Plunge in US yields leads to rampant Fed rate cut speculation

SUMMARY

ANALYSIS

USDCAD

Global equity markets are extending their losses for a sixth straight session this morning after President Trump failed to calm investor fears in his 6:30pmET press conference last night.  We felt that his repeated attempts to downplay the coronavirus as the common flu was disingenuous.  We thought his assurances that US health authorities have everything under control was foolhardy and misguided.  What is more, we felt President Trump’s comments about the stock market going down because of Tuesday night’s Democratic debate showed a deliberate attempt to politicize and distract from the seriousness of the coronavirus situation.  The S&P futures are trading down another 2%; the April crude oil futures are plunging another 4.5% after once again giving up the 49.60 support level, and the US 10yr yield keeps falling to new all time lows (now at 1.25%).

On the coronavirus front, markets are now concerned about a rise of suspected cases in New York state and one confirmed case in North Carolina from “unknown origin”, according to the CDC.  The virus continues to spread outside China, with Italy now reporting 528 cases and 14 deaths, South Korea indicating 1,766 infections and 13 mortalities, and with Iran showing a very troubling increase to 245 cases with now 26 dead.

Fed rate cut speculation has surged over the last 48hrs, with the futures curve now expecting a 25bp reduction at the April 29^th FOMC meeting.  We think this part in parcel explains USDCAD’s struggle to seriously break higher this week.  The market’s new uptrend (since January 29^th) is doing ok with USDCAD traders methodically taking out chart resistance at 1.3300, 1.3320 and now 1.3350...but it feels like they're swimming upstream.  The US just reported its January Durable Goods figures and the numbers beat expectations: -0.2% MoM vs -1.5% on the headline and +0.9% MoM vs +0.2% ex-Transport.  The 2^nd estimate of US GDP for Q4 2019 was just released as well and it met expectations of +2.1%. 

We think USDCAD has legs to continue higher so long as the 1.3350s hold.  We see mild chart resistance in the 1.3380s-1.3410s zone.  Canada reports its latest GDP figures tomorrow at 8:30amET and the consensus is looking for +0.1% MoM for December and +0.3% QoQ for Q4 2019. 

USDCAD DAILY

USDCAD HOURLY

APR CRUDE OIL DAILY

EURUSD

Continued risk-off flows came to the rescue for EURUSD in NY trade yesterday and last night’s press conference from President Trump added some fuel to the fire and allowed the market to finally break through the 1.0890s resistance level.  It’s been up, up, and away since then as Fed rate cut speculation now reaches a fever pitch.  US bond yields continue to plunge and they’re pressuring the Fed funds futures curve to price in 3 more rate cuts by year’s end…the first of which traders are expecting in April!  Is the economy still in a good place Jerome Powell and company?  Market’s don’t believe so.

Today’s rise in EURUSD has been so sharp that it has now killed the recent downward in our opinion.  With the 1.0890s now giving way so spectacularly and with the market extending to 1.0970-90s chart resistance so quickly, we think EURUSD will commence a new higher trading range (1.0890s – 1.0990s) heading into March.

EURUSD HOURLY

APRIL GOLD DAILY

GBPUSD

Sterling is underperforming today as traders digest the UK’s negotiating mandate for 2020 trade talks with the EU.  We’ve read it and we think it sets up Britain for a collision course with Brussels this year.  What is more, the UK said it will consider walking away from Brexit “IF AGREEMENT IS NOT LOOKING LIKELY BY JUNE MEETING”.  More here from the Guardian.

We stand by our view that yesterday’s relative GBP weakness was due to anxiety ahead of the release of the UK’s mandate, and we think the way the UK media is negatively portraying the headlines this morning is adding to the woes for GBPUSD.  We feel that a firm NY close below the 1.2900 level will give the bears a firm grip heading into UK/EU Brexit-transition negotiations next week.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar is finally catching a break today and we’d make the argument this is because Fed rate speculation is running rampant this morning.  It’s almost stealing the limelight from coronavirus headlines and is putting a drag on all things USD.  We think AUDUSD could correct higher to the 0.66 handle should the 0.6550s hold today.

Off-shore dollar/yuan (USDCNH) looks content to simply follow broad USD selling flows today after China’s National Health Commission continued to report a low number of new infections outside Hubei province for yesterday.  See here, from BNO News, for the latest coronavirus case/death counts across the world.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen is trading with a heavy tone this morning after buyers ultimately failed in the 110.50s yesterday and after the bond markets rush to price in more Fed rate cuts.  With US yields now making new all-time lows every hour, we’re seeing the Fed funds futures curve price in 100% of a 25bp cut in April, 100% of 50bp in cuts by June, and 92% of 75bp in cuts by November!!!  While we think USDJPY declines are being mitigating to some extent by the threat of a spike in new coronavirus cases/deaths in Japan, we feel the Japanese headlines have not been negative enough this week to counter traditional risk-off flows.  Growing Fed rate cut speculation won’t make it any easier in our opinion, which is why we think USDJPY may slip lower still…perhaps to chart support in the 109.40-60s.

We’re going to get a raft of Japanese data tonight around 6:30-7:00pmET.  Japan will report its January employment, industrial production and retail sales figures, as well as its February CPI.  Perhaps this data won’t capture coronavirus concerns just yet but here are the expectations:

Unemployment rate: 2.2%

Industrial Production: +0.2% MoM

Retail Sales: -1.1% YoY

CPI: +0.6% MoM

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.

Interested in creating a custom foreign exchange trading plan? Contact us or call CXI's trading desk directly at 1-833-572-8933.

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