CFD Markets News and Forecasts — 10-03-2020

FXStreet reports that the spreading of COVID-19 has forced the yen to appreciate, as is normally the case for the currency in times of crisis. This entails further pressure on an already stressed central bank, as Kiran Sakaria from Handelsbanken notes.

“Inflation figures from Tokyo were weaker than anticipated, further underlining the problem. In addition, consumers’ willingness to buy remains subdued.” 

“The new coronavirus is threatening the summer Olympics in Tokyo. We see no relief on the horizon for Japan, and we expect the yen to remain strong for the near future.”

“In the slightly longer term, however, we believe more measures will be taken, which may result in a weaker currency.”

FXStreet reports that according to economists at TD Securities, the price war between Saudi Arabia and Russia is going to put more pressure on EMFX (and NOK and CAD), while likely also adding to the case of more Fed easing this month. 

“The economic impact is closer to neutral as the benefit to US consumers adversely impacts US producers.”

“For the G10, developments in the oil space have redirected focus on NOK and CAD. Not only are these currencies positioned poorly in a riskoffworld, but now they have the added economic hit from the oil shock.”

“We are inclined to view USD/CAD dips as a buying opportunity. The 1.3550/3600 area should be supportive.”

• Everything non-essential should be canceled

FXStreet reports that economists at Standard Chartered Bank have revised their CPI inflation forecast higher though they expect inflation to fall through the rest of 2020 opening the door for further monetary easing. USD/CNY trades at 6.956.

“We revise our CPI inflation forecast for 2020 to 2.9% from 2.6%, which remains below the market consensus of 3.2%.”

“We maintain our expectation that monthly CPI will retreat rapidly from Q2. We expect CPI inflation to average 5% y/y in Q1, 3.5% y/y in Q2, 2.1% y/y in Q3 and 0.9% y/y in Q4.” 

“With inflation on a downtrend, China can further ease policy to revive business activity without inflation being a constraint. We expect the People’s Bank of China (PBoC) to rotate between cuts to the reserve requirement ratio (RRR) and medium-term lending facility (MLF) rate near-term.”

FXStreet notes that the cuts in oil prices will make a bad situation worse in Canada. The Bank of Canada (BoC) is already preoccupied with downside risks, and strategists at TD Securities are assessing an inter-meeting cut or a larger response at the April rate announcement.

“WTI has dropped by another 30%, and a simple rule of thumb suggests that the last three trading days of price action is consistent with a 0.3 p.p. hit to the level of GDP in Canada.” 

“Under normal circumstances, such a move would argue for 25 bps in BoC cuts. Looking at this move in the current context, it probably calls for another 50 bps in stimulus in short order.” 

“The BoC is also going to be especially sensitive to market signals in this environment, and markets are currently priced for an inter-meeting cut. If the Fed is forced to cut rates inter-meeting we expect the BoC to join, and we will be closely watching to see if the BoC moves rates alongside the Fed on March 18th.” 

“We now look for WTI prices to hold between $32-34 though Q3, with the drag to yearago inflation from gasoline and other energy products peaking at 1.0% in May (energy products make up just 6.5% of the basket). We look for inflation to hold below target for most of 2020, before drifting back above 2% in Q1 2021.”

FXStreet notes that the pound has weakened substantially in the past few days and is currently trading around 0.87 versus the euro. Kiran Sakaria, a Strategist at Handelsbanken, analyzes the pound’s outlook.

“This weakness is due both to the escalating virus crisis and the renewed fear of a no-deal Brexit, as it has become clear that the UK and the EU are a long way apart, now that the negotiations have begun.” 

“The coronavirus outbreak has caused the Bank of England to promise that it is ready to take the necessary measures to ensure financial stability, and the market is currently pricing in two policy rate cuts from the BoE by June at the latest.” 

“In the coming days and weeks, we expect the increasing uncertainty to continue to weigh on the pound.”

FXStreet reports that FX Strategists see NZD/USD facing extra volatility in the next weeks.

24-hour view: “After yesterday’s wild price action, NZD is likely to take a breather today and trade sideways, albeit likely within a broad range. Expected range for today, 0.6250/0.6400.”

Next 1-3 weeks: “The abrupt plunge this morning that sent NZD to a low of 0.6008 and the sharp snap back higher has clouded the outlook. Such violent price action is uncommon but NZD could continue to trade in volatile manner from here but overall stay under pressure. That said, it is left to be seen if can break and hold below 0.6000. From here, NZD has to move and stay above 0.6400 or the risk is on the downside even though any weakness is unlikely to be in a straight line.”

