Chief Macro Strategist
Summary: Markets were already in comeback mode yesterday before the news broke this morning on Chinese TV that researchers have found a drug for treating coronavirus victims. The risk comeback was almost already complete in equities, but commodities and currencies will have plenty more to price in if conditions on the ground on the coronavirus improve.
Breaking news this morning from China on a possible treatment option for the coronavirus came in about halfway through the composition of this morning’s update and has boosted risk-correlated assets and currencies strongly – we’ll refrain from going all in with the kneejerk reaction, but certainly there is further space within the bond yield-sensitive currencies (JPY and CHF) as well as risk- and commodity-correlated G10 small and EM currencies to rally here on this news if the facts on the ground soon confirm that we are getting past peak coronavirus concerns. We remain cautious.
A zany day yesterday for risk on, especially for equity markets, but with more participation this time from commodities and currencies, as EM bounced strongly – USDMXN closing close to cycle lows, for example – and on the flip-side, the JPY sent reeling after its recent surge as bond markets consolidated lower. We’re having a hard time pulling together the kind of confidence that equity markets seem to be trying to express here, preferring to keep an eye on long US treasuries, where the rise in yields has so far proven very modest and the still-flat US yield curve suggests the Fed remains behind the curve, its ongoing operations notwithstanding. Yesterday saw a $30 billion two-week repo heavily oversubscribed by almost another $30 billion – suggesting USD liquidity concerns are ongoing.
The Swedish krona has bounced the most among the G10 smalls after EURSEK extended above the important 10.60+ since last Friday – besides the comeback in risk appetite, we have a head turning couple of PMI’s from the country this week that are suddenly changing the narrative a bit for the currency, first with the surge to 51.5 in the January Manufacturing PMI and this morning with the Services PMI likewise with a print of 52.5 vs. 48.7 in December. EURSEK has tumbled back well below 10.60 and a further thaw in coronavirus fears could see it push well back into the former range toward 10.41, even if we doubt much potential for the currency until a more determined fiscal stimulus expectations arrive for Sweden and the EU.
No real takeaways yet from the partial (71%) results from the botched Iowa caucuses in the US – always a weird primary relative to the other states’ and possibly history for future elections. Pete Buttigieg looks to have beat Sanders by a small margin for the win, but he is polling at a fraction of his levels in Iowa in most other states and the race still looks a contest between Biden and Sanders. More soon.
Chart: NZDUSD
The kiwi has been on its back foot a bit in the crosses after the employment and wages data disappointed overnight, with the QoQ employment change a 0.0% and the average hourly earnings rising only +0.1% QoQ as well. The coronavirus treatment news has boosted the NZDUSD off the lows this morning, but we will continue to watch this pair for the risk of a full breakdown toward the sub-0.6250 cycle lows if it re-approaches and breaks back below 0.6450 – a neckline-like area on the way up.
The G-10 rundown
USD – the big dollar seems so inert to anything at the moment – we merely note that the Fed remains behind the curve as inferred from the flat US yield curve and will watch key incoming data through the end of this week for reactivity (ISM Non-manufacturing and ADP employment change today, NFPs on Friday).
EUR – the euro rather inert here as well – trading like a safe haven currency in the crosses and could be an interesting one if the markets decide the coronavirus situation was not what we should fear, but a real struggle in the global growth outlook.
JPY – the yen dropped sharply yesterday on the double whammy of sharply higher yields and max risk-on, but we note that after the markets have settled a bit in reaction to the virus treatment claims out of China that US Treasury futures are only a hair lower.
GBP – the wily sterling is churning back and forth as we await firmer news on the EU trade deal.
CHF – a kneejerk lower in CHF on the risk on move and bond yields trading higher since yesterday, and momentum starting to wane on this recent run lower – probably need severe risk off to get the pair to new lows.
AUD – the Aussie bouncing strongly in the crosses this morning – but plenty more wood to chop to get the currency in the clear for bulls.
CAD – USDCAD has found resistance near the top of the range but we need more than risk on to get the pair back lower – we need a much stronger North American oil price as the US WTI benchmark has been below 50.00 on this latest slide.
NZD – on its back foot and would look more to AUDNZD for interest in expressing a weaker NZD than in NZDUSD if Chinese markets take heart from the latest developments.
SEK – the stronger Swedish PMI’s and then this morning’s coronavirus news have seen EURSEK reverse the recent rally – making life more comfortable for bears looking for a retest of the sub-10.45 lows if we can close today well below 10.60.
NOK – a huge boost to the NOK from the backdrop, especially on this morning’s news on possible coronavirus treatment, but need a solid turnaround in crude and considerable further NOK rally to wipe out the damage done to NOK on this latest slide from below 9.90 to the 10.25+ of earlier this week.
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