Fed Surprises Markets With 50BP Rate Cut

SUMMARY

ANALYSIS

USDCAD

In a statement that followed what seemed to be a very short conference call, G7 finance minister and central bankers said this morning that they are “closing monitoring the spread of the coronavirus” and that they “stand ready to cooperate further on timely and effective measures” to counteract its impact on markets and economic conditions.  Full statement below:

Washington – “We, G7 Finance Ministers and Central Bank Governors, are closely monitoring the spread of the coronavirus disease 2019 (COVID-19) and its impact on markets and economic conditions.  Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.  Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.  G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system.  We welcome that the International Monetary Fund, the World Bank, and other international financial institutions stand ready to help member countries address the human tragedy and economic challenge posed by COVID-19 through the use of their available instruments to the fullest extent possible.  G7 Finance Ministers and Central Bank Governors stand ready to cooperate further on timely and effective measures.”

This response is obviously not in accordance with what markets were expecting yesterday, but we’d have to say that the disappointment this morning has been mild.  The S&P futures and US yields have pulled back off their overnight highs but both markets are still holding the bulk of their gains from yesterday.  The broader USD has a moderate bid tone to it as the Fed Funds futures curve dials back the 75bp cut expectations for March 18.  USDCAD traders look a little confused for the moment as they wrestle another 3% rally in crude oil prices this morning with a dialing back of Fed rate cut expectations.  The Bank of Canada is still expected to cut interest rates by 25bp tomorrow.

We think the USDCAD uptrend is looking a tad jittery here.  Yesterday’s daily chart recorded a bearish engulfing candle pattern.  April crude oil prices are trying to forge a bottom if we look at yesterday’s bullish engulfing candle with an outside reversal.   The AUDUSD market is trying to now get above the 0.6550s, which we said could invite some short covering.  What is more, there’s a chance in our opinion that the Bank of Canada could deliver a more optimistic sounding rate cut tomorrow (similar to what the Reserve Bank of Australia did last night).  We don’t think buyers will be willing to defend another move down into the 1.3320-40s support zone, and so we think the USDCAD bulls will very much want the upper end of this zone to hold going into the NY close.

USDCAD DAILY

USDCAD HOURLY

APR CRUDE OIL DAILY

EURUSD

Euro/dollar has finally begun to pullback, but it seems the market wanted to trip out a few more fund shorts yesterday before doing so.  The 1.1180s now appear to be the near term swing high and we see chart support now in the 1.1060-80s.  We continue to believe the market start to form a new trading range now, but we’ve had to adjust it higher once again because of yesterday’s price action (1.1040-60 to 1.1160-80).

EURUSD DAILY

EURUSD HOURLY

APRIL GOLD DAILY

GBPUSD

Sterling buyers have been fiercely defending the 1.2750-70 support zone over the last 24hrs and they got some additional help this morning from the better than expected UK Construction PMI for February (52.6 vs 48.8).  Outgoing Bank of England governor Mark Carney said today that policy makers around the world were working on a “powerful and timely” response to the economic hit from the coronavirus, but it appears it now won’t occur at the same time (as markets were hoping for yesterday).

The OIS market is still pricing in an 86% chance that the Bank of England cuts 25bp to 0.5% on March 26.  Expectations are low this morning as Boris Johnson’s Europe advisor David Frost meets the EU’s chief Brexit negotiator Michel Barnier to begin the first round of trade deal talks.  More here from the Belfast Telegraph.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar is rallying above chart resistance in the 0.6550-60s this morning after the Reserve Bank of Australia cut interest rates by 25bp to 0.5% last night.  While the rate cut was largely expected by traders, we felt that PM Morrison’s comments let the cat out of the bag and helped precipitate a “sell the rumor, buy the fact” type of market reaction.  The Australian Prime Minister, Scott Morrison, called on the big banks (an hour before the rate decision) to pass on any rate cut in full, saying they should now “do their bit”.  Then, if we look at the RBA’s statement, we felt the central bank was already looking past the conoravirus.  While they acknowledged that the outbreak is having a significant effect on the Australian economy, they said “Once the coronavirus is contained, the Australian economy is expected to return to an improving trend. This outlook is supported by the low level of interest rates, high levels of spending on infrastructure, the lower exchange rate, a positive outlook for the resources sector and expected recoveries in residential construction and household consumption.”  Full press release here.

We think both these factors (PM Morrison jumping the gun and the more optimistic tone in the bottom half of the RBA’s press release) are the reason why the Australian dollar is outperforming today.  We continue to believe that a NY close above the 0.6550-60s will invite some short covering.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen continues to struggle with the 108 handle this morning after the G7’s conoravirus communique mildly disappoints markets and sends US yields lower.  That being said, the disappointment has been mild for the bond markets so far and so that’s why we think USDJPY has not yet re-tested the 107 lows we talked about yesterday.  We still believe there’s a chance of this happening though as traders further digest this morning’s news.  We may not get coordinated global rates all at the same time (like we saw in December 2007, October 2008 and November 2011), but money markets are still saying we’re going to get them (at the upcoming BOC, Fed and BOE meetings).

Just as we finished typing, the Fed has announced an surprise inter-meeting rate cut of 50bp, saying the fundamentals of the US economy remain strong but the coronavirus poses evolving risks to economic activity.

USDJPY DAILY

USDJPY HOURLY

US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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