• We expect coronavirus to impact supply chains in industrial sector in coming weeks
• Government measures to cushion impact of coronavirus will be worth billions of euros

FXStreet notes that the tentative improvement in risk appetite this morning has seen the EUR give back some of its recent gains vs. the USD. Although EUR/USD was oversold in the 1.08 region, the EUR’s fundamentals are still looking strained with Italy once again threatening to be the fault line in the Eurozone, economists at Rabobank apprise.

“This morning’s news that the Eurozone grew a better than expected 1.0% y/y in Q4 suggest that the economy may have been on a slightly firmer position going into the coronavirus than initially thought. That said, it is still our central view that the Eurozone will fall into recession this year, with Italy set to lead the pack lower.”

“We do expect the ECB to cut its discount rate by another 10 bps at this week’s policy meeting and also to announce targeted liquidity measures.” 

“We see scope for a near-term retracement back towards the EUR/USD1.1220/30 area which represents the late December high.” 

“While spreads have narrowed moderately today, any indication that this situation is worsening could lead to a surge in demand for USDs and another drop in the value of EUR/USD.”

U.S. stock-index futures jumped on Tuesday, following Wall Street's worst day since the financial crisis, as investors' sentiment was supported by the U.S. President Donald Trump's promises to unveil "major" economic plans to deal with coronavirus later today.

Global Stocks:

McDonald's (MCD) resumed with an Equal-Weight at Stephens; target $210

(company / ticker / price / change ($/%) / volume)

FXStreet reports that strategists at TD Securities have changed their view and are now expecting a rate cut by the ECB due to the tightened financial conditions, the negative macro impact of the coronavirus outbreak with Italy now in total lockdown, and the euro’s volatility. 

“We now look for the ECB to deliver a 10bps rate cut at Thursday's policy meeting. We will look for direction from Lagarde as to how much further easing the ECB is considering.”

“At this stage, we still don't think that the ECB is likely to augment the pace QE.” 

“Even with a 10bps rate cut and other mitigating measures, we still believe that the market is going to be disappointed, especially given the rout we saw after the Fed's much more aggressive 50bps inter-meeting rate cut.” 

“The tone of the press conference will be key, but we're not convinced that a very green Lagarde will be able to persist with her consensual Governing Council approach but still deliver the ‘whatever it takes’ message that markets want to see.”

The administration officials told CNBC that the White House is not ready to roll out specific economic proposals in a response to the impact of the coronavirus outbreak.

Inside the administration, some officials were stunned by President Trump's claim Monday that he would hold a press conference Tuesday to announce an economic plan to offset the coronavirus-induced slowdown. "That was news to everyone on the inside," one official said.

The actual details of any plan remain up in the air. "It's not there right now," an official said. "A lot of details need to be worked out."

USD strengthened against other major currencies in the European session on Tuesday, rebounding after a plunge on Monday, supported by rising hopes that the Trump administration would introduce stimulus to cushion the economic impact of the coronavirus outbreak. 

The U.S. Dollar Index, measuring the U.S. dollar value against a basket of foreign currencies, rose by 0.97% to 95.82.

The U.S. President Donald Trump said on Monday his administration would discuss with Congress "a possible payroll tax cut or relief, substantial relief, very substantial relief" to support the economy and that "major" economic announcements would be made on Tuesday.

The U.S. Treasury Secretary Steven Mnuchin, meanwhile, downplayed the possibility of a recession, stating the fluctuations in the stock market reflected the oil shock rather than weakness in the U.S. economy. “This is not like the financial crisis where we don’t know the end in sight. This is about providing proper tools and liquidity to get through the next few months,” he said. “The economy will be in very good shape a year from now.”

FXStreet reports that FX Strategists at UOB Group believes Cable could recede and re-visit 1.3000 although a breach of this level looks unlikely in the very near-term.

Key Quotes

24-hour view: “GBP popped to a high of 1.3200 before retreating quickly. Upward pressure has eased and 1.3200 is likely a short-term top. The pullback from the high could extend lower but for now, any decline is not unlikely to move below the 1.3000 support (minor support at 1.3040). Resistance is at 1.3150 ahead of 1.3200.”

Next 1-3 weeks: “We highlighted yesterday (09 Mar, spot at 1.3080) the ‘stronger than expected recovery has scope to extend further to 1.3200’. GBP subsequently popped to 1.3200 before retreating quickly. From here, the prospect for a sustained advance above 1.3200 is not high. Looking forward, GBP has to register a NY closing above 1.3220 in order to indicate that it is ready to challenge the late December peak of 1.3284. Meanwhile, severely overbought short-term conditions could lead to a couple of days of consolidation. However, a break of 1.2960 (no change in ‘strong support’ level) would indicate that 1.3200 is a short-term top.”

