OFX Weekly Foreign Currency Market Update

?            China’s markets re-open today in which futures markets indicate there is to be a sea of red across the board in equities. The Chinese central bank announced on the back of the epidemic situation brewing over the holiday period that it will inject 1.2 trillion yuan (US$174 billion) into markets via reverse repo operations to ensure that there is ample liquidity in the market. The reverse repo injection is set to be one of 30 measures announced by multiple authorities in China to help steel the economy against the disruption from the coronavirus outbreak.

?            The Chinese Yuan fell to its lowest level this year. Last week, the USD/CNH started to trade at around 6.9449 and ended the week at 6.9972 (weaker Yuan). The Japanese Yen and Swiss Franc have continued to rise as safe havens amid mounting fears the Coronavirus will morph into a global health emergency.

?            The U.S. economy is chugging along just fine despite slowing consumer and weaker business investment, the economy is still showing signs of strength. GDP released last Thursday shows the U.S economy expanded at 2.1% annualized rate for the fourth quarter of 2019 which beat the median forecast of economist surveyed. The Greenback was able to maintain its bid tone on the back of a neutral FOMC meeting and as global efforts tried to address the spread of the Coronavirus.

?            The British Pound has been battered on Monday morning as investors begin to respond to Boris Johnson’s comments over the weekend that he is willing to walk away from talk’s over the U.K.’s future trade relationship with the EU if he doesn’t get what he wants. Additionally, the Pound was not helped last week by the U.K. Prime Minister potentially allowing Huawei Technologies Co. to build fifth-generation wireless networks, undoubtedly complicating its relations with the U.S.

?            The Loonie followed most G10 peers’ price action and the market’s mood, which was mostly in a “risk-off” environment. Specifically, the Loonie got moderately hammered amid a fall in the price of crude oil to a 3 and a half-month low. Nonetheless, the Loonie did better than the Aussie and Kiwi dollar, given that Australia is a good proxy of the Chinese economy, and the Kiwi economy is linked with the Australian economy. There was no important economic data released in Canada last week.

?            AUD Building Approvals MoM (Dec) - Monday

?            CNY Caixin China PMI Manufacturing (Jan) - Monday

?            EUR France Markit Manufacturing PMI (Jan) - Monday

?            GBP UK Markit Manufacturing PMI (Jan) - Monday

?            AUD RBA Cash Rate Target (Feb) - Tuesday 

?            CAD Markit Manufacturing PMI (Jan) - Tuesday

?            USD ISM Manufacturing PMI (Jan) - Tuesday

?            USD Durable Goods Order MoM (Dec) - Wednesday

?            AUD Retail Sales MoM (Dec) - Thursday

?            INR RBI Repurchase Rate (Feb) - Thursday

?            USD Initial Jobless Claims (Feb) - Friday

?            RBA communication for 2020 resumes this week with the central bank largely expected to remain on hold given better than expected CPI and labor market figures released over January. However, the bushfires, coronavirus and now the travel ban will impact growth via tourism and consumption, which is new information for the Bank since their last meeting in December. Governor Lowe is also set to give a speech titled “The Year Ahead” on Wednesday and then the bank is set to testify to parliament and release its Statement on Monetary Policy on Friday.

?            China’s CNY fixing today will be closely monitored by traders with the last fixing set on January 23 at 6.8876, in which the offshore-CNH has since broken the key 7.00 level. The sell-off in global assets as the coronavirus spreads has led to the widest gap between CNH and CNY in four years. The level at which the currency gap closes will be an indicator as to whether investors are becoming more confident in whether the outbreak can be contained quickly.

?            The FOMC meeting last week so interest rates remaining on hold, highlighting that sustained moderate economic growth and strength across the job/labor market were key drivers behind the unanimous policy decision. This decision represents little change since the December policy meeting and was widely expected across the broader currency market. Fed Chief Jerome Powell said that the outbreak of the Coronavirus will likely hit the Chinese economy and could spill wider.

?            The U.S Treasury 3-month bill v 10-year notes inverted on Thursday, the first time since October, reviving recession fears which plagued investors last year. The yield curve has typically reflected markets expectations of the economy and inflation, in which an inverted yield curve is a signal that investors are becoming increasingly concerned about central bank’s policy ability to counter headwinds as the coronavirus threatens to disrupt global growth.

?            Market participants are still expecting Australia to keep interest rates unchanged this week as the RBA continues to wait for an economic rebound. Economists and market participants in general are expecting the RBA to keep the cash rate on hold at 0.75%, but it may be too optimistic. When considering the near-term economic threat of the Coronavirus pushing the Chinese economy lower and Iron Ore collapsing by 10% last week, it will slow down the Australian economy. This new virus will probably have a material impact on Australian economic growth and it is likely that Australian GDP growth projections will be lowered this week by the RBA. The AUD/USD and AUD/JPY pairs already spoke loudly last week, falling 2% and over 2.6% in only 5 days.

?            The volatility of the GBP/USD pair fell on Friday as market participants priced out Bank of England risks. Right now, the volatility in the Pound trades is the lowest seen in more than six months. Yes, everything suddenly changed right after Brexit last Friday and following the BoE decision. However, Pound volatility may rebound should tensions over a trade agreement between the U.K. and the European Union escalate. At the same time, Euro volatility could have a pick up as U.S. President Donald Trump said Friday that a trade deal with Europe is next on the agenda.

?            The Loonie and the Norwegian Krone might be impacted when the OPEC and non-OPEC's Joint Technical Committee meet on February 4-5th to discuss the potential impact of the Coronavirus outbreak on the oil market. This meeting will likely discuss the alternative of prolonging or increasing a cut on oil output.

?            The U.K. Financial Conduct Authority said it is examining the spike in the British pound before Thursday’s BoE interest-rate decision. A spokesman said, “…we are aware of the incident and are looking into it.” The Sterling shot up toward 1.3100, 45 minutes after the BoE announcement, and it closed at 1.3210, a new 3 and half week high, at the end of last week.

?            The spread of coronavirus and its potential impact on global economic growth saw U.S oil’s benchmark, West Texas Instrument, drop to its nearest long-term support level of $51 a barrel. Technical measures such as the 14-day Relative Strength Index show that the commodity is in heavily oversold territory. WTI has lost $12 since its 2020 closing high and a reprieve may materialize with further tests of support.  

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