Currency View by OFX

Last week’s news

• The Coronavirus continues to transform into a global concern, triggering a sharp global equity market correction. The S&P 500 had its worst weekly performance since the GFC, falling more than 12%. US Stocks fell more than 4% last Thursday, and the sell-off continued into Friday, although the US market recovered on the last minutes before close, apparently on rumours around potential coordinated intervention by Central banks. The Fed released a statement saying they are ready to “use their tools and act as appropriate”.
• The Japanese Yen, Euro, and Swiss Franc have emerged as the currency world’s winners, rising 3.33%, 1.65%, and 1.36% respectively versus the U.S. dollar over the last week (the Euro had its strongest advance since 2017.) This happened in one of the most negative weeks in decades, where global equity markets plunged and expectations for US rate cuts increased amid the ongoing news about the Coronavirus.
• The U.S. dollar index saw a deep decline of 1.15% after market participants sharply raised bets that the growing fallout from the Coronavirus outbreak would prompt U.S. interest rate cuts. Futures for the Federal Reserve funds rate have priced in a rate cut by April and more than 90 basis points of reductions by year end, in December. This has created a pause in the recent rush to buy dollars. The Euro is benefiting from the expectation of a sooner than expected interest rate cut in the U.S.
• China reported the lowest manufacturing PMI reading on record at 35.7 and Services PMI at 29.6 giving the market a glimpse of the extent of the economic impact that shutdowns caused by the virus containment had caused. However, some comfort can be drawn looking forward, as containment measures reported by China seemingly look effective, and the resumption in activity is helping buoy sentiment towards growth.
• Christine Lagarde has played down chances of the European Central Bank providing an imminent response to the spread of the coronavirus, which has prompted economists to slash their forecasts for the eurozone. Ms Lagarde’s comments indicate that the ECB is hoping to keep interest rates on hold when it meets to discuss monetary policy in two weeks, despite calls from economists to cut rates to even further negative territory and step up its quantitative easing programme

Looking ahead

• Markets are panicking over the fast spread of the Coronavirus; however, World Health Organization Director Tedros Adhanom Ghebreyesus said, “Global markets … should calm down and try to see the reality.” He also added, “…based on the facts on the ground, containment is possible … But the window of opportunity for containing it is narrowing. So, we need to be preparing side by side for a pandemic.”
• As part of accomplishing a campaign promise to get the U.S. out of “endless wars,” Secretary of State Michael Pompeo led a delegation that signed an agreement with Taliban leaders. U.S. and Taliban officials signed a peace deal that aims to finish the war in Afghanistan after more than 18 years of fighting. Nonetheless, Pompeo warned that much to do lies ahead, calling it a “momentous” day for the U.S. and Afghan people.
• As expected, Joe Biden won in South Carolina due to his long-standing ties to the black community. This is Biden’s first victory, giving his campaign good momentum as the best moderate alternative to Vermont Senator Bernie Sanders. The next primary races are on Super Tuesday on March 3rd. Billionaire Michael Bloomberg will also be on the ballot for the first time.

Key market events this week

• CAD RBC Canadian Manufacturing PMI (Feb) – Monday
• USD ISM Employment & Manufacturing (Feb) – Monday
• RBA Cash Target Rate – Tuesday
• CHF Gross Domestic Product YoY (Q4) – Tuesday
• Eurozone Consumer Price Index Core YoY (Feb) – Tuesday
• AUD Gross Domestic Product YoY (Q4) – Wednesday
• Bank of Canada Interest Rate Decision (Feb) – Wednesday
• US ISM Non- Manufacturing/Services Composite (Feb) – Wednesday
• CAD Unemployment Rate (Feb) – Friday
• US Change in Non-Farm Payrolls & Unemployment Rate (Feb) – Friday