FXStreet notes that the RBNZ Governor provided a high-level speech on the unconventional policy measures at the Bank's disposal. Economists at TD Securities sensed the Bank was comfortable with current policy settings and did not feel compelled to deliver an inter-meeting cut.

“The RBNZ Governor Orr outlined the Bank's suite of possible unconventional monetary policy tools at its disposal. The Governor made clear that the Bank has no immediate intention in resorting to unconventional monetary policy, a view that we also share for the current cycle.”

“In today's speech, the Governor again indicated the next assessment of the OCR is on 25th March, suggesting the Bank is unlikely to deliver an inter-meeting cut.” 

“We forecast a 50bps cut at the Bank's March meeting, but the odds for a 50bps cut dropped from 70% to 35% following the Governor's speech.”

FXStreet reports that FX Strategists at UOB Group noted the bullish view on EUR/USD remains well and sound for the time being.

24-hour view: “While the rally in EUR is severely overbought, it is too early to expect a sustained pull-back. That said, there is room for EUR to ease off slightly but any weakness is viewed as part of a 1.1330/1.1470 range (a sustained decline below 1.1330) is not expected.”

Next 1-3 weeks: “EUR registered a huge 210 pips range yesterday (largest 1-day range since Jun 2018) as it rocketed to a high of 1.1492 before ending the day higher by a whopping +1.44% (1.1447), the largest 1-day advance Jun 2016. While severely overbought, there is still no indication that EUR is ready to top out just yet. That said, 1.1500 is relatively solid resistance and EUR has to register a NY closing above this level in order to indicate it has enough momentum to extend its rally to 1.1580, possibly 1.1640. Meanwhile, EUR could consolidate for a couple of days and only a break of 1.1230 (no change in ‘strong support’ level) would indicate that the current rally has run its course.”

• Coronavirus control tasks in Hubei, Wuhan remain arduous
• Hubei province should resume production step by step
• Will handle all kinds of issues might occur during coronavirus control, safeguard overall social stability
• Will speed up application of effective medicines for coronavirus

According to the report from Eurostat, the number of persons employed increased by 0.3% in both the euro area and the EU27 in the fourth quarter of 2019 compared with the previous quarter. In the third quarter of 2019, employment increased by 0.2% in the euro area and 0.1% in the EU27.

Compared with the same quarter of the previous year, employment increased by 1.1% in the euro area and by 1.0% in the EU27 in the fourth quarter of 2019 (after +1.1% and +0.9% respectively in the third quarter of 2019).

For the year 2019 as a whole, employment grew by 1.2% in the euro area and 1.0% in the EU27, after +1.5% and +1.4% respectively in 2018.

Based on seasonally adjusted figures, Eurostat estimates that in the fourth quarter of 2019, 209.3 million people were employed in the EU27, of which 160.7 million were in the euro area. These are the highest levels of employment ever recorded in both areas. More specifically, the number of persons employed has increased by 12.0 million in the euro area and 15.1 million in the EU27 since the lowest level of employment after the financial crisis (2013 Q2 for euro area, 2013 Q1 for EU27).

FXStreet reports that the playing field for the USD may be about to be re-written completely by the Federal Reserve. The big move higher in EUR/USD is probably mainly driven by position squaring and it may therefore have further legs to go, in the opinion of analysts at Nordea.

"Most European asset managers have had a big long USD position via a low hedge ratio on USD assets. If US equities are sold off then we see a net selling of USD spot due to a low or non-existent hedge of the USD component, that's the position squaring part."

"The next move could be driven by increased USD hedge ratios, as FX hedge costs are falling off a cliff. It simply becomes much more opportune for FX managers to increase hedge ratios in USD, when the price drops as fast as now."

"We choose to increase our EUR/USD target for year-end 2020 to 1.17 as a consequence."

According to an estimate published by Eurostat, seasonally adjusted GDP rose by 0.1% in the euro area (EA19) and by 0.2% in the EU27 during the fourth quarter of 2019, compared with the previous quarter. In the third quarter of 2019, GDP had grown by 0.3% in the euro area and by 0.4% in the EU27.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.0% in the euro area and by 1.2% in the EU27 in the fourth quarter of 2019, after +1.3% and +1.6% respectively in the previous quarter.

For the year 2019 as a whole, GDP grew by 1.2% in the euro area and by 1.5% in the EU27, after +1.9% and +2.1% respectively in 2018.

