4th March 2020 - Fed surprises with 50bp cut - USD pressured lower



Good morning


OVERNIGHT DATA AND HEADLINES


• U.S. cuts rates over coronavirus economic impact as more countries report illnesses - As the new coronavirus spreads in South Korea, Europe and the United States, the U.S. Federal Reserve cut interest rates on Tuesday in an emergency move to try to prevent a global recession with the virus taking a heavy toll on air travel, tourism and other industries. In a unanimous decision, the Fed said it was cutting rates by a half percentage point to a target range of 1.00% to 1.25%. U.S. President Donald Trump said a half point cut was not enough. Finance ministers from the G7 group of rich countries were ready to take action, including fiscal measures where appropriate, Japanese Finance Minister Taro Aso said. Central banks would continue to support price stability and economic growth.

• Euro zone consumer prices rose more slowly in February than in January, as expected, as the spread of the coronavirus around the world depressed oil prices. Prices rose 1.2% year-on-year after a 1.4% rise in the previous month. The reading was in line with a Reuters poll of analysts. The decline was mainly due to a 0.3% drop in energy prices. Without it, and excluding volatile unprocessed food prices, inflation accelerated to 1.4% year-on-year from 1.3% in January.

• Global equity markets seesawed in volatile trade and gold prices rose more than 2% after the Federal Reserve cut interest rates in an emergency move to shield the U.S. economy from the impact of the coronavirus.

• Wall Street tumbled in a volatile session after the Federal Reserve's surprise half percentage-point cut in interest rates raised alarm over the magnitude of the coronavirus impact on the economy. Dow Jones down 2.85% at 25,965, S&P 500 down 2.60% at 3,009, Nasdaq down 2.81% at 8,628.

CURRENCIES


• The USD fell across the board after the U.S. Federal Reserve cut interest rates – DXY index was 0.21% lower at 97.15.

• China's yuan strengthened after the Fed’s interest rate announcement – CNY falling from 6.9777 down towards 6.9579.

• EUR saw a less aggressive bounce than previous sessions, improving from 1.1120 up towards 1.1180 and held steady.

• GBP saw a grind higher from 1.2760 up towards 1.2845 but fell back towards 1.2810.

• USDJPY strengthened towards 106.93 from 108.50, paring small gains late in NY.

• AUD bounced higher after both the RBA cut yesterday and Fed’s move overnight – AUD saw a 0.6645 high but retraced back towards 0.6600 late in the NY session.

• NZD followed higher, breaking through 0.6300 to a 0.6325 high but fell back under the level to settle at 0.6280.

• AUDNZD reached the 1.0500 handle, making solid gains from 1.0410 yesterday.

• AUDEUR bounced on a stronger AUD, jumping up from 0.5840 lows towards 0.5940 highs. Settled back at 0.5905.


TREASURIES


• U.S. benchmark 10-year Treasury yields fell below 1% for the first time ever after the Federal Reserve slashed interest rates by 50 basis points in an emergency move to ease the economic fallout from the fast-spreading coronavirus.

• U.S. 10-year yields fell to a record 0.90% low from 1.17% highs yesterday but recovered somewhat to close at 1.02%.

• U.S. 2-year yields fell from 0.88% before the Fed cut down towards 0.628% lows, rebounding back up to 0.71%.

• Euro zone government bond yields fell after the U.S. Federal Reserve cut rates in an emergency move, and attention turned to whether the ECB would follow suit after it indicated a readiness to protect the economy from the coronavirus outbreak. German 10-year government bond yields were down 1 basis point on the day at -0.62%. They declined from highs at -0.57% hit earlier, but remained well off six-month lows at -0.67% reached in the previous session.


COMMODITIES


• Gold surged over 3% after the U.S. central bank cut interest - Spot gold climbed 3.4% to $1,640.77 an ounce from $1,601 an ounce, its biggest one-day percentage rise since June 2016.

