Risk sentiment up mildly after yesterday's pandemic fear driven moves
Erik Bregar of Exchange Bank of Canada - InsideFutures.com - Tue Feb 25, 9:23AM CST

USDCAD

Dollar/CAD continues to struggle with the 1.3300 mark this morning as global markets try to shake off another overnight session of concerning coronavirus headlines. The virus is still spreading in Italy, South Korea and Iran where the numbers have increased to 283, 977, and 95 respectively but the pace of the increase feels a tad slower when compared to developments over the weekend. We also got more positive news out of China -- just 9 new cases outside Hubei province for February 24 and a whole bunch of new economic stimulus measures aimed at helping Chinese small businesses.

Everyone was talking about gold prices late yesterday and how they reversed lower into the close. We heard rumors that the Bank of International Settlements was on the offer, and while we didnt think thisgold selling would initially bolster risk sentiment going into Asia, it seems like it ultimately did. April gold futures kept falling in Asia and in early European trade today and we think this part in parcel explains the 18pt bounce were seeing this morning in the S&P futures.

Todays North American session will be another quiet one in terms of economic data but we will hear from the Bank of Canadas deputy governor Timothy Lane at 12:30pmET (text of his speech titled Money and Payments in the Digital Age to be released at 12:15pmET).

April crude oil futures are trading moderately higher this morning as well as the market survives two downward re-tests of the 51.10-30 level that it broke above late yesterday. We'veheard chatter that some Chinese airlines have revealed plans to start reopening routes that were shut down due to the coronavirus outbreak.

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EURUSD

Euro/dollar pulled back from chart resistance in the 1.0860s yesterdayand this retreat coincided nicely with April golds late session reversal lower. We can debate the merits of the gold selloff and the seriousness of the overnight coronavirus headlines, but the fact is that risk sentiment is mildly better than this morning and this not good for EURUSD given its new status as a funding currency. Over 1.1blnEUR in options are expiring between the 1.0825 and 1.0835 strikes this morning and we think this is also adding some weight to the market here.

Large option expiries will likely be a feature for EURUSD for the rest of the week as well, with nearly 4blnEUR rolling off tomorrow between 1.0850 and 1.0900, 1.2bln at 1.0820 on Thursday, and 1.1bln near 1.0900 on Friday. This would suggest an eventful trading range for the rest of the week, baring any massive surprises on the coronavirus front. Germany reported its seasonally adjusted Q4 2019 GDP figures this morning and the numbers met expectations of flat (no growth) QoQ and +0.3% YoY.

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GBPUSD

Sterling is rallying this morning after EU ministers approved their negotiating mandate for 2020 trade talks with the UK. Full press releasehere. This sounds good on the surface, which we think partly explains the pounds relative strength vis a vis euro today, but we still need to hear from the UK and what their mandate will be (expected on Thursday). Traders are also talking about a large option expiry at the 1.3000 strike for tomorrow (555mlnGBP). The Bank of Englands Andy Haldane sounded mildly optimistic about the UK economy when he spoke yesterday afternoon. Moreherefrom Reuters.

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AUDUSD

The Aussie is getting sold this morning despite evidence of risk sentiment improving overnight. This has us on guard for negative headlines that could spur a continuation of the risk-off move that slammed global stock markets yesterday. We think the funds will feel comfortable adding to their net short positions so long as the market remains below the 0.6605-0.6630 level. The OIS market is still pricing in no chance of a 25bp interest rate cut when the Reserve Bank of Australia meets next Tuesday.

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USDJPY

Dollar/yen indeed found buyers over the last 24hrs at the 110.20-50 chart support zone we outlined yesterday. While the market followed US stocks lower during the North American session yesterday, wed argue some of this was sell-stop order driven and we think its still too early to conclude that the yens safe haven status has been restored. Confirmed coronavirus cases in Japan now stand at 160, and while the growth rate of new daily infections seems lower today compared to what were seeing in Italy and South Korea, we dont have confidence that Japan has its outbreak under control yet.

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US 10YR BOND YIELD DAILY

US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

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