Fed leaves rates unchanged. BOE hurts doves with rate hold. Coronavirus fears mount.
Erik Bregar of Exchange Bank of Canada - InsideFutures.com - Thu Jan 30, 10:27AM CST

USDCAD

Dollar/CAD broke out to a new uptrend overnight as this weeks familiar coronavirus news cycle delivered more bad news during the Asian and early European time zone. We now have 7,711 confirmed cases in China with 170 deaths, according to Chinese health authorities. Global economic chills are spreading even faster however as reports circulate about more international airlines cutting flights, more Western companies closing stores/offices and more Chinese cities and provinces effectively deciding to extend the Lunar New Year holiday for another week. Russia has closed its border with China in an effort to stop the viral outbreak and of course everybody is wondering what the WHO will say today after its Emergency Committee reconvenes. All this fear saw USDCNH spike briefly higher above the psychological 7.00 level but, as has been the pattern this week, were now seeing risk-off flows die down once again as we head into NY trade.

The US just reported its Advance GDP report for Q4 and while the headline growth rate met expectations of +2.1% QoQ, the core PCE price index came in softer than expected (+1.3% QoQ vs +1.7%). This could be another reason to sell USD broadly here at the margins. Were also seeing GBPUSD surge higher following the Bank of Englands hold to interest rates, and we think those USD sales are leaking through into other currency pairs as well as this hour.

The FOMC kept US interest rates on hold yesterday as well, and while the Feds 2pmET statement was truly the non-event we thought it would be, we felt the tone of Jerome Powells press conference titled to the dovish side. All the talk about not being satisfied with inflation running below 2%, continuing with overnight & term repo + T-bill interventions into at least April, and raising bank reserves to anample yet loosely defined level, told us that the Fed is not going to take its foot off the monetary stimulus pedal any time soon. Frankly, it doesnt really know what else to do. Money market participants are now addicted to publicly-infused reserves because the private Eurodollar banking system is still not functioning normally and while they may have given Jerome Powell a free pass on the funds rate again yesterday, we believe they will effectively force the Feds hand into a cut at some point later this year.

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EURUSD

Euro/dollar caught a bid into the Feds press conference yesterday as some of the dovish tones from chairman Powell crossed the wires. While most of this evaporated into the NY close, weve noticed a steady buy the dip mentality in overnight trade today as US yields continue to price in global growth fears related to the escalating coronavirus outbreak. Traders seem to be shrugging off the weight of this mornings sizable option expiries in the 1.0985-1.1005 zone (3blnEUR), and now seem focused on trend-line resistance in the 1.1020s as GBPUSD surges higher. We think this level will be the pivot for NY trade today. A move above will likely invite some short covering into the mid-1.10s while buyer failure will relegate EURUSD to its familiar 1.0990s to 1.1020s range weve seen all week. Germany reported decent January employment numbers earlier today and its preliminary CPI read for January met expectations of -0.6% MoM.

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GBPUSD

Outgoing Bank of England Governor Mark Carney proved a lot of people wrong this morning by deciding to keep UK interest rates unchanged. The OIS market continued to price coin flips odds ahead of the decision and GBPUSD looked technically weak going into the 7amET press release (firmly below 1.3010s), but the result was a 7-2 vote in favor of keeping rates at 0.75%. The BOE cited signs that Britains economy had picked up since Decembers election as reasons for not adding more stimulus right now, but Carney said To be clear, these are still early days. It is less of a case of so far, so good, than so far, good enough when referring to UK economic data. It will be important for the hard data on activity to follow through on the recent pick-up in the surveys, and for domestic price inflation to strengthen." Moreherefrom Reuters.

We found the communication around forward guidance to be mixed. On the dovish side, the Bank of England said it removed its limited and gradual phrasing because it implied multiple rate rises, which is not the case now. It also said MONETARY POLICY MAY NEED TO REINFORCE EXPECTED GROWTH RECOVERY IF RECENT SIGNS OF STRONGER GLOBAL AND DOMESTIC ACTIVITY ARE NOT SUSTAINED, OR DOMESTIC INFLATION STAYS RELATIVELY WEAK. However, on the hawkish side, it also said that the OIS markets called it wrong this time around by saying: MARKET PRICING SHOWING A BOE RATE CUT LEADS TO INFLATION OUTCOME ABOVE TARGET, INCONSISTENT WITH BOE REMIT and BOE SAYS "SOME MODEST TIGHTENING" OF MONETARY POLICY MAY BE NEEDED FURTHER OUT IF ECONOMY RECOVERS AS FORECAST. This is typical central bank double-speak in our opinion, but the point we think traders have to deal with today is the fact that markets got a little too excited about rates cuts and that those betsnow need to bescaled back.

The OIS market is now showing just a 18% chance that the BOE cuts rates at its next meeting on March 26th. Sterling shorts have been forced to cover, taking GBPUSD all the way back to the 1.31 handle. EURGBP has collapsed back below 0.8450. With GBPUSD now trading back above 1.3010s, we think the markets downward momentum has now technically been halted. However, we dont see sustainable upside momentum until the market breaches last Fridays highs in the 1.3130-40s. In the meantime, we may be forced to live with a range-trade.

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AUDUSD

The hemorrhaging losses continuefor the Australian dollar trade today after another overnight session of negative coronavirus headlines. This mornings 3amET spike above 7.0000 for USDCNH was enough to see AUDUSD break yesterdays chart support zone in the 0.6740-50s. This technical breakdown now exposes the market to a re-test of its late September/early October 2019 lows in the 0.6670s in our opinion. We think the Reserve Bank of Australia will welcome this downward move in the Aussie when it meets next Tuesday. The move is coming from China fears, not an OIS market that is pressuring the RBA for another rate cut, and we think theyll talk about how a lower AUD will help Australia cope with all the recent stress its economy has been facing.

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USDJPY

Dollar/yen is holding on to chart support in the 108.80s this morning as NY traders are once again fading the overnight negativity on the coronavirus. Off shore dollar/yuan has pulled back from the psychological 7.0000 level; US yields are clinging to trend-line chart support at 1.56%, and even the S&P and crude oil futures are bouncing a little bit. Is this the calm before the next storm? We think so. We think traders need to be on guard for another risk-off reaction should the WHO declare an international health emergency.

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Charts: Reuters Eikon

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