Analytics, News, and Forecasts for CFD Markets: currency news — 11-03-2020.

FXStreet reports that economists at Rabobank now expect the ECB to show more forceful/specific action at tomorrow’s Governing Council meeting. In addition to a rate cut, liquidity measures are expected as well.

“The situation in Italy has deteriorated so rapidly that we have further adjusted our baseline forecast for Eurozone growth now, taking it down to -0.1% for 2020 from +0.2% previously. This is entirely due to Italy.”

“A 10bp rate cut still stands, as it would be a signal that the ECB is willing to do everything within its mandate.” 

“Whilst we think that a 20bp cut would smack of panic, refraining from a cut altogether would surprise the market negatively.”

“We expect specific liquidity measures to be announced now already while an expansion of the APP is no longer unthinkable, but it’s not our base case for tomorrow.”

FXStreet reports that in the opinion of analysts at TD Securities, today's UK budget proposal contains several positive elements for GBP and it may take some time for this to be felt in FX markets, but the headline impact is there.

“The pound has been fairly slow to react to today's budget, but we think the outlook has brightened. That is particularly the case when we take today's comprehensive policy package in its entirety.” 

“While GBP/USD will certainly remain heavily influenced by day-to-day developments, sterling may begin to benefit a bit more in a relative sense.”

“EUR/GBP is to retrace some of its recent gains. There, we think the cross could gravitate back toward the 0.86 mark. That level, in our view, represents a better near-term equilibrium on a risk-adjusted basis.”

• Vote expected Thursday

FXStreet notes that data released on Wednesday showed the Consumer Price Index rose 0.1% in February against expectations of a flat reading. Analysts at Wells Fargo point out the strength in consumer price inflation won’t last. They see, both headline and core inflation, set to slow, giving the Federal Reserve more reason to ease further.

“Consumer price inflation was a bit stronger than expected in February, increasing 0.1%. As expected, lower energy costs were a drag, but the headline was boosted by the largest increase in grocery prices in more than five years.”

“The collapse in oil prices stands to send inflation sharply lower in the coming months. We expect CPI to increase just 1.4% yr/yr in Q2. The drop is not expected to bleed over into core inflation, but the core is nonetheless likely to slow as prices for hotels and airfare decline amid a pullback in travel.”

“The disinflation ahead will give the Fed more reason to ease.”

FXStreet reports that analysts at TD Securities note that despite holding strong yesterday, crude oil remains in the dumps amid a double-edged supply and demand shock, while some optimism comes from OPEC and Russia.

“Headlines regarding the price war will keep volatility extremely elevated, while increased social distancing and diminished travel globally will continue to weigh on the demand front.” 

“News that Novak and Russia are keeping in contact with OPEC, and will attend the March committee meeting, is adding a sense of optimism that OPEC+ will eventually return to new output cuts in the future, but the Saudi supertanker loaded with crude is the more immediate worry for markets as inventories are set to swell.”

The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories climbed by 7.664 million barrels in the week ended March 6. Economists had forecast an advance of 2.266 million barrels.

At the same time, gasoline stocks declined by 5.048 million barrels, while analysts had expected a drop of 2.482 million barrels. Distillate stocks fell by 6.404 million barrels, while analysts had forecast a decrease of 1.911 million barrels.

Meanwhile, oil production in the U.S. reduced by 100,000 barrels a day to 13.0000 million barrels a day.

U.S. crude oil imports averaged 6.4 million barrels per day last week, up by 174,000 thousand barrels per day from the previous week.

• Says impact of coronavirus issue was initially underestimated internationally
• Treasury is working on economic options to back affected people and companies
• Treasury is working with Congress, IMF, World Bank, regulators on coronavirus relief issues
• Met with U.S. Secretary of State Pompeo this morning on coronavirus
• First concern on coronavirus is protecting U.S. economy
• Small-, medium-size businesses need help for costs as employees self-quarantine
• Looking at big increase in lending to small companies
• Hundreds of billions of dollars can be put into economy with deferred tax payments
• May provide over $200 billion of liquidity by tax payment delays

FXStreet reports that economists at TD Securities note the February CPI report was a bit stronger than expected, but the report can probably be dismissed as old news given potential downward pressure on inflation from the COVID-19 crisis and the recent plunge in oil prices.

“The total CPI rose 0.1% m/m in February, above the 0.0% consensus; the TD Securities forecast was 0.1%. The core index rose 0.2%, which matched consensus (and the TD forecast), but the rise was a fairly solid 0.22% before rounding (consensus: 0.16%, TD: 0.19%).”

