Plunge in US yields leads to rampant Fed rate cut speculation

USDCAD

Global equity markets are extending their losses for a sixth straight session this morning after President Trump failed to calm investor fears in his 6:30pmET press conference last night. We felt that his repeated attempts to downplay the coronavirus as the common flu was disingenuous. We thought his assurances that US health authorities have everything under control was foolhardy and misguided. What is more, we felt President Trumps comments about the stock market going down because of Tuesday nights Democratic debate showed a deliberate attempt to politicize and distract from the seriousness of the coronavirus situation. The S&P futures are trading down another 2%; the April crude oil futures are plunging another 4.5% after once again giving up the 49.60 support level, and the US 10yr yield keeps falling to new all time lows (now at 1.25%).

On the coronavirus front, markets are now concerned about a rise of suspected cases in New York state and one confirmed case in North Carolina from unknown origin, according to the CDC. The virus continues to spread outside China, with Italy now reporting 528 cases and 14 deaths, South Korea indicating 1,766 infections and 13 mortalities, and with Iran showing a very troubling increase to 245 cases with now 26 dead.

Fed rate cut speculation has surged over the last 48hrs, with the futures curve now expecting a 25bp reduction at the April 29thFOMC meeting. We think this part in parcel explains USDCADs struggle to seriously break higher this week. The markets new uptrend (since January 29th) is doing ok with USDCAD traders methodically taking out chart resistance at 1.3300, 1.3320 and now 1.3350...but it feels like they're swimming upstream.The US just reported its January Durable Goods figures and the numbers beat expectations: -0.2% MoM vs -1.5% on the headline and +0.9% MoM vs +0.2% ex-Transport. The 2ndestimate of US GDP for Q4 2019 was just released as well and it met expectations of +2.1%.

We think USDCAD has legs to continue higher so long as the 1.3350s hold. We see mild chart resistance in the 1.3380s-1.3410s zone. Canada reports its latest GDP figures tomorrow at 8:30amET and the consensus is looking for +0.1% MoM for December and +0.3% QoQ for Q4 2019.

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EURUSD

Continued risk-off flows came to the rescue for EURUSD in NY trade yesterday and last nights press conference from President Trump added some fuel to the fire and allowed the market to finally break through the 1.0890s resistance level. Its been up, up, and away since then as Fed rate cut speculation now reaches a fever pitch. US bond yields continue to plunge and theyre pressuring the Fed funds futures curve to price in 3 more rate cuts by years endthe first of which traders are expecting in April! Is the economy still in a good place Jerome Powell and company? Markets dont believe so.

Todays rise in EURUSD has been so sharp that it has now killed the recent downward in our opinion. With the 1.0890s now giving way so spectacularly and with the market extending to 1.0970-90s chart resistance so quickly, we think EURUSD will commence a new higher trading range (1.0890s 1.0990s) heading into March.

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GBPUSD

Sterling is underperforming today as traders digest the UKs negotiating mandate for 2020 trade talks with the EU. Weve read it and we think it sets up Britain for a collision course with Brussels this year. What is more, the UK said it will consider walking away from Brexit IF AGREEMENT IS NOT LOOKING LIKELY BY JUNE MEETING. Moreherefrom the Guardian.

We stand by our view that yesterdays relative GBP weakness was due to anxiety ahead of the release of the UKs mandate, and we think the way the UK media is negatively portraying the headlines this morning is adding to the woes for GBPUSD. We feel that a firm NY close below the 1.2900 level will give the bears a firm grip heading into UK/EU Brexit-transition negotiations next week.

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AUDUSD

The Australian dollar is finally catching a break today and wed make the argument this is because Fed rate speculation is running rampant this morning. Its almost stealing the limelight from coronavirus headlines and is putting a drag on all things USD. We think AUDUSD could correct higher to the 0.66 handle should the 0.6550s hold today.

Off-shore dollar/yuan (USDCNH) looks content to simply follow broad USD selling flows today after Chinas National Health Commission continued to report a low number of new infections outside Hubei province for yesterday. Seehere, from BNO News, for the latest coronavirus case/death counts across the world.

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USDJPY

Dollar/yen is trading with a heavy tone this morning after buyers ultimately failed in the 110.50s yesterday and after the bond marketsrush to price in more Fed rate cuts. With US yields now making new all-time lows every hour, were seeing the Fed funds futures curve price in 100% of a 25bp cut in April, 100% of 50bp in cuts by June, and 92% of 75bp in cuts by November!!! While we think USDJPY declines are being mitigating to some extent by the threat of a spike in new coronavirus cases/deaths in Japan, we feel the Japanese headlines have not been negative enough this week to counter traditional risk-off flows. Growing Fed rate cut speculation wont make it any easier in our opinion, which is why we think USDJPY may slip lower stillperhaps to chart support in the 109.40-60s.

Were going to get a raft of Japanese data tonight around 6:30-7:00pmET. Japan will report its January employment, industrial production and retail sales figures, as well as its February CPI. Perhaps this data wont capture coronavirus concerns just yet but here are the expectations:

Unemployment rate: 2.2%

Industrial Production: +0.2% MoM

Retail Sales: -1.1% YoY

CPI: +0.6% MoM

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US 10YR BOND YIELD DAILY

US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

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