Next 24 hours: About rate cuts and bull markets
Today’s report: Pivotal moment for central bank policy strategy
The big story into Wednesday is the Fed’s decision to move ahead with an emergency rate cut of 50 basis points, in an effort to offset fallout from the coronavirus. Unfortunately for stocks, the rate cut wasn’t able to produce the desired reaction, with risk off sentiment persisting.
Wake-up call
- Fed cut
- Liz Truss
- Yield differentials
- SNB challenge
- AUDUSDAussie GDP gives currency another prop
- OIL recovery
- PM Ardern
- No love
- hard asset
- two-way flow
- traditional markets
Suggested reading
- What If You Can't Afford to Fight Coronavirus?, D. Fickling, Bloomberg (March 4, 2020)
- Coronavirus Reveals the Limits of Monetary Policy, J. Caton, AEIR (March 2, 2020)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The downtrend off the 2018 high is looking exhausted and the prospect for a meaningful higher low is more compelling. A higher low is now sought out above the multi-year low from 2017, ahead of the next major upside extension. Only a weekly close back below 1.0800 would compromise this outlook. Back above 1.1240 will strengthen the view.EURUSD – fundamental overview
The Euro continues to extend its run on the yield differential advantage, after the Fed came out with its emergency 50 bp rate cut. ECB President Christine Lagarde said the central bank is ready to take 'appropriate, targeted steps' amid the outbreak, which factored into some Euro selling into this latest run up. Key standouts on today’s calendar come in the form of German retail sales, Eurozone services and composite PMIs, Eurozone retail sales, US ADP employment, US ISM non-manufacturing and the Fed Beige Book.EURUSD - Technical charts in detail
GBPUSD – technical overview
The market has seen a recovery out from the lowest levels since 2016, with the price now pushing back above the weekly Ichimoku cloud to signal a bullish structural shift. Ultimately, only back below the 1.2500 handle would compromise the newly established constructive medium and longer-term outlook. Next key resistance comes in the form of the monthly high from September 2017 at 1.3658, with setbacks expected to be well supported ahead of 1.2800.GBPUSD – fundamental overview
Worry around coronavirus fallout in the UK has resulted in the pricing in of more rate cuts at the BOE. This along with harsher talk on trade from Liz Truss have been weighing on the Pound in recent sessions. We have seen some demand however, on the back of the latest 50 bp emergency rate cut from the Fed. Key standouts on today’s calendar come in the form of UK services and composite PMIs, US ADP employment, US ISM non-manufacturing and the Fed Beige Book.USDJPY – technical overview
The major pair has seen a contraction in range over the past several years. We're getting closer to the market breaking out of the range one way or the other, but until then, look for rallies to be well capped ahead of the 2019 high at 112.40, and dips to be supported ahead of the 2019 low at 104.45.USDJPY – fundamental overview
The Yen rallied some more on Tuesday, with the currency feeling the impact of an emergency Fed rate cut that was accompanied by risk off flow. There have been some offers into Wednesday, though we suspect any continuation of risk off, especially after such an aggressive cut from the Fed, will continue to fuel more Yen demand. Key standouts on today’s calendar come in the form of US ADP employment, US ISM non-manufacturing and the Fed Beige Book.EURCHF – technical overview
The market remains very well capped into offers and the medium-term picture continues to favour the downside. A break back above 1.1060 would be required to take the immediate pressure off the downside. Technicals are however looking extended and the market should be well supported ahead of 1.0500.EURCHF – fundamental overview
The SNB remains uncomfortable with Franc appreciation and continues to remind the market it will need to be careful about any attempts at trying to force an appreciation in the currency. But the SNB will also need to be careful right now, as its strategy to weaken the Franc is facing headwinds from a less certain global outlook, and from a US administration that has put Switzerland on its currency manipulator watchlist. Any signs of risk liquidation in 2020, will likely invite a very large wave of demand for the Franc that will put the SNB in the more challenging position of needing to back up its talk with action, that ultimately, may not prove to be as effective as it once was, given where we're at in the monetary policy cycle.AUDUSD – technical overview
Aussie has extended declines to its lowest levels against the Buck since 2009. At this point, there is risk for a full retracement to the multi-year low from 2008, which comes in at 0.6006. At the same time, technical studies are looking stretched and any additional setbacks below 0.6000 should be a difficult task, at least over the coming months. Back above the December 2019 high at 0.7032 would be required to take the immediate pressure off the downside.AUDUSD – fundamental overview
The Australian Dollar has been in recovery mode despite the RBA's Tuesday cut. It seems the fact that the cut had been priced in accounted for initial demand in the aftermath. But since then, Aussie had received additional support from a 50bp emergency Fed cut and today's better than expected Aussie GDP. Key standouts on today’s calendar come in the form of US ADP employment, US ISM non-manufacturing and the Fed Beige Book.USDCAD – technical overview
