Italy, South Korea and Iran in panic mode as number of coronavirus infections explode higher.

SUMMARY

ANALYSIS

USDCAD

Global markets are looking panicky this morning after the number of new coronavirus infections surged outside China over the weekend.  South Korean now has 833 reported cases and 8 deaths versus just 204 on Friday.  Italy reported an alarming 223 new cases over the weekend and 7 deaths, leading authorities to effectively lockdown about 50,000 people and cancel public events in 12 villages outside Milan.  The outbreak continued to spread in Iran as well, but with an noticeably higher mortality rate (12 deaths amongst 47 infections).  All of Iran’s neighbors (Lebanon, Kuwait, Bahrain, Afghanistan and Iraq) also reported their first coronavirus cases over the weekend as well.  See here for the latest updates from BNO News.

All this has led to rising global pandemic fears to start the week.  Traders are dumping stocks, crude oil futures, and commodity currencies while flocking to bonds and gold.  Dollar/CAD has quickly resumed its uptrend, after teasing traders with bearish price action below 1.3220 support on Friday.  The market regained 1.3220s in the final moments of NY trade and there’s been a steady bid to the market ever since last night’s gap open.  Some sellers have emerged at chart resistance just above 1.3300 as traders watch the WHO’s latest attempt to calm everybody down, but it appears we could be in store for a long day because there’s really nothing else major on the data docket to distract market participants from the reality of the worsening coronavirus situation outside China. 

Canada reported higher than expected Wholesale Trade figures for the month of December just now (+0.9% MoM vs +0.5%) and while one could argue this justifies USDCAD’s pullback off the 1.3300 level from earlier this morning, we don’t traders will dwell on this 2^nd tier data for very long if broader risk sentiment deteriorates further.

USDCAD DAILY

USDCAD HOURLY

MAR CRUDE OIL DAILY

EURUSD

Euro/dollar has fallen back below the 1.0850s to start the week after traders feel they have to price in some of the panic selling we’re seeing in Italian assets today.  The euro’s new status as a funding currency has allowed it to benefit from risk-off scenarios of late but we think it's been hard for traders to ignore the 6% plunge in the Italian stock market and 10bp spike in 10yr BTP yields earlier this morning.  Germany reported a higher than expected IFO survey for the month of February today and while we laugh at the institute’s conclusion that “the economy seems not to be affected by the coronavirus”, traders are taking everything at face value, like they usually do, and have bid EURUSD off its lows. 

The leveraged funds at CME added to their net short EURUSD for the 4^th week in a row during the week ending February 18 and we think they’ll remain in charge so long as the market stays below the 1.0880s.  Germany reports its seasonally adjusted Q4 2019 GDP figures tomorrow.

EURUSD HOURLY

APRIL GOLD DAILY

GBPUSD

Sterling has slipped back below the 1.2940-50s support level to start the week as this weekend’s surprising surge of conoravirus infections inside Italy sparked broad demand for dollars.  The CFTC’s latest Commitment of Traders report showed the fund net long GBPUSD position extending for the second straight week during the week ending February 18; a development which we think doesn’t help the market here because these new positions (and the ones added a week before) are now underwater. 

This week’s UK calendar doesn’t feature any notable economic releases but we’ll hear from the Bank of England’s Andy Haldane at 1:30pmET today.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar is holding up well this morning despite the plunge in broader risk sentiment, and we think this is because the USDCNH market is believing China’s claim that there were just 11 new cases of coronavirus reported outside Hubei province today.  This arguably fudged statistic looks laughable when compared to the explosion of new cases now within much smaller populations outside of China, but the headline is positive enough for our “take everything at face value” markets and we think this largely explains USDCNH’s continued struggle at the 7.05 handle.  Since the AUD has shown a good correlation with CNH lately, we’d argue the inability for the Chinese yuan to weaken significantly today part in parcel explains the Aussie’s ability to hold up here.

Everyone’s now talking about next weekend’s Reuters poll expectation for the upcoming Chinese PMI report for February, which at the moment shows a fall of just 5pts in the Manufacturing index to 45.0, versus a read of 50.0 for January.  These expectations should be much lower in our opinion, and so we’ll be watching these expectations this week to see if they get revised downwards.  An unrealistically high expectation could set the markets up for grave disappointment when they reopen next Sunday night.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen is slipping lower today but not with the intensity that we’re used to seeing, because the worsening coronavirus outbreak in Japan has arguably put a dent in the yen’s traditional safe haven status.  The US 10yr yield has plunged over 10bp to the 1.36% level this morning but USDJPY is only just now breaking below the 111.00 level.  The S&P futures are now trading down 100pts (-3%) and the April crude oil futures are plunging 5% as demand fears rule the day.  Even the Fed Funds futures market has joined the panic, with a 25bp cut now being fully priced into the June FOMC meeting.  We think USDJPY will be hard pressed to buck a worsening risk-off trend in NY trade today, but we think the market will find buyers on dips to 110.20-50 if the number of conoravirus cases continues to rise in Japan.

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.

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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