FX Update: Corona virus concerns return, taking JPY higher

The Bank of Canada meeting produced an even more dovish turn than we expected, as the statement noted the recent slowdown in the economy and in particular noted that the “outgap has widened” and in the policy guidance, was clearly wary of the risk of a continued slowdown even if its forecast was not explicitly negative. In the press conference, Governor Poloz was more or less forced to indicate that the “door” is open for a rate cut: “I’m not saying that the door is not open to an interest rate cut, obviously it is, it is open”. The Trim CPI measure for December, posted just ahead of the meeting, dipped to 2.1% vs. 2.2% in November. The 2-year CAD swaps are some 10 bps lower from recent levels, driving a strong CAD selling impulse and taking USDCAD more firmly back into the old range that extends higher toward 1.3300+. An ugly sell-off in crude oil, and the massive discount on key Canadian grades (more than 20 dollars below WTI) are further weighing on CAD.

The Aussie got a bump from strong headline jobs growth in December, but aside from the fact that the Australia employment change data series is highly erratic, the full-time position growth remains a concern as the last three months have been near or below zero, with all job growth in part-time work.  The unemployment rate dipped back to 5.1%, a 9-month low. The reaction in Australia rates was very muted, but the AUD pulled back sharply higher versus the USD and NZD, a performance that looks fairly resilient given the fresh concerns about the corona virus outbreak in China overnight.

Today, we continue to watch the risk for a wider risk-off contagion, regardless of the cause, as this crazily risk-hungry market looks ripe for a correction technically and the steady grind lower in long US yields looks a bit spooky given the complacent backdrop – the US 10-year yield benchmark has poked below the 1.75% pivot area, helping drive JPY upside and a sign of weak belief in the longer term inflation and growth outlook.

Plenty of discussion on the ECB policy review and how ECB president Lagarde will spin this today, but we have a hard time seeing near term catalysts for the euro from this unless we see an explicit mention of the deleterious effects of NIRP as a hint that the ECB would like to copy the Riksbank in exiting negative rates eventually. It’s likely too early for that.

Chart: USDCAD
USDCAD jumped to attention on the more dovish than expected Bank of Canada meeting yesterday, with the drop in Canadian rates pointing to higher risk of a rate cut in coming meetings. Plenty more room for USDCAD to explore the full extent of the prior range to 1.3300+ and perhaps even the longer term range into 1.3500+ on further USD strength, weak Canadian data and/or a further markdown in crude oil prices. Local support perhaps around 1.3100 – the pivot area on the way  up.