“The 12-month change in the overall CPI slipped to 2.3% in February from 2.5% in January (consensus: 2.2%, TD: 2.3%). That 12-month change is likely to drop below 2% in March due to the latest plunge in energy prices. The 12-month change in the core index rose to 2.4% from 2.3%.”

“More recent developments suggest slowing ahead. That is certainly true at the headline level due to the collapse in oil prices, but weakening in the economy could lead to some slowing at the core level as well.”

• Says fund will help buy surgical masks and face shields, boost vaccine research
• Will make it easier for workers to claim employment insurance, help firms with sick employees
• Says government is prepared to take further measures to combat the coronavirus outbreak if needed

• Sees 2021 GDP growth of 1.8% versus 1.6% forecast previously
• Says UK budget will meet fiscal rules with room to spare
• Sees 2021/22 deficit at 2.8% of GDP
• 2022/23 deficit of 2.5% of GDP

• Will make statutory sick pay available to all advised to self-isolate
• Will provide separate GBP500-million hardship fund to local authorities
• For businesses with under 250 staff, will refund cost of up to 14 days of staff sick pay due to coronavirus
• Will provide temporary loans to businesses
• Government will guarantee 80% of bank loans of up to 1.2 million to small businesses
• Will scrap business rates property tax altogether for some smaller firms
• Self-employed people will get sick benefits from day one
• Business rates abolished for small businesses 'entirely' for a year
• Total fiscal stimulus of GBP30 billion
• There will be further GBP18 billion of fiscal loosening this year
• Total coronavirus measures will cost GBP7 billion

The Labor Department announced on Wednesday the U.S. consumer price index (CPI) rose 0.1 percent m-o-m in February, the same pace as in the previous month.

Over the last 12 months, the CPI climbed 2.3 percent y-o-y last month, following an unrevised 2.5 percent m-o-m jump in the 12 months through January.

Economists had forecast the CPI to be flat 0.2 percent m-o-m and to increase 2.2 percent y-o-y in the 12-month period.

According to the report, gains in the indexes for shelter (+0.3 percent m-o-m) and for food (+0.4 percent m-o-m) were the main causes of the February increase in the seasonally adjusted all-items index, more than offsetting a drop in the energy index (-2.0 percent m-o-m).

Meanwhile, the core CPI excluding volatile food and fuel costs rose 0.2 percent m-o-m in February, the same pace as in the previous month.

In the 12 months through February, the core CPI surged 2.4 percent, following a 2.3 percent advance in the 12 months ending January.

Economists had forecast the core CPI to rise 0.2 percent m-o-m and 2.3 percent y-o-y last month.

FXStreet reports that analysts at TD Securities think we have neared the point where the USD may see more consolidation against the reserve currency rather than underperformance in recent days.  

“Conditions are highly fluid but our positioning measures suggest that markets are closer to neutral the USD after a notable long base observed since 2018.”

“We think markets may begin to reward currencies that deliver bold fiscal support. Here, we think the US will eventually be positioned to meet this condition once the contours of a fiscal package emerge.” 

“We think EUR/USD is inclined to trade towards 1.10 over the tactical horizon before markets reassess another look higher.”

“We are more cautious on the JPY as it has invariably become a dominant risk proxy, and we do not think that risk assets are out of the woods yet.” 

“We still think that yen intervention is a more plausible risk should 100 fail to hold in the immediate future in USD/JPY as the Trump Administration has been politically weakened due to its handling of the crisis.”

GBP traded little changed against its major rivals in the European session on Wednesday, erasing its earlier declines following a surprise Bank of England (BoE) rate cut in response to the coronavirus.

The BoE lowered its key lending rate by 50 basis points to 0.25%, the first unscheduled move since the global financial crisis of 2008, to contain the economic fallout from the coronavirus outbreak.

In its emergency statement, the BoE also noted that "although the magnitude of the economic shock from COVID-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months".

As well as the rate cut, the UK's central bank said it would allow banks to release a special store of capital, so they could continue lending to households and businesses during the coronavirus epidemic.

Market partiсipants are also awaiting the UK's government to present its annual budget later today in Parliament (due shortly after 12:30 GMT). It is expected that the budget could include some coronavirus-focusing spending plans.

FXStreet notes that conditions on the European Continent have taken a sharp turn for the worse in recent weeks. Therefore, action from the European Central Bank will be needed, in the opinion of analysts at Westpac Institutional Bank.

“It is now our expectation that the Euro Area economy will fall into recession in the first half of 2020.” 

“External demand contracted through 2019 and now faces an additional headwind from supply disruptions and weaker growth.” 

