FX Update: Second wave of coronavirus fears broadens

Hard to know why the timing is what it is in this market, but the renewal of coronavirus fears looks more intense here and showing signs of washing over global markets rather than staying limited to Asia and commodities as the major equity futures are also sharply lower overnight on the latest figures and as well, the drumbeat of major companies announcing suspension of activity in China. We urge traders to remain cautious.

FOMC Wrap
The new FOMC statement released last night was one of the least changed statements in modern memory, with one adjective downgraded from “strong” to “moderate” in describing the growth in household spending. An ever so slightly weaker USD during the Powell press conference may have been down to the Fed chair expressing frustration that inflation remained so low at this point in the cycle (market inferring rate cut preference and forward rate projections did tick a few basis points lower. Powell: “We’re not satisfied with inflation running below 2%, particularly at a time such as now where we’re a long way into an expansion and a long way into a period of very low unemployment, when in theory where inflation should be moving up,”

Otherwise, the Fed’5 basis point hike in the interest on excess reserves was a move many expected and didn’t trigger a market reaction as it is seen as a technical move to unwind some of the measures taken during the disruption of money markets late last year. The Fed did indicate in an “implementation note” released together with the statement that it would extend repo operations into April (prior statement only said at least into January), while keeping the language unchanged. From Powell’s discussion of reserves and the expanding Fed balance sheet in the press conference, it sounds like the Fed thinks it can get the reserves back to $1.5 trillion and then ease off the balance sheet growth.

Today we await the Bank of England decision with little anticipation, even as the market is highly divided on the likelihood of a rate cut, as any cut would be seen as buying a last bit of insurance rather than the first of a series. Were it not for the coronavirus situation, it would be easier to call for no cut, given the surge in a number of confidence and other surveys of late, but it’s a finer balance now. We would fade any sterling rallies tactically on a no-cut as this market has both eyes on risk-on, risk-off over the coronavirus situation at the moment.

Also today – watch for a potentially weak US GDP print, dragged lower in part by Boeing’s struggles.

Chart: AUDUSD
The AUDUSD is nearing its cycle low close around 0.6700 as Australia faces severe fallout risks from weakened Chinese demand over the coronavirus situation. Somehow, the market is pricing extremely low risks of a rate cut at next Tuesday’s RBA meeting. Given the unknowns of the situation, why would the RBA wait several months to cut rather than doing so now? Of course, a rebound in global markets on a sudden fading of fears could support the Aussie, but we remain cautious as long as key commodity markets continue to price severe disruptions.