Wall St Gives Up Gains, FX Struggles to Follow

The last 2 days has been brutal for US markets with the Dow Jones Industrial Average experiencing its worst 2 day sell-off in 4 years. On Wednesday stocks opened strongly but the rally faded as equities turned negative on reports of more coronavirus cases . This is a headline driven market because at one point the Dow was up more than 400 points. Currencies typically follow the risk on / risk off direction dictated by equities but today, we saw limited correlation until stocks turned lower. USD/JPY rebounded to 110.50 but the rally was modest at best. The Australian dollar hit a fresh 11 year low and held onto its losses throughout the NY session while NZD/USD fell to a 4 month low. The Canadian dollar also resumed its slide while sterling dropped to the bottom of its recent range. Euro was the most resilient currency but also ended the day slightly lower.

These FX moves combined with the persistent decline in Treasury yields tell us that investors are still risk averse. Who can blame them when there hasn’t really been any good news to justify today’s rally. New cases of coronavirus were reported in South Korea, Italy, France, Iran, China, Brazil and the US. US new home sales data were better than expected but this report is not significant enough to fuel the recovery. Some investors may be encouraged by the beginning of human trials for a drug to treat the virus in US and the prospect of optimistic comments from President Trump this evening. Trump is scheduling a special virus new conference and his tweets about the news media making “coronavirus” look as bad as possible suggest that he is going to downplay US impact.

Today’s attempted rally is clearly a dead cat bounce. Until coronavirus peaks and the number of countries reporting new cases decline, the risk of continued selling exceeds buying especially when countries like Germany say that we are at the beginning of a coronavirus epidemic. We haven’t even seen the impact of the virus on earnings and February economic data. We’ve heard the warnings but when the data is revealed from countries around the world, it should trigger further risk aversion. It won’t be long before GDP forecasts are downgrades so for all of these reasons, we remain bearish USD/JPY, all of the Japanese Yen crosses, euro, Australian and New Zealand dollars.

Meanwhile its worth noting that some countries are starting to fight the virus impact with stimulus. Hong Kong announced a program that amounts to slightly more than 4% of GDP. They will be offering a one time cash disbursement of 10,000 Hong Kong dollars per person which is roughly $1,285. With that said, the process of applying will not begin until summer with cash payments likely to take months. While we don’t expect such bold action by other governments, different forms of fiscal or monetary stimulus could be provided.

A number of economic reports are scheduled for release over the next 24 hours including New Zealand’s trade balance, Eurozone confidence, Canada’s current account balance, revisions to US Q4 GDP, US durable goods and pending home sales. New Zealand data is set to improve, which may explain why NZD outperformed AUD today. EZ confidence numbers however should be subdued. US GDP revisions are difficult to predict but durable goods orders should fall. While we don’t expect President Trump to say anything meaningful this evening, traders should be vigilant around the time of his speech, scheduled for after the market close at 6pm NY time.