“Domestic demand is set to weaken materially, principally as a result of consumption, investment and services exports.”

“The ECB will be forced to act but has limited scope to aid growth.”

• We will do whatever is necessary in facing the current crisis
• We are looking carefully at European Commission's proposals to counter virus impact
• Does not think that closing borders is an adequate measure to counter the spread of coronavirus

The Mortgage Bankers Association (MBA) reported on Wednesday the mortgage application volume in the U.S. surged 55.4 percent in the week ended March 6, following a 15.1 percent climb in the previous week.

According to the report, refinance applications jumped 78.6 percent (the highest level of refinancing since April 2009), while applications to purchase a home increased 5.6 percent.

Meanwhile, the average fixed 30-year mortgage rate dropped to 3.47 percent from 3.57 percent.

"Taking into the account the current economic situation and how much rates have fallen, MBA is nearly doubling its 2020 refinance originations forecast to $1.2 trillion, a 37% increase from 2019 and the strongest refinance volume since 2012," noted Joel Kan, an MBA economist. "As lenders handle the wave in applications and manage capacity, mortgage rates will likely stabilize but remain low for now. This, in turn, will support borrowers looking to refinance or purchase a home this spring."

FXStreet reports that the statement that accompanied today's 50 bps rate cut the Bank confirmed that it was working closely with HM Treasury in order to present a coordinated front. The reassurance that the UK authorities have prepared a comprehensive package to counter the economic impact of the coronavirus should also provide support for the pound, as economists at Rabobank note.

"The initial market reaction to the Bank's policy announcement this morning is that UK policy makers are handling the crisis well. At 12:30 GMT the baton will be handed over to an inexperienced Chancellor and a new government to outline what the fiscal responses will be."

"If the Chancellor can maintain the momentum started by the BoE this morning GBP is likely be able to hold its own vs. the USD and the EUR."

"Over the next couple of days, how the market judges the fiscal responses of the US government to the crisis and the monetary policy of the ECB will be instrumental in determining the near-term outlook for EUR/GBP and GBP/USD."

"While we see the potential for GBP to outperform the EUR in the coming weeks, upside potential in GBP/USD could be sticky given the role of the greenback as a store of value."

FXStreet reports that it looked like turnaround-Tuesday for EUR/USD as the cross dipped below 1.13, but the cross drifted higher again overnight as risk sentiment soured yet again. Economists at Danske Bank analyze the pair which is trading at 1.131.

"In general, the cross remains correlated with US equity markets (positive), oil prices (negative) and thus OPEC/Russia speculations, and should be very sensitive to news on US and European fiscal loosening."

"Markets arguably by now look quite well-stretched into a negative view, as the situation in Europe and the US continues to deteriorate, while virus and economic news out of Asia is improving."

"Tactically, we stick to the view that upticks in EUR/USD should be faded near term, while keeping a firm eye on the risk of a US recession: in this downside risk scenario, strategically upside in the cross would likely be brewing."

FXStreet reports that few eurozone countries have announced significant extra fiscal spending to compensate for some of the economic impact of the coronavirus. Germany and Italy have laid out some measures but are going to fall short, in the opinion of economist at ABN Amro.

"The German government has announced that it will spend EUR 12.4bn (equal to 0.4% of GDP) extra on government investment during the years 2021-2024, which is limited considering the potential short-term economic damage from the spreading of the coronavirus.

"In any case, the German government has ample room for fiscal stimulus. Reducing the structural balance to zero would free some EUR 18bn and reducing it to the maximum allowed deficit of -0.5% would double this amount."

"Italy's government has announced fiscal measures worth EUR 7.5bn (0.4% GDP) and plans to boost this amount to EUR10bn (0.6% GDP). The measures include extra spending on health and emergency services."

"In addition, financial assistance is planned for the worst affected households, firms and sectors. It emerged today that the government was negotiating with banks to provide breaks from debt payments including mortgages across the country."

• Government will announce series of measures in budget to help households, businesses

• Economic shock will hurt both supply and demand in the UK

• BOE coordinating with Treasury to ensure measures have maximum impact

• BOE will take all necessary further steps to help UK economy

• Today's move by the BOE is a 'big, big package'

• We can cut rates below 0.25% to close to but above 0%

• QE and assets purchases are very much part of BOE toolkit

• Still very early to judge scale of virus impact on UK economy

• We have anecdotal evidence of sharp fall in UK trading conditions

• The coronavirus situation will pass, but how long remains to be seen

According to the report from Office for National Statistics, GDP remained level in the three months to January 2020, following no growth in Quarter 4 (Oct to Dec) 2019. A notable fall in production in the three months to January 2020 was offset by positive contributions from services and construction. The production sector fell by 1.0% in the three months to January 2020, driven by widespread falls in the manufacturing industry. Elsewhere in production, mining and quarrying performed poorly in the three months to January, falling by 2.9%. Monthly growth for production was negative 0.1% in January 2020, with energy production acting as the main drag on growth.

