sign up log in
Want to go ad-free? Find out how, here.

More chunky falls in global equities and global rates on COVID-19 spread. NZD and AUD supported as USD takes a hit. EUR recovers further; GBP under pressure on UK-EU trade talk

Currencies
More chunky falls in global equities and global rates on COVID-19 spread. NZD and AUD supported as USD takes a hit. EUR recovers further; GBP under pressure on UK-EU trade talk

The market remains focused on the deteriorating news of the spread of COVID-19, seeing further large falls in global equities and US Treasury rates lurching down to fresh record lows. The USD is under a little pressure, which has prevented further falls in the NZD and AUD, while EUR continues with its recovery. GBP is the weakest of the majors as focus turns to UK-EU trade negotiations.

US equities are on track for their sixth consecutive daily fall. The S&P500 fell as much as 3.5%, but the loss has been pared back to 0.7% as we go to press in a choppy trading session. The market has corrected more than 10% from its record high set just over a week ago. Without a rebound, this would prove to be the worst week for the S&P500 since the GFC. The move in equities follows another rough day in Asian markets, while the Euro Stoxx 600 fell by a meaty 3.8%.

In updated news of COVID-19, for the second day more new cases were reported outside China than within China. While the spread of the virus in China appears under control, if you believe the numbers, the virus is spreading more globally, with a number of new countries reporting confirmed cases. Many countries are calling it a global pandemic, although it still hasn’t reached the threshold for the WHO to declare that. It noted that China’s efforts show that containment can work, but clusters of infections in Iran, Italy and South Korea are “cause for concern”.

The market was spooked by a report that US health authorities detected a case of COVID-19 in California without any known ties to an existing outbreak, suggesting that the virus is already spreading within the US, even if the number of confirmed cases is still only 15. The patient is likely to have picked up the virus from an unknown traveller.  Meanwhile, the economic hit from the spreading of COVID-19 is rising by the day and corporate profit warnings have continued abated. Microsoft is the latest high profile company to warn of crimping sales due to the virus.

Rising fear of a global recession has seen core global bond yields fall to fresh lows. Poor risk appetite is resulting in some discrimination though, with rates higher across Italy, Spain and Portugal. The US Treasury curve shows a steepening bias, as the market prices in a rising chance of the Fed taking policy action, sooner rather than later. Three full 25bps rate cuts are now priced this year, with a high chance priced in that the Fed moves as soon as next month. The 2-year rate is down 4bps to 1.12%, having fallen as low as 1.03% while the 10-year rate is down 2bps to 1.32%, having fallen as low as 1.24%. In the WSJ, former Fed Governor Warsh argues that the Fed should take immediate action and jointly cut interest rates with the PBoC, ECB, BoE and BoJ.

In currency markets, the USD is facing some downward pressure as long speculative bets continue to close and with the market seeing much more scope for easier monetary policy in the US than other countries, given the higher starting point for its policy rate. EUR continues with its recovery, up 0.8% to 1.0970, after earlier stretching to 1.10, and well up from the sub-1.08 level at the end of last week. As well as the closing of short EUR positions that have supported the currency, according to media reports, Germany’s government is looking at stimulus measures that would mitigate any major economic impact of COVID-19 on the economy.

At the other end of the leaderboard, GBP is down 0.2% to 1.2880.The political brinksmanship has already begun on UK-EU trade deal negotiations, with UK PM Johnson saying that he’ll walk away from the negotiating table in June if it’s not clear that he’s going to get a Canada-style trade agreement. The UK isn’t willing to trade away its sovereignty in the pursuit of a deal. The EU argues that because of the size of the UK and its proximity, replicating a Canada-style deal is unreasonable, and that the UK is backing away from what was agreed in the Political Declaration of the Withdrawal Agreement. A trade deal is in the best interests of both parties but GBP is likely to remain volatile throughout the trade negotiation process.

During the local trading session, the NZD reached a fresh low of 0.6284, but the weaker USD overnight sees it lift back up through 0.63. The AUD has tracked a similar path and has lifted to 0.6580. NZD/AUD is little changed at 0.96. The weak GBP sees NZD/GBP up through 0.49, while the strong EUR see NZD/EUR down to about 0.5750. JPY has been well supported, given the risk off mood, seeing NZD/JPY nudge down to 69.5. Ongoing weakness in oil prices, down another 2-3%, is proving a headwind for CAD.

Once again, economic data have taken a backseat to the focus on COVID-19. But for the record, the dataflow was positive, with US durable goods order better than expected, and the same can be said for economic confidence for the euro area.

In NZ news, before the local rates market opened, MNI published an interview with RBNZ Assistant Governor Hawkesby who was quoted as saying "In recent days we see that markets are placing a high probability that monetary policy will have to be eased in the face of these [coronavirus] developments, but we are still very much in the world of weighing up the probabilities because the outlook is so unclear", adding that "Monetary policy is not the right tool to be using and there are a whole lot of different ways the broader NZ Government could provide assistance”. These comments appeared to be on the hawkish side, but the market paid little attention and NZ rates fell through the day. Swap rates fell 4-5bps across the curve.

The ANZ business outlook survey wasn’t as bad as feared, with the key own-activity indicator only showing a small fall to a net 12.0%. That figure dropped to 4.0% for the third of respondents who answered the survey most recently, taking on board the more negative news of the spread of COVID-19. Trade data also positively surprised, although the stronger exports data for January didn’t fully capture the later logistical issues as COVID-19 took hold.

The economic calendar in the day ahead is full, but focus will be on China’s PMIs released Saturday, with the only question being how much they plunge, given the widespread travel bans and factory shutdowns. This will set the scene for trading on Monday’s open.

Daily exchange rates

Select chart tabs

Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
End of day UTC
Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.