FX Update: Markets trying to shake off coronavirus fears

A number of pivotal levels have been reached across commodity and fixed income markets recently on the fallout from the coronavirus crisis, even if the impact into major equity markets has been limited. Levels like the 1.50% yield point for the US 10-year T-note and the 2.00% 30-year bond have both been reached and crude oil has slipped to major psychological and chart price points as well. These are the kinds of levels . Among currencies, the AUDUSD has reached the major 0.6700 area and looks very similar to the action in the crude oil and other commodities charts as we discuss below.

The RBA refrained from hiking rates, as most expected (though I thought they might go for a cut). The AUD bounced modestly in reaction as the RBA cited hopes that the economy is still on a solid footing, noting strong employment and real estate prices. I suspect that the RBA is simply reversing what little policy easing room it has left before launching QE to wait for conditions on the ground to be outright recessionary before cutting rates again.

Yesterday’s US ISM Manufacturing Survey for January bounced back above 50.0, a surprisingly strong result, but one marred by the fact that coronavirus situation was only impacting in the final days of the month. As well, the employment sub-index. Pessimists were hasty to point out that back in early 2008, the ISM Manufacturing never got as low as it did during this recent episode and bounced back above 50 for a couple of months before lurching into a nasty slide as the global financial  crisis entered its critical phase.

We were meant to find out the results from the very first Democratic primary in Iowa yesterday, but some sort of technical glitch has prevented those results from emerging, with plenty of conspiracy theories afoot that this may have been about preventing a strong result for Sanders emerging. We’ll refrain from rumor and wait for the facts – but this could be a sign of a bitter and divided process as the populist progressive wing of the party is an existential threat to the centrist core that doesn’t understand what the Trump phenomenon and direct democracy are weakening the influence of traditional party structures.

We are taken aback at the market’s confidence that we will quickly get over this coronavirus situation with little lasting impact – preferring a cautious stance here until more is known on further risk of the disease spreading. In the meantime, consider the next leg of the US response to perceived currency manipulators as the US Commerce Department is mobilizing for potential duties on countries labeled as currency manipulators.

Chart: AUDUSD
After the RBA no-cut decision, the AUDUSD price action was rather muted even if AUD was a bit more firm in some of the crosses. The key here for AUDUSD is the 0.6700 area and whether commodity prices and the Chinese growth outlook can stabilize and improve from here. We’re not hopeful for the AUD outlook and would lean against rallies for further downside risks into 0.6500 and lower.