Chinese coronavirus fears spark "risk-off" flows in Asian trade

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD continues to range trade this morning as FX traders don’t seem all that concerned yet about last night’s coronavirus fears out of China.  A reported 300+ infections in China, six confirmed deaths and reports of people being tested in Thailand, Japan, South Korea and Australia was blamed for the USD-positive, “risk-off” flows we saw during the Asian session, but some more positive economic narratives out of Europe this morning have now put pressure back on the greenback.  

Canada just reported its Manufacturing Sales figures for the month of November and they missed expectations (-0.6% MoM vs -0.2%), but we don’t think traders will care too much about this.  This morning’s 1% slump in February crude oil prices, on the back of coronavirus-driven demand fears, is more worthy of focus in our opinion as the daily chart is on the verge of recording a bearish outside day pattern (which could be USDCAD supportive).

USDCAD DAILY

USDCAD HOURLY

FEB CRUDE OIL DAILY

EURUSD

Euro/dollar is getting a boost this morning after German’s ZEW institute reported investor morale at its highest level in almost 5 years during the month of January.  The Economic Sentiment index surged to 26.7, beating expectations of 15.0; largely on the back of the recent decrease in trade tensions between the US and China, according to ZEW President Achim Wambach.  

We wouldn’t get too excited about US/China trade relations just yet, but the headline has been enough to see EURUSD bounce off yesterday’s chart support in the 1.1080-90s to now test trend-line resistance at 1.1120.  The market needs to close NY trade below this level to keep the bearish “head & shoulders” pattern in play.

EURUSD DAILY

EURUSD HOURLY

FEB GOLD DAILY

GBPUSD

Sterling is enjoying a rally this morning following yesterday’s “seller failure” in the 1.2960-80s and today’s much better than expected UK employment report.  Headline job growth was +208k in November vs +110k expected, the unemployment claimant count for December was +14.9k vs +22.6k expected, and wages grew +3.2% YoY for the last 3 months, which beat the consensus looking for +3.1%.  

All this is now seeing the OIS market re-price January 30th Bank of England rate cut odds to slightly more than a coin-flip (59%).  GBPUSD has regained the 1.30 handle with force, but the market has yet to seriously threaten the level it broke down below over a week ago (1.3080s and now 1.3100…given the upward sloping nature of that trend-line).

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Aussie succumbed to last’s night “risk-off” flows in Asia and we think the reports of a man getting tested in Brisbane (on his way back from China) didn’t help with sentiment.  More here from the Metro UK.  Sterling and euro strength has come to the rescue for the Australian dollar this morning however, as we feel it’s leading broad USD weakness into the NY open.  The Chinese yuan is trading sharply lower today as a result of the coronavirus fears as well and we think today’s overnight news flow regarding the US/China “phase one” trade deal is adding to its woes.

China’s Ministry of Commerce said the purchase of US agricultural goods will not impact imports from other countries (in other words, they’re not going to abandon their new sources of Brazilian soybeans, which are still priced more competitively than US beans).  The South China Morning Post is out with an article saying the deal “may be doomed from the start”, citing China’s insistence that US purchases will be based on market conditions.  What is more, we had US Treasury Secretary Mnuchin say today that the “phase two” trade deal “wouldn’t necessarily be a big bang that removes all existing tariffs”.  

So again, what do we really have here with this “phase one” US/China trade deal?  A whole lot of Chinese goodwill that is not worth the paper it’s written on, in our opinion.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

The legs underneath dollar/yen longs look like they’re finally starting to shake.  Last night’s coronavirus headlines out of China sounded scary and we saw US yields and USDJPY knee jerk lower in price as a result, and gold prices spike higher.  Some calm has returned in European trade however, and we think the swift reversal lower now for gold prices is stealing the limelight and helping USDJPY to recover even further.  Chart resistance in the 110.10-20s continues to cap prices however and we wonder where the next positive “risk-on” catalyst will come from at this point.

The Bank of Japan nudged up its economic growth forecast overnight (+0.9% GDP growth for fiscal 2020 vs +0.7% prev), based on the view that the risks surrounding the global outlook have “subsided somewhat”.  However, the Japanese central bank kept all their accommodative monetary policy measures in place as expected, which turned the meeting into a non-event as usual for FX markets.  More here from Reuters.

USDJPY DAILY

USDJPY HOURLY

GERMAN 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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