Commenting on today's GDP figures for the three months to January, Head of GDP Rob Kent-Smith said: "The economy continued to show no growth overall in the latest three months. Growth in construction, driven by housebuilding, offset yet another decline in manufacturing, particularly the drinks, cars and machinery industries. The dominant services sector also showed no growth in the latest three months with falls in retail and telecoms balanced by strength in rentals, employment and education."

Office for National Statistics also reported that gross domestic product (GDP) showed no growth in January 2020, with growth in services offset by falls in production and construction.

FXStreet reports that the Bank of England (BoE) announced a number of measures this morning intended to bolster policies in this afternoon's budget. The BoE announced a rate cut, a reduction in the CCyB and a new Term Funding Scheme for SMEs (TFSME), economist at TD Securities report.

"The BoE's three policy committees (MPC, FPC, and PRC) issued a joint statement today, easing policy on a number of fronts. As we broadly expected, the BoE cut Bank Rate by 50bps to 0.25%, slashed the countercyclical capital buffer (CCyB) to 0%, and introduced a new Term Funding Scheme for Small and Medium-Size Enterprises (TFSME)."

"We forecast no further easing by the BoE at this stage. With Bank Rate at 0.25%, any cut to the effective lower bound of 0.10% would be purely symbolic, and would likely accompany a broader QE package, which we do not expect at this time."

"We have not changed our view of the UK/EU negotiations, and expect the eventual deal to disappoint. For that reason, we do not expect the MPC to be in a position to raise Bank Rate this year or next."

CNBC reports that the oil price rout this week may be a chance for the industry to restructure and could ultimately be a positive for the market, a strategist said.

The oil markets tanked Monday, plunging over 20% following a disagreement on production cuts between OPEC and its allies. Russia declined to lower output last week, and Saudi Arabia announced Saturday that it will offer discounts to its official selling prices next month. The kingdom is also reportedly planning to raise production.

Despite the depressed prices, the response from Saudi Arabia and Russia is "long-term rational" for them, said Damien Courvalin, head of energy research at Goldman Sachs.

Low-cost producers like Saudi Arabia have been supporting prices for years through supply cuts - which in turn boosted higher-cost producers like shale companies in the U.S. and enabled even greater output from the shale producers.

The latest market developments will allow for the restructuring and rebalancing of supply to take place, Courvalin told CNBC, who expects oil prices to stay low - around $30 a barrel for Brent crude - for two quarters.

"This is more about a restructuring of supply - less activity by high-cost producers for low-cost producers to roll," said Courvalin.

And there will be a point at which there will be a "material change" in the landscape where overall production would fall due to low prices. A higher price for crude will then emerge as supply falls.

FXStreet reports that the crude oil price rebounded, recouping some of the losses of Monday, following the breakdown of the OPEC+ alliance. The rebound is not expected to last long, with Saudi Arabia and Russia boasting about how much they can boost output by as the battle for market share begins, strategists at ANZ Research apprise.

"Investors were somewhat buoyed by the news that US tax cuts may shield the commodity markets from loss of demand."

"The rally remains on shaky ground, Saudi Arabia and Russia setting the scene for a lengthy battle for market share in the oil market."

"Saudi Arabia warned that it would boost output by 25%. The OPEC producer said it can reach 12.3mb/d next month. This was quickly followed by Russia, who said it can increase production by 500kb/d to a record 11.8mb/d."

"The US shale industry warned it might see output cuts as a result of the lower prices."

FXStreet reports that the government presents its first full budget since late-2018, and economists at TD Securities expect the chancellor to stick to fiscal rules. Monthly GDP is also to be released earlier in the morning.

"We expect Chancellor Sunak to stick to the fiscal rules laid out by his predecessor, and to be relatively vague on large infrastructure spending, though he may outline the total envelope available."

"Focus will be on 'leveling up' the country and on COVID-19 response, where we could see around £1bn allocated to helping firms and households deal with the outbreak."

"Monthly GDP is released earlier in the day for the month of January. We look for optimism following the election result to be reflected in activity data, with a gain of 0.2% m/m for monthly GDP (mkt: 0.2%), and manufacturing 0.1% m/m higher (mkt: 0.3%)."

eFXdata reports that Citi Research discusses its base case for the Fed policy trajectory over the coming months.

