- Markets gear up for another bout of risk-off, USD/JPY targets 108.50.
- China Coronavirus contagion risks to impact AUD/NZD to the downside, depending on economic data.
- BoE on hold, but GBP upside to be capped on Brexit.
- USD/CAD downside risks on a technical basis in focus.
There’s so much we don’t know about Coronavirus, which increases the level of concern from public health officials, you & I as well as the markets and we can expect a risk-off start to the week ahead of a pretty major schedule.
Depending on where you are in the world, its probably that time of year, flu season, which doesn’t help the situation on an international scale as immune systems are already fragile and panic will be amplified at the sound of a sneeze, a headache or a cough. However, the latest figures, depending on where you look or what authorities to trust, are a little frighting.
The New York Times calls it a “rapidly expanding outbreak” which has “fueled fears of a global pandemic.” Also, another factor which is worrying is that there has been an uptick of these viruses over recent years, including SARS, MERs, and now this, pointing to outbreaks becoming more frequent. In a global world, the contagion factor is at an extreme height. Or, could it be that we’re just better at detecting and tracking the spread of viruses? In any case, it is certainly no time to be travelling to south-east Asia.
Eyes on World Health Organisation headquarters
With 56 deaths reported in China, several cities under quarantine and more than 1,975 confirmed cases, including in Hong Kong, Thailand and Malaysia, the smoke signals emanating from World Health Organisation headquarters in Geneva will be one to watch for the week ahead. It really depends on how much attention will be taken away from facts in the economic data and the courses of central banks. The US bond market will be a good place to start monitoring of clues as to just how serious nervous investors are turning.
USD/JPY & the US Bond factor, 108.50 in focus
For the week ahead, we will have the Federal Reserve as one of the main highlights. The current consensus surrounding the Fed is one of a neutral stance with much of the hard work gone in last year. Expect a message of stability in monetary policy for now which is unlikely to materially impact USD. It could be more of a story in the bond market to drive USD/JPY though. The pair wasn’t sitting pretty in the 110 handle and subsequent to a tighter spread between US and Japanese 10 years, along with a risk-off turn of events, the pair finally gave up the ghost to the well-perceived support level of 109.20.
There are little expectations of a meaningful upside correction in the immediate future, not with the fears of a global pandemic and various geopolitical risks simmering away in the background. The risks of a slower recovery in global growth are coming back to the fore and the US bond markets are telling us that, progressively suggesting more risk-averse positioning will be on the cards along with a drop to 108.50 where support meets the 200-Day moving average.
Aneteopodeans in focus, AUD/NZD vulnerable
One currency that has been a major focus has been AUD. Considering the nation’s close proximity and resilience on the Chinese economy, we can expect more pressures on AUD, despite the uptick in the labour market data and a lower unemployment rate. We will have the Aussie Conser Price Index following a week where markets slashed their expectations for 1Q monetary easing. In just one week the pricing for the 4th Feb meeting moved from -14bp to -4 bp. If CPI comes in short, or even inline with expectations, well below the RBA’s target bracket of between 2-3%, the upbeat tone in the labour report (which needs another consideration by markets when we start to factor in the amount of part-time hiring going on here) will likely dampen the positive tone surrounding the currency. On the other hand, an upside surprise in the data will surely fuel an upside extension in the currency, targeting 0.6880 and closes above the 200-day moving average fro scope to 0.6920, provided the contagion risks of Coronavirus are contained. In any case, expect choppy markets in the Asian-Pacific.
As for its sister currency, NZD, the same risk consensus will apply. The bulls are likely to be more nervous than usual considering the Coronavirus, while otherwise, the fundamental economic backdrop has been improving for them. CPI was confirming that the Reserve Bank’s policy rate is appropriate, with the 1.9% Q4 result creeping towards the central banks mid-point target. Traders will be looking for similar positives in this week’s trade numbers, expecting a positive surplus. AUD/NZD downside could be shaping up to be a fresh surge below the 1.03 handle. A correction back to 1.0380s may, however, be in order first depending on the data this week and the RBA next week.
USD/CAD to correct and potentially collapse
Another focus, from a technical standpoint at least, is how far USD/CAD has rallied subsequently to a dovish shift at the Bank of Canada. A downside correction could be in order. More on that in this weeks Chart of the Day, here. (More to come…)
UK PMIs & BoE, Brexit and a recipe for a fade on rallies
The Bank of England is going to be a huge event, as the incumbent governor, Mar Carney’s, last. As reported in last week’s article, GBP/USD: All eyes on the BoE as bulls start to stall, GBP/USD now hangs in the balance of the Brexit date, 31st, and the BoE meeting, 30th. A major focus ahead of the interest rate decisions will be the PMIs on Friday. The pricing in a 50% probability of a cut but if the PMIs impress, we can see the BoE on hold, in anticipation of a new incoming governor, Andrew Bailey, and an uncertain economic reaction to Brexit and subsequent negotiations. Should the BoE be on hold, it will not necessarily mean blue skies for the pound due to the Brexit uncertainty nor knowing what Bailey’s bias is with respct to montary ploicy and Brexit, so a fade on rallies could be in order.
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