Markets panicking. Traders expecting Fed to cut at least another 75bp on March 18.
Erik Bregar of Exchange Bank of Canada - InsideFutures.com - Fri Mar 06, 11:11AM CST

ANALYSIS

USDCAD

Traders are trying to focus on the positives this morning after both the US and Canadian reported higher than expected headline job gains for the month of February, but theyre having a tough time given all the risk-off flows that have remerged in the overnight session. The S&P futures are falling another 3%, US 10yr yields are plunging below 0.70%, USDJPY collapsed through 106.10s support and EURUSD surged past 1.1230-40s resistance. Implied Fed funds for March 18this now trading at 0.48%, which suggests the Fed will cut at least another 75bp in just under two weeks time! All this as the coronavirus headlines keep coming in and the number of confirmed cases worldwide officially tops 100k. To make matters worse, theres been no love from Russia today as Moscow has reportedly not agreed to participating in OPECs proposed 1.5M bpd deepening of oil production cutsand so April crude oil prices are plunging another 7%. WSJ and EnergyIntel reporters are posting headlines like this:

Holy cow! Thismornings North American jobs data almost feels like a non-event given everything else thats going on. Yes theyre good numbers, but theyre old now and it feels like the bond markets are already expecting these employment numbers will turn negative in the coming months as conoravirus fears further impact economic activity. USDCAD is struggling once again to benefit materially from all the risk-off sentiment today, which is a bit concerning. We think the 1.3430s will be absolutely pivotal heading into the weekend.

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EURUSD

Euro/dollar has shattered our expectations for any sort of trading range to start the month of March. The downtrend ended on February 27thfollowing the markets surge above the 1.0890s, but it has made quick work of almost every single chart resistance level since then. We finally started to observe buyer failure in the 1.1160-80s earlier this week as US 10yr yields tried to regain the 1% level and, while this technical development tried to sow the seeds for some EURUSD price consolidation, all of this analysis has been thrown out the window following the 35bp puke-fest wewitnessed in US 10s since Wednesday night. The plunge in bond yields continues and the surge in Fed rate cut expectations has reached an almost unbelievable fever pitch. Markets are now expectingthe Fed to cut at least another 75bp on March 18! The FOMC may as well do another emergency rate cut and go straight to zero at this point.

The move above the 1.1160-80s post London yesterday triggered more buying in EURUSD to 1.1230-40 in Asia. The early European move through this level today has since prompted yet even more buying up to the next chart resistance level (1.1320s). What are the next targets for price, should the risk-off flows keeping coming? Wed say 1.1350-70 at the very least. A move above there however could usher in a panicking scramble to the 1.15 handle. We wouldnt fight this EURUSD rally until we see clear signs of buyer failure at a known resistance level.

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GBPUSD

Sterling has rallied back above the 1.3000 mark this morning and we think what were seeing is a continuation of yesterdays theme of the UKs monetary policy outlook not looking as dovish as the Feds. Yes, the markets are now expecting a 50% chance (increased odds) that the Bank of England will cut rates by 50bp on March 26th, but theyre now expecting 100% that the Fed will cut by 75bp on March 18th. Nothing else seems to matter right now...not even the nervousstart to UK/EU 2020 trade talks. Everyones focused on plunging US interest rates/interest rate expectations and its killing the dollar against the euro. We think a NY close above the 1.3040s (February highs) would be perversely positive for GBPUSDs chart structure.

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AUDUSD

Todays unprecedented surge in Fed rate expectations is helping the Aussie as well. One could argue that this is counterintuitive given that the Australian dollar is a risk proxy and that risk sentiment is in the toilet this morning. We understand that argument but we feel as if todays risk-off is more US yield/oildriven thancoronavirus driven. There are probably a lot of panicky flows going on in the wider interest ratemarkets just because of the off the chart levels were trading at, and so we think theres agreater focus on yield differentials this morning (AUD vs USD) if that makes sense.

The Australian dollars rally though the 0.6620s is a positive technical development for the market this morning but we think the market needs to close NY trade firmly above it in order to confirm. Some mild selling has emerged at trend-line chart resistance in the 0.6650s.

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USDJPY

Dollar/yen puked yesterday after it lost trend-line chart support in the 106.90s, and its imploding again today following last nights fall below the 106.10s. The leveraged funds at CME, who collectively increased their net long USDJPY position during the week ending February 25to a new one year high, must have absolutely capitulated by now and gone net short...since the market is now 500pts lower! Well get the latest read on their positioning at 3:30pmET today, when the CFTC releases its weekly Commitment of Traders report.

The Bank of Japan was rumored to be calling banks asking for pricesthis morning, which is fueling gossip that they're nothappy about the swift rise in the yen and may want to intervene.

USDJPY DAILY

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USDJPY HOURLY

US 10YR BOND YIELD DAILY

US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

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