The market has been confined to a choppy consolidation, with no clear directional insight. At this stage, it will take a clear break back above the 2018 high at 1.3662, or below the 2019 low at 1.2952 for an indication of trend. Until then, look to play the range.USDCAD – fundamental overview
A better round of economic data out of Canada over the past week or so, and this latest rebound in the price of OIL, have been helping to restore some demand for the Canadian Dollar. We've also seen Loonie demand after the Fed went ahead with an emergency rate cut of 50 bps. Meanwhile, Canada PM Justin Trudeau said his government will 'ensure the coronavirus doesn't cause an economic slowdown.' Looking ahead, the Bank of Canada is expected to follow the trend of coronavirus rate cuts, with a 25 bp downward adjustment priced in later today. Other key standouts on today’s calendar come in the form of US ADP employment, US ISM non-manufacturing and the Fed Beige Book.NZDUSD – technical overview
There's a case to be made for a meaningful bottom ahead, with the market looking quite extended as it gravitates back into familiar support in the 0.6200 area. As such, look for setbacks to be well supported in the days ahead, in anticipation of another rebound. Only a weekly close below 0.6200 would give reason for rethink. Back above 0.6500 would now be required to take the immediate pressure off the downside.NZDUSD – fundamental overview
Though expectations have been built up for more easing from the RBNZ in response to the coronavirus, these expectations have been offset by the latest emergency Fed response, in the form of a 50bp cut. Meanwhile, NZ PM Ardern said that the global impact from Covid-19 is "likely to be significant" but not necessarily long-term, and that she hasn't received any advice that the NZ economy faces a recession. Key standouts on today’s calendar come in the form of US ADP employment, US ISM non-manufacturing and the Fed Beige Book.US SPX 500 – technical overview
There have been signs of a major longer term top, after an exceptional run over the past decade. Any rallies from here, are expected to be very well capped, in favour of deeper setbacks targeting an eventual test of the 2018 low at 2339. Rallies should now be well capped ahead of 3200.US SPX 500 – fundamental overview
Although we've seen the market extending to fresh record highs in 2020, with so little room for additional central bank accommodation, given an already depressed interest rate environment, the prospect for a meaningful extension of this record run, on easy money policy incentives, should no longer be as enticing to investors as it once was. Meanwhile, tension on the global trade front, geopolitical risk, and worry associated with coronavirus fallout, should weigh more heavily on investor sentiment into 2020. We recommend keeping a much closer eye on the equities to ten year yield comparative going forward, as the movement here is something that could be a major stress to the financial markets looking out.GOLD (SPOT) – technical overview
The 2019 breakout above the 2016 high at 1375 was a significant development, and suggests the market is in the early stages of a bullish move that follows a multi-month consolidation. The next major level of resistance comes in around 1700 (measured move extension target), while in the interim, look for any setbacks to be well supported above 1500.GOLD (SPOT) – fundamental overview
The yellow metal continues to be well supported on dips with solid demand from medium and longer-term accounts. These players are more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and trade war threats. All of this should keep the commodity well supported, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax.BTCUSD – technical overview
Setbacks should be very well supported in the 6,000 area, with a higher low sought out in favour of a bullish continuation back above the 2019 high and towards the record high from late 2017 further up. Ultimately, only a weekly close below 5,750 would compromise the constructive outlook. Back above 10,500 further encourages the bullish prospect.BTCUSD – fundamental overview
There has been plenty of two way flow with respect to the price of Bitcoin in 2020. On the one side, there continues to be good demand from players looking out to the medium and longer term, who see Bitcoin as a safe haven, store of value asset. On the other side, there are many players who aren't willing to look past the shorter term, where bitcoin is still a risk correlated emerging technology.BTCUSD - Technical charts in detail
ETHUSD – technical overview
The market is in the process of turning back up after stalling out in the latter half of 2019. Look for setbacks to be well supported above of previous resistance turned support at 180 on a weekly close basis, in favour of the next major higher low and bullish resumption back towards and through the 2019 high up at 363. Ultimately, only a weekly close below 180 would compromise the outlook.ETHUSD – fundamental overview
While there is plenty of Ether demand built up, with so much optimism around prospects for the blockchain, given all of the development going on in the decentralised finance space, macroeconomics will likely play a negative role in 2020, with Ether expected to underperform in a risk off backdrop, in light of Ethereum's higher sensitivity and correlation with risk themes.