During the fourth quarter of 2019, GDP in the United States increased by 0.5% compared with the previous quarter (after also +0.5% in the third quarter of 2019). Compared with the same quarter of the previous year, GDP grew by 2.3% (after +2.1% in the previous quarter).

FXStreet reports that the ECB meets this week amid a dramatic tightening in financial conditions and collapse in the oil price while Italy's decision to quarantine the whole country will affect 15% of Europe's GDP. Analysts at ANZ Research expect interest rates to be cut, forward guidance to be enhanced and emergency liquidity measures.

"Whilst a rate cut from the ECB may do little to boost demand or ease supply difficulties short term, it is an important aspect of policy easing and can help to loosen monetary conditions. A 10bps cut from the ECB, which would take the deposit rate to -0.70%, has been priced in for this week."

"Fiscal spending in Italy has typically had very little impact on raising productivity. Debt concerns in Italy may well return. We think this makes it all the more important for the ECB to act early and decisively, particularly concerning liquidity provision. Failure to do so could prompt a sharp rise in impaired and bad loans in Italy's banking system."

According to the report from Istat, in January 2020 the seasonally adjusted industrial production index increased by 3.7% compared with the previous month. Economists had expected a 1.6% increase. The change of the average of the last three months with respect to the previous three months was -0.9%.

The index measures the monthly evolution of the volume of industrial production (excluding construction). With effect from January 2018 the indices are calculated with reference to the base year 2015 using the Ateco 2007 classification (Italian edition of Nace Rev. 2).

The calendar adjusted industrial production index decreased by 0.1% compared with January 2019 (calendar working days in January 2020 being 21 versus 22 days in January 2019).

The unadjusted industrial production index decreased by 3.2% compared with January 2019.

FXStreet reports that volatility and the lack of liquidity remain the key risk and could hobble the Kiwi again. Risk-off is weighing on the USD but analysts at ANZ Research remain of the view that the NZD is on borrowed time.

"Volatility is the theme; Kiwi has rallied more than 4 cents off yesterday's intraday low before consolidating."

"The risk-off mood continues to weigh on the USD; while that's to be expected given the depth of markets there, we expect the NZD to capped and weaken after the RBNZ cuts."

"Support 0.6235 Resistance 0.6470"

CNBC reports that U.S. government debt prices were lower on Tuesday morning as investors make a tentative re-entry into risk assets following Monday's mass sell-off.

The yield on the benchmark 10-year Treasury note, which moves inversely to price, was higher at 0.672% having hit a record low of 0.318% on Monday. The yield on the 30-year Treasury bond was also up at 1.104%.

The historic flight to bonds seen in recent days started with concern over the global spread of the new coronavirus, which has now infected at least 110,029 people worldwide and caused at least 3,817 deaths, according to the latest World Health Organization (WHO) figures.

This risk-off sentiment was compounded by plunging oil prices on Monday as the 14 oil-exporting countries of OPEC and ally Russia seemingly entered a price war after failing to agree a deal on production cuts.

However, pre-market data is pointing to an attempted stock market recovery on Tuesday after President Donald Trump floated the idea of a "payroll tax cut or relief" to offset the coronavirus impact, following a 2,000 point plunge for the Dow Jones industrial average and the worst day for the S&P 500 since the financial crisis.

FXStreet reports that economists at Deutsche Bank have adjusted their expectations for the ECB meeting on 12 March amid mounting pressure following market sell-off.

"We continue to expect a new targeted liquidity facility. This could, for example, take the form of a six month LTRO aimed at backstopping SME lending in affected regions, perhaps complemented by easy collateral rules and flexibilities in now NPLs are recorded."

"We expect a 10bp deposit rate cut to -0.60%. Although we question the wisdom from the perspective of the banking system stability the ECB has persistently argued that the reversal rate has not been reached."

"We expect the ECB to do something to supplement general liquidity."

According to the report from INSEE, in January 2020, output increased in the manufacturing industry (1.2%, after −2.2%), as well as in the whole industry (+1.2%, after −2.5%). Economists had expected a 1.8% increase in the whole industry.

Manufacturing output decreased over the last three months in manufacturing industry (−1.1%), as well as in the whole industry (−1.1%).

Over the last quarter, output slumped in the manufacture of coke and refined petroleum products (−13.7%). It decreased in "other manufacturing"(−0.9%), in the manufacture of transport equipment (−2.4%), in the manufacture of machinery and equipment goods (−1.5%) and in mining and quarrying, energy, water supply (−0.8%). Conversely, output improved in the manufacture of food products and beverages (+0.4%).

