time, recent developments in the Relative Strength Index (RSI) casts a bearish outlook for AUD/USD as the oscillator snaps the bullish formation from earlier this month and slips into oversold territory.

- Keep in mind, the monthly opening range has been a key dynamic for AUD/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 2, with monthly high for November occurring during the first full week of the month, while the low for December materialized on the first day of the month.

- The opening range for 2020 showed a similar scenario as AUD/USD marked the high of the month on January 2, and recent price action keeps the downside on the radar as the exchange rate clears the 2019 low (0.6671).

- As a result, AUD/USD may continue to give back the correction from the 2008 low (0.6006), with the break/close below the Fibonacci overlap around 0.6620 (100% expansion) to 0.6650 (61.8% expansion) opening up the 0.6510 (161.8% expansion) to 0.6540 (78.6% expansion) region as the exchange rate continues to track the downward trend from earlier this year.

- Will keep a close eye on the RSI as its sits in oversold territory, and the bearish momentum may gather pace over the coming days as long as the oscillator holds below 30.

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