"Citi analysts now expect Fed rates to fall to zero lower bound (0 - 0.25%). In their base case, Fed cuts 50bp cut at the March 18th FOMC (to 50-75bp) followed by a 25bp cut at the April 29th FOMC (to 25-50bp) and another 25bp cut (to the 0-25bp ZLB) either intermeeting or at the June FOMC," Citi notes.

"Citi analysts though do not expect a US recession and expect a substantial reacceleration in global and domestic activity in H2. This makes hikes possible in 2021," Citi adds.

The US dollar fell against the yen after the largest strengthening against the Japanese currency in almost 7 years at the end of the previous session.

Demand for safe haven assets is rising again amid a continuing increase in cases of COVID-19 coronavirus worldwide, and a lack of specifics about U.S. plans to support the economy.

On the eve of the dollar soared in price by 3.2% against the yen - the highest rate since 2013- thanks to the promises of us President Donald Trump to pass through Congress a number of measures that will limit the negative effects of the coronavirus epidemic on the American economy.

On Tuesday, Trump met with Republican senators to discuss his initiative to lower the payroll tax, as well as introducing targeted measures to support tourism along with other possible steps to boost economic growth. Trump would like the payroll tax holiday to be in effect until the end of the country's presidential election in November this year.

At the end of the meeting, Trump acknowledged that there is no consensus on how to act, but expressed confidence that the US economy will cope with the current difficulties.

The focus of traders ' attention is the meeting of the European Central Bank (ECB), which will be held on Thursday. Italian Prime Minister Giuseppe Conte called on the ECB to support the economy, a source in the EU leadership said. Experts, however, do not expect a change in the ECB's key interest rates on March 12.

CNBC reports that as governments around the world scramble to contain the spread of the coronavirus, the situation in China may have "passed its worst," according to the regional chief investment officer of UBS Global Wealth Management's Kelvin Tay.

There is a "semblance that production capability is actually now coming back to the Chinese economy," Tay said, citing a decline in the number of reported infections in the country.

That will likely make the Chinese economy "the first in the world" to get back on track, he told CNBC.

Tay's comments came ahead of Chinese President Xi Jinping's visit to Wuhan on Tuesday, the city where the disease was first reported and the worst hit in the country. It was his first visit since the outbreak in December.

Asked about the danger of China seeing a resurgence in cases due to the diseases being imported from overseas, Tay from UBS said: "It's actually easier for the Chinese to control that" as they can control the airports and ports.

Commenting on the potential economic impact of the virus' spread elsewhere, Tay said 60% of China's economy is "basically domestic consumption," adding that this will likely serve as a "buffer" if production can be brought back up to speed and consumption begins again.

eFXdata reports that Credit Agricole Research discusses its expectations for this week's ECB policy meeting.

"Contrary to the GFC and the Eurozone crisis however, the ECB has a limited role and limited room of manoeuvre in the current crisis. We expect it to take targeted measures with limited scope, only to ensure that monetary conditions remain favourable," CACIB notes.

"In our view, the most important parts will be two 'symbolic' measures: (1) an increase in the issue and issuer share limit, from 33% to 50% (as proof that the ECB can do QE on the scale it wants to) and (2) a refinancing operation with a rate below the deposit rate (as proof that the ECB can do whatever it wants).

We do not think the ECB can afford to avoid a rate cut, but we expect work on, if not implementation of, further measures to preserve the banking system," CACIB adds.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1439 (2660)

$1.1416 (2607)

$1.1398 (3321)

Price at time of writing this review: $1.1353

Support levels (open interest**, contracts):

$1.1244 (407)

$1.1224 (438)

$1.1200 (723)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date April, 3 is 73281 contracts (according to data from March, 10) with the maximum number of contracts with strike price $1,0800 (4361);

GBP/USD

Resistance levels (open interest**, contracts)

$1.3120 (1560)

$1.3087 (1018)

$1.3057 (892)

Price at time of writing this review: $1.2932

Support levels (open interest**, contracts):

$1.2837 (769)

$1.2817 (1364)

$1.2793 (2868)

Comments:

- Overall open interest on the CALL options with the expiration date April, 3 is 17134 contracts, with the maximum number of contracts with strike price $1,3200 (2596);

- Overall open interest on the PUT options with the expiration date April, 3 is 19364 contracts, with the maximum number of contracts with strike price $1,2900 (2868);

- The ratio of PUT/CALL was 1.13 versus 1.15 from the previous trading day according to data from March, 10

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.