Manufacturing output of the last three months declined compared to the same three months a year ago (−1.7%), as well as the output in the whole industry (−1.8%).

Over a year, output slumped in the manufacture of coke and refined petroleum products (−29.5%). It decreased markedly in the manufacture of transport equipment (−6.0%), in mining and quarrying, energy, water supply (−2.3%), in the manufacture of machinery and equipment goods (−1.7%) and more slightly in "other manufacturing" (−0.3%) and in the manufacture of food products and beverages (−0.4%).

In today's Asian trading, the US dollar rose against most major currencies, and the yen fell on expectations of government stimulus measures in the face of the COVID-19 coronavirus outbreak. Yesterday, the Japanese yen rose against the dollar to its highest level since 2016.

The ICE Dollar index, which shows the value of the dollar against six major world currencies, rose 1.03% compared to the previous day.

The yield on ten-year US Treasuries rose 15 basis points to 0.645% after falling 22 basis points on Monday. On Monday, US Treasury bonds rose in price amid growing demand for safe haven assets.

Japan's Cabinet of Ministers today approved a bill allowing Prime Minister Shinzo Abe to impose a state of emergency in response to the coronavirus outbreak. In addition, the government must agree on a second package of economic response measures, said Taro Aso, the country's Finance Minister.

Yesterday, US President Donald trump said that he will take "serious" steps to protect the economy from the impact of the spreading coronavirus epidemic, in particular, discuss reducing income tax.

FXStreet reports that Alvin Liew at UOB Group assessed the recently published US monthly labour market report.

"US employment creation added another fantastic month, as the US economy created 273,000 jobs in February… Even more impressive was the significant 85,000 upward revision to the jobs data of the preceding two months as January's job print was revised higher to 273,000 (from 225,000) while the increase for December was also raised to 184,000 (from 147,000)."

"US unemployment rate edged lower to 3.5% in February (from 3.6% in January) in line with the strong jobs print while labor participation rate stayed steady at 63.4%, matching the highest participation rate since June 2013. US wage growth came in right at market expectations, rising by 0.3% m/m, 3.0% y/y from 0.2% m/m, 3.1% y/y in January. US wage gains has been at or above 3% on a y/y basis since July 2018."

"As 2020 progresses, the strong start in January and February may not sustain. We had earlier highlighted the risks of a prolonged growth cycle and expectations of slower US economic outlook which may slow the US jobs creation but we still expect positive job increase overall. But with the arrival and the rapid spread of the coronavirus (COVID-19) in the US, some sectors will be directly impacted, resulting in reduced hiring or even job losses."

"We now expect the US to record its monthly net job losses soon, the first since October 2010, if not in March, then most likely in April."

eFXdata reports that Danske Research maintains a bullish EUR/GBP bias in the medium-term

"EUR/GBP has moved higher since mid February driven by a combination of a repricing of 'no deal Brexit' risks, repricing of Bank of England (BoE) amid virus fears and the weaker USD. The next big trigger for a leg higher in EUR/GBP will be the continued Brexit process, once this starts to hit the wires again when we get closer to trade negotiations in June.

We expect EUR/GBP to hit 0.89 in 3-6M on Brexit fears and BoE easing. Our base case remains a deal will be reached eventually, which should trigger a move lower back towards 0.84, probably some time in the autumn. We target 0.84 in 12M," Danske notes.

"A key near-term risk to our forecast is whether the BoE is going to ease monetary policy as much as currently priced, which could send EUR/GBP lower for a while," Danske adds.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1585 (5301)

$1.1568 (2659)

$1.1545 (3326)

Price at time of writing this review: $1.1357

Support levels (open interest**, contracts):

$1.1274 (422)

$1.1241 (693)

$1.1204 (724)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date April, 3 is 73503 contracts (according to data from March, 9) with the maximum number of contracts with strike price $1,1350 (5301);

GBP/USD

Resistance levels (open interest**, contracts)

$1.3231 (1560)

$1.3211 (1013)

$1.3193 (891)

Price at time of writing this review: $1.3020

Support levels (open interest**, contracts):

$1.2914 (751)

$1.2882 (1323)

$1.2846 (2861)

Comments:

- Overall open interest on the CALL options with the expiration date April, 3 is 16585 contracts, with the maximum number of contracts with strike price $1,3200 (2601);

- Overall open interest on the PUT options with the expiration date April, 3 is 19099 contracts, with the maximum number of contracts with strike price $1,2900 (2861);

- The ratio of PUT/CALL was 1.15 versus 1.11 from the previous trading day according to data from March, 9

* - 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.