• China's iron ore futures extended gains on hopes of further government support for the coronavirus-hit domestic economy, and after Brazil reported a 17.5% month-on-month drop in February exports of the steelmaking raw material. Iron ore rebounded on Monday from a four-session sell-off as grim factory data reinforced expectations of more stimulus measures from Beijing, and as stockpiles at the country's ports fell further. Benchmark 62% iron ore rebounded from a three-week low to settle at $88 a tonne.

• Copper tripped into the red, retreating from its highest level in more than a week, despite news of an emergency cut in U.S. interest rates and hopes about more stimulus spending. Three-month LME copper was down 0.6% at $5,665 a tonne after touching $5,780.50, its highest since Feb. 21.

• Oil prices rose but remained below session highs reached - Brent crude was up $1.50 a barrel (2.7%) at $53.40. U.S. West Texas Intermediate crude was up $1.49 a barrel, or 3.1%, at $48.23 a barrel.

EVENT RISK TODAY


• Australia - Q4 GDP (last 0.4%, forecast 0.4%). Modest growth, weak wages & construction contracting. Q4 GDP, %yr (last 1.7%, forecast 2.0%). Annual growth up (base effects) but still well below trend.

• NZ – Global Dairy Trade auction (last -2.9%). Milk futures point to a further drop.

• NZ - Jan building consents. Monthly issuance levels have been flattening off. Feb ANZ commodity prices –0.9% – –4.0% Dairy, meat, log prices down on COVID-19 disruptions.

• China - Feb Caixin China PMI services (last 51.8. forecast 48.0). Service sector hard hit by COVID-19.

• Europe - Feb Markit services PMI (last 52.8). Contagion in Europe to hit service economy Feb/Mar. European January Retail Sales (last –1.6%, forecast 0.5%). Pre-dates COVID-19 shock.

• US Fedspeak – Fed's Evans Takes Part in Moderated Q&A.

• Feb ADP employment change (last 291k, forecast 170k). Employment growth to soften in 2020.

• Feb ISM non–manufacturing (last 55.5, forecast 55.5). Markit measure highlighted US not immune from COVID-19.

• Federal Reserve's Beige book – Conditions across the 12 Federal Reserve districts.

• Canada - Bank of Canada policy decision (last 1.75%, forecast 1.75%). On hold as it assesses impact of global uncertainty.


AUD THOUGHTS


AUD bounced to fresh 2 week highs up towards 0.6645 as the Fed's 50bps surprise cut overnight negated any bearish effects the RBA's cut had vs. the USD, putting in jeopardy the AUD bear trend from the Dec. 31 high.

The Fed's willingness to consider acting again has weighed on U.S. rates broadly, driving the 10-year yield to an all-time low of 0.90% on the probability of additional Fed cuts high.

The somewhat surprising Fed move came after a teleconference between G7 finance ministers and central bank heads earlier in the session that produced broad consensus to take whatever steps each country feels appropriate to reduce the risks from the global coronavirus.

The hope is central banks with room to cut rates, a much smaller group these days, will do so or will attempt to steer liquidity to sectors most hurt by the virus, and that governments will pitch in with targeted fiscal stimulus.


Looking Ahead for today we have Australian real GDP out at 11.30am with forecasts around 0.4% for the month and year/year 1.7%.

Tonight will focus on the U.S. with the ADP payrolls number, non-manufacturing, Fed beige book and Bank of Canada interest rate announcement. Expectations were for a no change however the global efforts by central banks to restore law and order may see BOC follow suite.


For the AUD, the USD remains on the defensive after the Fed's inter-meeting rate cut and may continue to be pressured lower which will force AUD higher. Looking for another re- test of the critical 0.6645/55 resistance level.


TECHNICAL OUTLOOK


Australian-U.S. yield spreads show the greenback's yield advantage is eroding.

AUD shorts scramble to cover after Fed moves. Gains for stocks, commodities, bond yields buoy AUD early NY

AUD spikes above 0.6645 but rally stalls short of 21-DMA and Dec 31 trend line resistance.

AUD nears 0.6600 late as stocks & commodities drop, AUD/JPY turns negative

AUD bear trend threatened but longs likely need more help.

Daily and monthly RSIs imply that upside momentum is solid.



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