Apple warns due to coronavirus. German ZEW for February misses expectations.

SUMMARY

ANALYSIS

USDCAD

Global markets are trading with a risk-off tone after the coronavirus forced Apple to issue a revenue warning for its current quarter.  According to the Financial Times, the world’s most valuable technology company said that it had assumed that work would return to normal in China after the new year holiday that ended on February 10. Instead, it said it was “experiencing a slower return to normal conditions than we had anticipated”.  More here.  Economic fears emanating from the coronavirus outbreak also showed up in today’s February ZEW survey out of Germany, with both the Current Conditions and Economic Sentiment indexes missing expectations.  If we combine this with last night’s RBA Minutes, which referred to the virus as a “material near-term risk to the economic outlook”, we have the recipe for this morning's defensive tone.

Global equities, oil prices, the Chinese yuan and commodity currencies are all trading lower while traders flock to bonds, gold and the yen.  USDCAD regained the 1.3240s support level after dipping below it in quiet holiday trade yesterday and we now have a market that is challenging chart resistance in the 1.3260s.  The leveraged funds at CME reduced their net short USDCAD position during the week ending February 11, according to CFTC data released late Friday afternoon.

Today’s dosage of economic reality is coming as a wake-up call to global investors who continue to buy into the belief that Chinese authorities have the coronavirus under control.  China’s National Health Commission continued to celebrate the declining trend of new coronavirus cases outside of Hubei province, which today dropped below 100 for the first time.  This comes as over 150 million Chinese citizens now face restrictions on how often they can leave their homes.  More here from the New York Times.  

A couple of 2^nd tier economic data points released at 8:30amET have just given USDCAD a boost above the 1.3260s; a NY close above which would open the door for a re-test of the 1.3300 level in our opinion.  Canadian Manufacturing Sales for December missed expectations (-0.7% MoM vs +0.5%) and the NY Fed Manufacturing survey beat consensus estimates (12.9 vs 5.0).

This week's North American calendar features the Canadian CPI report for January tomorrow and the Canadian Retail Sales report for December on Thursday.   There will be lots of Fed-speak as well but Fed member comments haven’t been moving markets all that much of late.

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EURUSD

The bear trend in euro/dollar keeps intensify and we think today’s weak German ZEW survey got the selling re-started again in Europe.  The Current Conditions index fell to -15.7 vs -10.3 expected and -5.4 previously.  What is more, the forward looking Economic Sentiment index collapsed to just 8.7 vs 21.5 expected and 26.7 previously.  This morning’s better than expected NY Fed Manufacturing survey is now adding a little insult to injury as EURUSD now scrambles to find chart support in the 1.0790s.

The leveraged funds at CME rushed back into short EURUSD positions for the 3^rd week in a row during the week ending February 11.  We think the fact that there’s no end in sight to Europe’s economic woes, and the fact that the ECB doesn’t know what to do about it, is the key negative fundamental driver for the market here.  If we add the US’ relative outperformance on the economic front and the Euro’s new status as a “funding” currency of late, we think even asset managers are struggling to find reasons to own EUR here.  We see mild trend-line extension support for EURUSD in the 1.0720-40s, but no serious support on the charts until the 1.0550-1.0600 area!  Buyers have to show up today or else.

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APRIL GOLD DAILY

GBPUSD

Sterling is outperforming on its own merits again this morning, with today’s bounce coming from a better than expected UK December employment report and news that the government’s budget will be released on March 11 as scheduled.  The UK reported +180k new jobs created versus +145k expected, and while wage growth came in slightly less than expected (+2.9% YoY for the last 3 months vs +3.0%), the unemployment claimant count increased by just 5.5k vs 14.9k in the previous month.  More here from the BBC.

The market regained chart support in the 1.2980s after the UK employment report was released and it vaulted up to resistance in the 1.3040s after new finance minister Rushi Sunak’s confirmed the March 11 budget date.  GBPUSD has since pulled back and we think this morning’s better than expected NY Fed Manufacturing survey is partly to blame.  The UK will report its January CPI data tomorrow, its January Retail Sales data on Thursday, and its flash February PMI data on Friday.

The leveraged funds added to their net long GBPUSD position for the 1^st time in over a month during the week ending February 11.  The confidence from the speculative community is rather telling here as it comes despite a return to a clear uptrend for GBPUSD.  We think a NY close above the 1.3070-80s is necessary to confirm that.

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AUDUSD

The Aussie took a hit on the release of the RBA Minutes last night and we think this is because some of the headlines showed a bit more of a focus on coronavirus risks when compared to the press release following the Reserve Bank of Australia’s latest interest rate decision.  This was the key one in our opinion: RBA MINUTES: CORONAVIRUS A "MATERIAL" RISK TO OUTLOOK FOR CHINA ECONOMY, AND THUS AUSTRALIA

The news saw AUDUSD fall below chart support in the 0.6690-0.6700 zone, but some broad USD selling is now emerging following President Trump’s tweet thread titled “THE UNITED STATES IS OPEN FOR BUSINESS”. 

Australia reports its Q4 Wage Price Index tonight at 7:30pmET (+0.5% QoQ expected) and its January employment report tomorrow night.  Over 3lbnAUD in options will be expiring over Wed/Thurs this week at the 0.6700 strike, which is huge size for the Australian dollar.

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USDJPY

Dollar/yen dipped towards the bottom end of its 109.60-110.00 range overnight amidst the Apple-initiated risk-off move, but it's getting a bump higher now following this morning’s tweets from President Trump about wanting to make it EASY for foreign counties to do business with the USA.  We’re not sure that a few tweets like this are enough to get everyone’s mind of the looming economic impacts of the conoravirus outbreak, but it seems to be working for now.

Over 3.2blnUSD in options will be expiring tomorrow and Thursday around the 110.00 strike, which we think could make USDJPY price action quite uneventful before the global flash PMIs for February are released on Friday.  The leveraged funds at CME started liquidated USDJPY shorts and re-commenced building long positions during the week ending February 11.

USDJPY HOURLY

US 10YR BUND 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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